Things are looking somewhat up for Pennsