A Feast or Famine Economy

This morning's Boston Globe contains an interesting article by Rob Gavin that highlights the feast or famine nature of the current economic recovery in Massachusetts.   The recent poll of Massachusetts households by Suffolk University's Political Research Center found that:

• 77% do not believe the recession in Massachusetts has ended
• 54% think it will take at least two years for the state recession to end
• 70% that the state economy will either get worse (18%) or stay the same (52%) in the next year
• 35% expressed some concern that they might lose their job 

MOE= +/- 4.9%

A Relatively Robust Economic Recovery is Underway

However, as this Poll highlights, for many across Massachusetts it doesn’t much feel like a strong recovery is underway.   Statewide, consumer and business confidence remain weak, high levels of joblessness in key industries and major regions of the state persist, and the housing slump is entering its sixth year.   

Part of the explanation for the disconnect between the undeniably strong macroeconomic performance of the state economy and the “lived experience” of this recovery is revealed by a closer look at the areas of the economy that have been benefiting from this recovery and those that have not. In a number of important respects, this has been a business-led recovery.

A Business-Led Recovery

As measured by the MassBenchmarks Current Economic Index (CEI), the state economy emerged from recession in the summer of 2009 and has grown steadily since.  Throughout 2010 the pace of the Commonwealth’s economic expansion has consistently outpaced the U.S., frequently by a substantial margin.

As can be seen below, Massachusetts grew at nearly twice the rate of the U.S. in the first and third quarters and nearly three times as fast in the second quarter.

Growth in Real Product, Massachusetts Current Economic Index (Blue) vs. U.S. GDP (Gray)

 Source: US Bureau of Economic Analysis, MassBenchmarks Current Economic Indexes

The Commonwealth’s “growth premium” appears to be largely a function of the strength of the Massachusetts innovation economy that, unlike recent recessions, helped buffer Massachusetts from the “Great Recession” and has been a growth driver during the recovery period.

Specifically, Massachusetts has benefited significantly and disproportionately from the choices that consumers, firms and investors have been making in how they spend and invest the trillions of dollars in capital that have been injected into the national economy as the result of federal monetary and fiscal policy choices.  According to the U.S. Bureau of Economic Analysis, as of the second quarter of 2010, corporate profits had nearly regained their prerecession peak.

Corporate profits before tax with inventory valuation and capital consumption adjustments, (seasonally adjusted annual rate, billions of dollars)

                                                           

Source: Bureau of Economic Analysis, National Economic Accounts, National Income and Product Accounts, Table 6.16D 

To date, while federal stimulus efforts have had a demonstrable and positive impact on the national economy, they have not succeeded in improving the national jobs picture sufficiently to induce a recovery in consumer spending, a prerequisite for more robust national growth in economic activity and job creation.  

While weak consumer demand is understandable in light of the nation’s high unemployment rate and uncertain economic outlook, weak demand, along with the current low interest rate environment, helps to explain why businesses have been in a cost-cutting mode, have been reluctant to hire, and have been making significant investments in their future capacity to grow both through spending on inventory replenishment and investment in productivity-enhancing technology products and processes.

According to the most recent U.S. GDP report, investment in equipment and software – a reasonable proxy for investment in innovation and technology sectors – grew by 12 percent between the second and third quarter of 2010 dwarfing the more modest 2.6 percent rise in personal consumption expenditures and a 0.5 percent growth in disposable personal income during the same period.

Business investment is driving current economic growth in Massachusetts

 Source:  Bureau of Economic Analysis, National Economic Accounts, National Income and Product Accounts Tables 1.5.1, 2.3.2 and 2.1, 3rd quarter 2010 (advance estimate).

Investment in equipment and software declined precipitously in the last half of 2008 but have recovered rapidly since.  While the pace of growth has slowed of late, this pattern helps to explain why the innovation-intensive Massachusetts economy has been expanding significantly faster than the more consumer-dependent national economy.

It also helps to explain why sectors that depend on well-educated knowledge workers have benefited while the sectors that traditionally provide employment to more "blue collar" workers have continued to struggle (in some cases mightily).

Our imbalanced recovery underscores the fact that in 21^st century Massachusetts, the benefits of economic growth and the substantial income generated by the Massachusetts innovation economy largely accrue to workers and regions that with the necessary brainpower and physical, technological and intellectual infrastructure to compete at a high level in an increasingly competitive and global economy.  

As the state’s public and private sector leaders chart the state’s course through these difficult times they would be well advised to keep the lessons of this recovery in mind as they set program and investment priorities.   Extending the opportunity for more Massachusetts communities and families to contribute to and benefit from the state’s extraordinary innovation economy should be a central goal of state economic and workforce development policies in the years ahead.

Upgrading the skills of our workers and expanding the innovative capacity of all of our regions will not be easy and it will not happen overnight.  However, ensuring that all of the state’s regions and working families have the opportunity to reap the benefits during periods of prosperity and share the pain during difficult economic periods is what we must do if we are to truly fulfill the promise of being a Commonwealth.

"The Impact of Health Insurance Reform in Massachusetts"

One of the major "tea party" talking points during the recent national elections was that recently enacted national health care reforms were going to bankrupt our nation. 

A new study released by the National Bureau of Economic Research (hat tip to Econbrowser) suggests that these concerns may be misplaced finding that health care reforms in Massachusetts (aka Romneycare) have had a number of impacts that were -- when the reform was being debated-- predicted by supporters and scoffed at by opponents. 

Specifically, they find that following the implementation of the new law in Massachusetts...

Coverage through Medicare, which provides insurance for those over age 65, did not change significantly in the elderly population. And, after the reform, the total number of newly insured and their doctors apparently did not demand more inpatient care. In fact, after the Massachusetts reform, treatment intensity -- as measured by length of hospital stays -- decreased by approximately 1 percent.

Use of hospital emergency rooms for routine care also declined after 2006: the reform’s expanded insurance coverage resulted in a 2 percentage point decrease in the fraction of hospital admissions from the emergency room. The reduction in emergency admissions was particularly pronounced among people in low-income areas of the state.

Hospital admissions for treating preventable conditions also fell. The authors find a decrease of 2.7 percentage points in inpatient admissions attributable to preventable conditions.

The authors note that the Massachusetts mandate for individual insurance coverage widened access to outpatient treatment and thus management of preventable conditions. Despite finding other hospital impacts, this study finds no evidence that hospital cost growth increased following the reform.

 Source: http://www.nber.org/digest/nov10/w16012.html, abstracted from the The Impact of Health Care Reform on Hospital and Preventive Care: Evidence from Massachusetts (NBER Working Paper No. 16012), co-authors Jonathan Kolstad and Amanda Kowalski

In as much as new national health reform (aka "Obamacare") has many of the same features as the Massachusetts reforms, this study provides some real reason to believe that national reforms may be able to "bend the cost curve" in a positive direction while expanding access to the uninsured.  This is something many observers (including the newly elected house leadership) have claimed is impossible.  

The Other Other Side of Question 3

With just over two weeks remaining before election day, the supporters and opponents of the various candidates and ballot questions are scrambling to make their cases and persuade their undecided neighbors.

Particularly during economically difficult times, the ability to persuasively claim  that your project or proposed policy change will have a positive impact on the economy can be very compelling for obvious reasons.

Yesterday,  Suffolk University's Beacon Hill Institute (BHI) weighed in on the potential economic impact of Ballot Question 3 -  A proposal to reduce the Commonwealth's sales tax from 6.25 percent to 3 percent.

Their press release was entitled "The Other Side of Question 3: More Jobs and Less Unemployment" suggesting that their analysis of the impact found that the passage of Question 3 would have a net positive effect on the economy.

A closer look at their release and their brief report suggests that this headline is more than a little misleading....

Based on their brief description, what BHI did is to use a model to develop a "dynamic" estimate of the economic effects of what would occur in the event Question 3 is approved.   In their report they claim that:

•  27,199 private sector jobs would be created and 9,885 public sector jobs would be lost (net positive job impact of 17,314.

• $2.05 billion in state tax revenue would be lost.  $33.4 million in local tax revenue would be gained (as a result of the positive effects of the additional wages produced by the new jobs).

When evaluating these kinds of claims, I typically ask myself what would really happen if the policy change in question were in effect....in this case if the state suddenly found itself down another $2 billion in tax revenue.

While BHI briefly reflects on how the state might make ends meet with $2 billion less in revenue, they are far from specific and not very compelling.  In their concluding paragraph they suggest that job losses could be minimized with wage cuts for state employees, increased health care and pension contributions and service privatization.

Left unanswered is the question of whether sufficient savings could be plausibly achieved in this manner.  Additionally, even if such changes were implemented, they would directly reduce the income of state workers thereby reducing their level of economic activity and yielding, at best, a neutral economic result.   

The Mass Taxpayers Foundation (MTF) recently released its take on this issue.  While the size of the revenue impact of Question 3 is in dispute -- MTF estimates a $2.5 billion impact, BHI's estimate of the impact is closer to $2 billion,  MTF's analysis of the impact of Question 3 on the state's discretionary spending is not.   It is based on a review of the way the state actually spends its money, is methodologically transparent and, unlike the BHI analysis that uses a proprietary model, can be double-checked or replicated by anyone who is inclined to do so.

As MTF rightly points out, fully half of the state budget is legally mandatory (MassHealth, Chapter 70, debt service, pension costs, unemployment benefits and other federal requirements).  That means that the other half of the budget would bear the entire brunt of the revenue cuts that would result from the passage of Question 3.

Even if we accept BHI's $2 billion estimate, combined with a widely recognized $2 billion structural deficit the state already faces, discretionary state spending would need to be reduced by $4 billion (or approximately 25%) to arrive at a balanced budget in the event Question 3 becomes law.

This begs the question of what areas of the budget are discretionary and how much money would need to be cut from each in the event Question 3 passes?

According to MTF, the approximately $16 billion in state discretionary expenditures and cuts would be distributed over a wide variety of state programs and services including:

• Local Aid to Cities and Towns ($400 million+ in additional cuts)*
• Public Higher Education ($200+ million in additional cuts)*
• Public Safety ($600+ million in additional cuts)* 
• Transportation ($50+ million in additional cuts)*
• Economic Development ($75+ million in additional cuts)*
• Human Services ($1+ billion in additional cuts)*
• Capital Spending (reduced, potentially higher debt service cuts if bond rating is lowered) 

* Assumes about an across the board 25% cut in discretionary FY11 expenditures.  Reductions in the size of the cuts in one area would necessarily require increasing the size of cuts in another.

It is easy to imagine several additional "dynamic effects" of these cuts not considered by BHI's model, most notably the impacts of the cost shifting from state government to households and local governments that would likely occur in the event these cuts were made.

The impacts on household budgets of likely increases in property taxes in some communities, school fee hikes and higher user fees for courts and other public services are not systematically considered by the BHI model.

Further, it stands to reason that these cuts would disproportionately impact families with special needs (those with a developmentally disabled,  mentally ill or elderly family member), those who are out of work and those attending a public institution of  higher education.  These households would either need to pay out of pocket for these services (thus reducing their disposable income available to spend on other things and reducing economic activity) or do without these services.

Additional impacts such as the need for some family members to leave the workforce to care for a elder or disabled family member no longer covered by state services would also have negative economic effects.  This is to say nothing of the profound human costs that would result from some of these cuts in programs and services.

So, what can we learn from the BHI report?  Two conclusions seems warranted and both are non-controversial in my view.

1) The proposed sales tax cut would have some positive effects on the state economy.
2) It will also dramatically reduce tax revenue.

Significantly, what we don't learn is whether on balance the implementation of Question 3 would have a net positive impact on the state economy.  Notwithstanding the misleading title of the report suggesting otherwise, there are clearly numerous reasons to believe the net impact of Question 3 may be negative in purely economic terms.

While it is not always possible for a given analyst to definitively answer all sides of a given question, it is standard practice for analysts (as opposed to advocates) to discuss the limitations of their work and transparently acknowledge the implications of issues they could not consider or systematically address.

It is unfortunate that BHI made no effort to account for any or even acknowledge any of these additional potential impacts in their analysis despite their claims that their "dynamic model" captured the range of Question 3's economic impacts.

The problem here is what a methodologist would term omitted variable bias and what Saint Thomas (and my Mom) would call a sin of omission.  Bottom line, to the extent that BHI failed to consider or even acknowledge additional factors that could have a material impact on the analysis, their analysis is misleading.

As someone who has led a number of these types of projects,  I am acutely aware of how technically difficult it can be to conduct these studies in a manner that carefully considers both the economic benefits and the costs of a given project or proposal.  These sorts of challenges should make all policy analysts humble and policymakers and the public skeptical about all claims about the costs and benefits of major changes in public policy.  

Regardless of how one feels about the role of government in society, I think we can all agree that the price of getting our decision on Question 3 wrong will be very high.  What we need in this situation is an honest debate about how to cope with the profound fiscal challenges we are facing while promoting a high quality of life and standard of living across the state.  Viewed through this lens, yesterday's Beacon Hill Institute release leaves a lot to be desired.

It is completely legitimate and healthy for us to have a vigorous public debate about the role that the state and the nation should play in providing a social safety net for its people.  This is a debate that is currently occurring across the nation and it is a very important one. 

If policy analysis is to inform rather than distort these critical public discussions, analysts must clearly distinguish between what is (facts) and what should be (values).  In the matter of Question 3 the facts are clear.   What remains to be decided on November 2nd is a question of values.

Let's hope we get it right...

Housing Development and Municipal Budgets: A Reality Check

 This was originally published on the Massachusetts Housing Partnership's "Growing Debate Blog" but, given the looming election and the ongoing debate over Question 2, I thought it was worth reposting....

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“But we can’t afford it!”

This is among the most common arguments made against proposed housing developments in communities across the Commonwealth and in many cases it is just simply wrong. 

Undoubtedly, cities and towns across Massachusetts face profound budget pressures and in some cases increased demands for services from residents who, in many cases, are already highly burdened by property tax costs and are facing substantial financial pressure in their own right.

But the common assumption that new housing development is always a net fiscal loser for cities and towns is not borne out in the actual experiences of communities that have agreed (or have been forced) to develop much needed new affordable and market-rate housing.  

This seems very counter-intuitive.  After all, new housing means new residents and those new residents need services and services cost money.  In an environment where per pupil expenditures in some suburban communities are well in excess of the average property tax payment, how could it be otherwise?

The answer is that the cost of providing services to each additional resident doesn’t automatically add the per capita cost of these services to the community’s bottom-line but rather the marginal cost of providing these services.

In other words, adding new students to the school system only costs more money if you need to expand the capacity of your schools to serve those students.  If you have extra seats in your classrooms and on your school buses, the marginal costs to the community of serving additional students are significantly less than the per capita costs and in many cases these costs are negligible.

According to a 2007 UMass Donahue Institute study, between 1999 and 2004, school enrollment in Massachusetts grew an anemic 0.2 percent while spending on schools rose over 28%.  Clearly, enrollment is not the primary driver of school spending in Massachusetts.   Rising health care and labor costs are a much bigger reason why expenses are rising even in communities with declining numbers of students.   It is patently unfair to place the blame for these expenditure increases on new residents and their children.

Now to be sure, there are communities where adding additional housing, residents and school age children requires additional capacity to meet the service needs of the new members of the community.  In these cases the state must be ready to step forward and help “make these communities whole” if it is to expect them to take on these new developments. 

The relevant provisions of Chapters 40R and 40s (when properly funded) were designed in part for this purpose but, as currently written, they essentially accept the false premise that development is always a fiscal loser for cities and towns and that communities must be “paid off” in order to accept new developments.

A more effective policy would guarantee payments to any community that developed housing that served to meet a regional or statewide need and could be demonstrated to be a net fiscal cost to the community.  This would ensure that the Commonwealth was not paying communities to develop housing that would have been developed anyway and would make a real difference for communities that were truly fiscally burdened by housing development.

It is high time that we recognize that the “fiscal impact” argument against housing development in Massachusetts is far too often a “red herring” that serves to distract us from a more thoughtful discussion of how we can manage development and growth in the Commonwealth in a manner that fairly balances local, regional and statewide needs.

We can do better.

One of these Polls is Not Like the Others...

I awoke this morning to discover-- thanks to the Sunday Boston Globe -- that the Gubernatorial race here in Massachusetts is now looking like a toss-up (5 weeks or so from election day).

I must confess to being a bit surprised....after all, last week the typically reliable Suffolk Poll had Governor Patrick leading by 7 percent (outside of the poll's margin of error) while the Globe Poll (conducted by Andrew Smith at the University of New Hampshire) has the Governor leading by a single point (a statistical tie given that it is well within the poll's margin of error). 

As I have discussed previously, up until today the preponderance of the polling evidence has indicated that Governor Patrick has a relatively decent lead and a high probability of victory.  So what, if anything, has changed and what possible explanations can we offer for the apparent change in the Governor's political prospects.
 
A closer look at the technical details and findings of both the Suffolk and the UNH/Globe Poll is revealing:

1) Even though they were released several days apart, these two Polls were actually in the field at the same time:

The Suffolk Poll- Conducted September 16th-19th (Source: Boston Herald)
UNH Poll- Conducted September 17th-22nd (Source: Boston Globe)

This begs the question of whether there was a major sea change in public opinion during the three days last week when the UNH poll was in the field and the Suffolk Poll was not.  And if so, why?

UNH reports that they interviewed 522 adults (471 of which were likely voters) and so they averaged about 87 interviews per day over the six day period.  So, for the sake of discussion, let's assume that 261 (or 87*3) of the 522 respondents were answering the UNH questions during the three day period in question.

In order for the data collected during those three days to have a large enough impact to explain the difference between the two polls, there would have had to have been a pretty large shift in sentiment that UNH was able to capture and Suffolk missed. 

So, what, if anything, happened between September 20th to the 22nd that might account for this change?  A few possibilities come to mind:

1) We have had some debates....maybe they made a difference?

The latest debate was broadcast on the evening of September 21st and so the UNH/Globe Poll did interview somewhere between 87 and 174 of its respondents during or after the debate.  Could this have made a difference?  Sure.  Could it explain the entire difference?  Seems unlikely to me.

In order for the debate to have made a difference of this magnitude, it would have had to have had a huge audience and there would have to be a very large proportion of non-Baker voters whose minds were changed by the debate. 

2)  Didn't Tim Cahill's campaign manager and senior advisor just quit?  Couldn't this have led to some of his supporters defecting to Charlie Baker?

Maybe, but any impact could not have been reflected in the UNH/Globe poll.  According to the Herald,  Cahill's campaign manager quit the evening of the 23rd (his campaign manager quit shortly thereafter), after the UNH/Globe Poll had completed its interviews. 

3)  Maybe the undecided voters decided en masse last week and they are disproportionately declaring their intention to vote for Baker?

Nope.  The Suffolk Poll identified 10% of the voters as undecided, the UNH/Globe Poll reported that 14% of voters remain undecided.

At this point some of you may be asking yourselves, "Isn't it possible that the Suffolk Poll was wrong?"

Indeed it is. However, since the Suffolk Poll is consistent with the previous polling data, it is the UNH/Globe poll that, as the folks from Sesame Street so nicely put it, does not look like the others and therefore is the "data point" that requires an explanation.

So, absent some missing "real world" event that changed voters minds, one has to wonder whether the UNH/Globe Poll is an outlier, a statistical anomaly that occasionally and unavoidably throws a wrench into the best laid plans of survey researchers to conduct a valid poll.

If, as is common practice, the estimates contained in the UNH Poll are offered with a 95% Confidence Interval this could simply be a case of bad luck for UNH's Dr. Smith.  In this context, what a 95% Confidence Interval means is that if the Poll were conducted 20 times, one of those times the estimates would fall outside of the margin of error, perhaps even well outside. In other words, any given poll has a 1/20 chance of being wrong, perhaps even wildly wrong.

I can't help but wonder whether this is one of those times....

Income Inequality and its Discontents

This weekend,  Todd Henderson attracted a great deal of attention when he published (originally posted here but subsequently removed and cached here) an extended complaint about how difficult it will be for he and his wife to make ends meet if the Bush tax cuts are not extended by the Congress.

What made these comments so striking was the fact that Todd Henderson is a Law Professor at the University of Chicago and his wife is a practicing physician.  Based on his declarations of his tax payments and other info Professor Henderson unwisely shared with his readers, Berkeley's Michael O'Hare estimates that the Hendersons earn an estimated household income of $450,000 a year.

Not surprisingly, Professor Henderson has been catching quite a beating for his kvetching from a number of observers (James Fallows provides an excellent summary here).   But it is Berkeley's Brad DeLong who, after reminding Professor Henderson that he is in fact rich, makes an observation that absolutely nails the real issue here.....that the gap between the top .01% of households and everybody else has widened so dramatically that even the rich feel deprived (albeit relatively).

As Professor DeLong puts it,

"Cast yourself back to 1980. In 1980 a household at the bottom of the 1% rich households in America had an income equivalent in today's dollars $190,000 a year. They know of 1000 people--900 of them poorer than they are in income brackets 90-99% and 100 people richer than they are in the top 1% income bracket. The 900 people poorer than them back in 1980 had incomes from $85,000-$190,000 a year. Those are, if you are sitting at the bottom of the top 1%, the middle class who are not as successful as you. You don't look downward much. Instead, you look upward. Of the 100 above you, 90 in 1980 had incomes less than three times their incomes. And they would have known of 1 person of that 100 who was seven times as rich as they were.

Now fast forward to today. Today a household at the bottom of the 1% rich households in America has an income of nearly $400,000 a year--the income of that slot in the labor market has more than doubled, while the incomes of those at the slot at the bottom of the 10% wealthy has grown by only 20% in two decades. The 900 people he knows in the 90%-99% slots have incomes that start at $110,000 a year. Compared to Henderson's $455,000, they are barely middle class--"How can they afford cell phones?" Henderson sometimes wonders.

But he wonders rarely. He doesn't say: "Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!" For he doesn't look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Henderson doesn't look down.

Instead, Mr. Henderson looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.

And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them--widening income inequality over the past generation has excluded him from the rich who truly have money. "

While relative deprivation has long been a sociological fact of life and is an interesting phenomenon in its own right, there is a larger lesson here that goes to the heart of some major economic and social challenges facing the United States. 

What Professor Henderson -- who no doubt now regrets ever opening his mouth on this subject -- reminds us, is how many different worlds we Americans live in, worlds whose boundaries appear to be increasingly divided by income.

In future posts I will discuss some of the social and economic implications of rising income inequality and the important role it may be playing in the current economic recovery. 

It's the Consumer, stupid

There are a number of reasons to be concerned about the sustainability of the economic recovery both nationally and here in Massachusetts.  In particular, recent consumer sentiment and consumer behavior data are particularly troubling. 

Consumer behavior is important for a number of reasons, not the least of which is how dependent the national economy is on what the Bureau of Economic Analysis terms "personal consumption expenditures".  

How important is consumer spending to growth?  Well, the latest US Gross Domestic Product release estimates that consumer spending contributed +1.4 percent to national economic growth in the second quarter of 2010 (total growth was estimated to be +1.6 percent in that same quarter).   In other words, pretty damn important.

So, what are American consumers thinking and, perhaps more importantly, what does their recent behavior suggest our economic future holds?

I think there are at least three things worth paying attention to....all of which are troubling.


1) Consumer confidence appears to be weakening

Nationally, consumer confidence (as measured by the University of Michigan consumer sentiment survey) remains relatively weak by historical standards and the latest data indicate consumers are less optimistic about the future than they were a year ago.  Closer to home, the news is no better according to the latest MassInsight's Consumer Confidence Survey for Massachusetts. 

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 2) The "deleveraging of household balance sheets" continues

In an environment where home equity continues to decline,  unemployment is high and interest rates are low, it is not surprising that many households are consuming less, saving more and paying down their debts.  In the long run this is a good thing but it in the short run it reduces consumer spending and slows economic growth.

The caution of the American consumer is all the more understandable given the most recent Flow of Funds report released by the Federal Reserve.  As Calculated Risk points out, the data in the report indicate that, "household net worth is now off $12.3 Trillion from the peak in 2007, but up $4.7 trillion from the trough in Q1 2009."  This negative wealth effect is undoubtedly constraining consumption as well.

However, this may not be as healthy as it sounds.  According to a recent Wall Street Journal Analysis of these same data, most of the "deleveraging" appears to be the result of consumer defaults on mortgages and other consumer credit obligations rather than through the paying down of these debts.   The Journal estimates that of the $610 billion in outstanding consumer debt that has been shed in the past two years, a mere $22 billion has been paid off in the traditional way, with the balance being reduced through credit defaults.

Source: Wall Street Journal

Many of these households that have been forced or have chosen to default on their debts will now find themselves unable to access consumer credit at reasonable (or even unreasonable) terms.   Absent access to credit, it is hard to imagine these families making major purchases (purchasing a car or a home etc) anytime soon.

3) Small businesses are worried about the lack of demand for their goods and services

As the Congress debates whether to extend the Bush tax cuts or not, one keeps hearing about how important small businesses are to job growth and how we must be very careful not to allow changes in tax policy to discourage them from hiring.

While undoubtedly small businesses create the majority of the jobs in the US economy,  it does not appear that taxes represent the biggest concern for our small businesses.  According to the most recent National Federation of Small Business (NFIB) survey, small business confidence remains weak.

As a number of observers have pointed out (notably Catherine Rampell and Paul Krugman), 31 percent of small businesses surveyed by the NFIB identified poor sales as their biggest problem.

Source: New York Times

So consumers are spending less in part because of legitimate concerns about their financial futures and job security, while small businesses can't hire because of weak consumer spending.  

A nasty catch-22 to say the least and a real cause for concern going forward....

Another month of job growth for the Commonwealth

Yesterday the Massachusetts Executive Office of Workforce Development released their preliminary job estimates for August (the press release and links to latest data can be found here).  These estimates indicate that Massachusetts has added jobs for seven consecutive months, gaining 64,300 net new jobs over this period.

A couple of noteworthy items from the release and the associated detailed monthly data. 

• The private sector continues to add jobs (+4,000 between July and August) but public sector job losses (-1,900 during the same period) are partially offsetting these gains.

• Seasonally adjusted job gains were led by Leisure and Hospitality (up 19,300 jobs so far this year), Professional and Business Services (up 13,500 jobs in 2010) and Construction (up 1,600 since July and 3,200 year to date).

•  Job losses were concentrated in Manufacturing (down 1,600 for the month but up 600 overall year to date), Information ( down 1,100 for the month but up 500 overall year to date) and Government (down 1,900 for the month but up 3,800 overall year to date)

• Government job losses were largely concentrated among federal employees (down 1,500 for the month) which likely reflects the continued impact of the layoffs of the pool of temporary workers hired for the decennial census.

A couple of things to bear in mind when making sense of this data:

1)  These monthly data releases are notoriously volatile and subject to revision so, it is wise to not put too much stock in a single month's worth of data.

However, this report contained an upward revision of the July numbers (from +13,200 jobs to +15,200 jobs) and is the 7th consecutive month of net job growth....both very encouraging signs.

2) Given the continued sluggishness of the national and global economies,  one can't help but wonder how long this can last.  Eventually, the slowdown in key markets for Massachusetts goods and services has got to take at least some of the wind out of the sails of the state's recovery.

3) That said, corporate profits are approaching pre-recession levels and domestic investment in equipment and software still appears to be holding up as reflected in the national income and product accounts and the earnings reports for some of the leading technology firms.

Bottom line, this is undeniably very good news.  The growth of construction employment is especially welcome as this sector has been hit especially hard in recent years.

What will the banks do?

The weak housing market has long been a drag on state and national economic growth but, up until recently it appeared that prices had hit bottom and a slow but steady recovery was underway. Since the expiration of the federal housing tax credit, however, the recovery in the housing market appears to have stalled. 

According to First American Core Logic, in the second quarter 15% of Massachusetts homeowners with mortgages were in a negative equity or "underwater position" (versus 23% nationwide). And according to the Warren Group, foreclosures are way up and sales are down in Massachusetts of late.

A major wild card in all of this is well described in a recent Wall Street Journal article.  The article highlights how important the decisions banks make in how they dispose of their REO portfolio (the foreclosed properties they own) will be to the future trajectory of the housing market.

With demand for housing continuing to wane, a potential flood of bank owned properties into the market could force housing prices down further, pushing more homeowners "underwater" and fueling a vicious and self reinforcing circle that is now in its fifth year. 

The job market is another wild card here.  Here in Massachusetts, if we can continue to add jobs at current pace, I think that household finances should be stable enough to allow more families to keep current with their mortgages and slow the pace of foreclosure activities.  If not, more foreclosures seem inevitable.

You would think that any self respecting bank would consider holding onto properties so that they don't end up racing each other to the bottom.  But most banks hate being landlords and so, if history is any guide here, it seems likely that the supply of these homes on the market will increase. 

Considering that housing supply already appears to be rising, it is beginning to look like we are in for another round of housing price declines.

Forecasting the Gubernatorial Election

As election day grows near, I have begun to pay more attention to what the professional political forecasters are saying.   In politics as in economics, predicting the future is a tricky business but it often can be very enlightening, especially when done well.

Nate Silver, whose independent blog became very influential during the 2008 elections and who recently teamed up with the NY Times, is one of the more interesting political forecasters out there. His latest models suggest that:

• The Republicans have a 2 in 3 chance of taking back control of the house of representatives.

• The Republicans have a 1 in 4 chance of taking control of the Senate.

• The Republicans are expected to control 30 of the 50 State Houses (up from 23).

Nate also prepares models that forecast each gubernatorial race -- his current prediction (as of 9/7) for the Patrick-Baker-Cahill race suggests that it is highly likely that the Commonwealth will buck the national trend and remain in Democratic hands. 

Specifically, he assigns a 73.4% probability of a Patrick victory, a 26.6% chance of a Baker victory and a 0% chance of a Cahill victory (sorry Mr. Treasurer). 

Locally, the always interesting David Bernstein over at the Boston Phoenix comes to pretty much the same conclusion albeit with a lot less number crunching and a lot more on the ground insight.

It is still early but, absent some major game changers in the next 6 weeks, it appears we are due for a major shakeup in the Congress and a second term for Governor Patrick and Lieutenant Governor Murray.

Ladies and Gentlemen, the next Chair of the President's Council of Economic Advisors

Dr. Austan Goolsbee-- professional economist, amateur comedian (hat tip to Calculated Risk)

Looking for a new way to stimulate the economy?

The American Society of Civil Engineers (ASC) has created a very interesting set of "Infrastructure Report Cards" for the nation and the fifty states.

They give the nation a D and highlight the following issues here in Massachusetts:

• 56% of Massachusetts’ bridges are structurally deficient or functionally obsolete.

• There are 303 high hazard dams in Massachusetts. A high hazard dam is defined as a dam whose failure would cause a loss of life and significant property damage.

• 246 of Massachusetts’ 1,630 dams are in need of rehabilitation to meet applicable state dam safety standards.

• 18% of high hazard dams in Massachusetts have no emergency action plan (EAP). An EAP is a predetermined plan of action to be taken including roles, responsibilities and procedures for surveillance, notification and evacuation to reduce the potential for loss of life and property damage in an area affected by a failure or mis-operation of a dam.
• Massachusetts’ drinking water infrastructure needs an investment of $8.56 billion over the next 20 years.
• 41% of Massachusetts’ major roads are in poor or mediocre condition.

• Vehicle travel on Massachusetts’ highways increased 41% from 1990 to 2007.

• Massachusetts needs to come up with an additional $15 - $19 billion over the next two decades for maintenance on existing transportation assets.
• Massachusetts has $3.16 billion in wastewater infrastructure needs.

Source: American Society of Civil Engineers, http://www.infrastructurereportcard.org/state-page/massachusetts

Given that we are experiencing what can fairly be described as a blue collar depression, have thousands of unemployed construction workers desperately searching for work and the Feds can borrow money at historically low interest rates, it is high time we started to deal with these problems.

Doing so would not only help put people back to work,  the product of their work would enhance the capacity of our nation to grow more rapidly. This needs to happen if we are to deal effectively with our existing and looming fiscal challenges (read pay back all the money we are borrowing).  It would also improve public safety, public health and the quality of life in our nation (always a nice bonus).

President Obama recently proposed the formation of a national infrastructure bank which represents an important first step in this direction.  However, the ASC estimates that the US has $2.2 trillion dollars in infrastructure investments to make and so, while his proposed initial investment of $50 billion will certainly help, it appears we are a very long way from where we need to be.

Le Livre Beige

Earlier today, the Federal Reserve Board released its latest "Beige Book", a succinct and always interesting take on economic conditions in each of the Fed's 12 districts.

Unlike most economic reports the Beige Book is a more qualitative summary of economic conditions. Here is how the Fed describes how it's prepared:

"Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources." 

The research staff of the Boston Fed prepares the report for the first district -- which is defined as the entirety of New England except for Fairfield County in CT which is covered by the New York Fed.

The latest district 1 report contains a number of interesting observations, several of which bode well for the Commonwealth's near term economic prospects.  To wit,

Software and information technology contacts in the First District report that business conditions continued to improve. Year-over-year revenue increases ranged from mid-single digits to 15 percent in the most recent quarter. Half of contacted firms increased their headcounts and another was "on the cusp of hiring." One contact, however, reports a modest reduction in headcount due to restructuring. Wages are steady or up notably, with some merit increases in the range of 3 to 5 percent. Prices held steady and one contact observes less discounting pressure relative to a year ago. Half of contacted firms say that they have increased capital and technology spending relative to last year in order to expand or upgrade equipment; remaining contacts held capital and technology expenditures steady. The outlook among contacts is moderately positive.

This is good news for Massachusetts, where a large component of our export economy involves firms that develop, produce and sell information technology products and services to customers worldwide.  For a comprehensive examination of the role that the IT industry plays in the Massachusetts economy, see this relatively recent analysis.   

All that said, there are some sobering observations in this edition of the Beige Book as well.  Fed contacts report that residential and commercial real estate markets remain very weak and that non- technology sectors are only "slowly re-hiring " workers laid off during the recession.

Bottom line, it's a mixed bag but it definitely appears that it could be worse -- check out the national overview here

The "Silly Season" begins

Political observers often say that nobody pays attention to Fall elections until after Labor Day.  Well, Labor Day has come and gone and so it is worth briefly reflecting on where things stand here and nationally as the Congressional midterm and the gubernatorial races enter the hone stretch.

Nationally, the so-called "generic ballot" polling suggests that congressional races may be closer than many observers think although these same polls show Republicans significantly more motivated than their Democratic counterparts.

Here in Massachusetts, there hasn't been a ton of public polling but polls completed to date consistently show Governor Patrick leading...although the size of that lead seems to be shrinking (please note that this latter observation is based solely on evidence from the Rasmussen poll which may have some methodological issues).   In any event, the oft made observation that Cahill is playing the role of the spoiler for Baker seems to fit the facts. 

It will be very interesting to see if last night's debate changes this dynamic at all....I suspect not.

 

Tech remains vital to Bay State economy

Robert Gavin's article in this morning's Globe highlights the findings of a recent analysis conducted by the regional office of the Bureau of Labor Statistics and offers yet another example of how the relatively faster recovery here in Massachusetts is being driven by our innovation economy and highly educated workers. 

While this is not much consolation for our neighbors who work(ed) in construction and traditional manufacturing, the reliance of the Commonwealth on the "yankee ingenuity" of its residents is clearly getting stronger.

Money quote:

"Ultimately, it’s the “genius of the people’’ that drives the tech sector and the state’s knowledge-based economy, said Eric Nakajima, senior innovation adviser in the state Executive Office of Housing and Economic Development."

Jobs and the Massachusetts Economy on Labor Day 2010

Yesterday, the Massachusetts Budget and Policy Center released a brief report describing the condition of the labor market in the Commonwealth.  It is well worth checking out....

News Flash- Upper middle class students prefer the University of Michigan to UMass Amherst

Tracy Jan's article in yesterday's Boston Globe totally misses what I think is a fundamentally changing attitude towards public higher education among middle class families in Massachusetts and elsewhere.   Enrollment at UMass Amherst is growing strongly and the profile of its students has never been better.  You would never know this from reading this article.

Instead what we learn is that elite high school students in Massachusetts (at least one at Wayland High School) continue to draw the obvious conclusion that, if price is no object, public universities in Ann Arbor, Berkeley, Charlottesville and Chapel Hill are more prestigious places to get a bachelor's degree than our flagship public university in Amherst. 

What the Globe is really missing here is how the recent recession and associated financial crisis has forced many families to think hard about how much they can afford to spend on junior's college education.  This is beginning to bring some real price competition to bear in the higher educational marketplace.  For more details,  check out a 2006 MassINC report by Harvard's Bridget Terry Long that documents the growing burden of rising higher ed costs on Bay State households.

When I graduated from high school in idyllic Newton, MA, UMass Amherst was considered by many of my classmates and their families to be a safety school.  I think that financial reality is forcing many of these same classmates to seriously consider public higher education for their own children.

The article does a nice job of highlighting how poorly our state college and university system has been supported in recent years and underscores the price of this disinvestment in terms of the number of faculty and overall research output. 

On a related note....it is astounding to me that people are willing to to pay an extra $17,000 per year to send their kid to UConn.  Cal or Michigan -- OK fine.  But Storrs?  Is a successful basketball team really that important?   I'd like to think not.  I also can't help but wonder if some of these "student exports" weren't accepted at UMass Amherst. 

It will be interesting to see if the declining ability of middle class families in Massachusetts to pay for private colleges and universities will lead to any public call for greater investment in our public higher education system.

An accidental economist

I remember it like it was yesterday.

I was standing in Boston's South Station watching the commuter rail train schedule display the list of trains taking commuters from Boston to Worcester.   An unremarkable moment except for the fact that this was the first day that expanded train service between the Hub of the Universe and the Heart of the Commonwealth was finally happening.  As the author of the report that had made the case for this service expansion, it was an especially satisfying moment.

Ironically, that same day I received a letter from the Editor of a reasonably prestigious academic journal informing me that, after several rounds of revisions, they had finally agreed to publish a paper I had written along with the Chair of my dissertation committee.  It was a very anti-climactic experience.

That day I was given the rare opportunity of seeing two different professional paths laid out clearly before me.  The first, a traditional academic career, seemed much less fulfilling than the opportunity to make a difference in the so-called real world.  The path I had been on for nearly a decade shifted significantly.  I would defer the dream of "the life of the mind" and focus my efforts on applied public policy research.  Shortly thereafter I defended my dissertation and was awarded a Ph.D. in Sociology from Boston University.

Within a year, after answering a newspaper ad, I was hired into what at the time was the ideal position for someone with my aspirations in Massachusetts.  In June of 2001 I joined the UMass Donahue Institute as their Director of Economic and Public Policy Research, a position I held until August of 2009.

My time with the Institute was a very intense and professionally rewarding period in my life.  Over the years, the economic and public policy research enterprise grew from a staff of two to more than twelve and our grant and contract revenue grew tenfold -- reaching about $1.5 million annually by the end of my tenure. The public influence of our research activities grew substantially and, perhaps most importantly, I had the opportunity to mentor and work alongside an extraordinary group of talented analysts and managers.  Together we built something that continues to make me very proud.

The Economic and Public Policy Research group was home to three major activities;  The State Data Center (and Population Estimates research program), MassBenchmarks (the journal of the Massachusetts economy published by UMass in collaboration with the Boston Fed) and grant and contract funded research that over the years produced numerous studies of the state's people, economy and industry base.  This work afforded me the opportunity to become well versed in the challenges and opportunities facing the Commonwealth, its regions and 351 communities.

During this period I also spent a significant amount of time working with the New England Economic Partnership (NEEP),  a non-profit organization which for over thirty years has prepared semi-annual economic forecasts for each of the New England states.  I served for a year as the Massachusetts Forecast Manager and then for three years as the organization's President.   It was during this time that, as I like to say, I became an accidental economist.

In the summer of 2009 I was presented with an opportunity to assume a more traditional role within the University of Massachusetts system and to help grow a young but promising graduate public policy program. I found myself back at South Station -- reconsidering my professional direction and contemplating a return to a more traditional path.

In the end, it was UMass Dartmouth's sincere commitment to public service and civic engagement that closed the deal.  I would be given the opportunity to continue to work on economic and public policy issues that I thought were critically important to the future of the Commonwealth and help to train the next generation of policy analysts, public managers and policymakers.  And, significantly, I would have the academic freedom and the time to do things like start a blog.
 
About this blog

This blog is primarily designed to provide a forum for a non-partisan and evidence based discussion of economic conditions and public policy issues in Massachusetts.  

In this blog, I speak for myself and consequently its contents do not necessarily reflect the opinions or official position of my employer (the University of Massachusetts) or of any organization or board of directors with which I am otherwise affiliated.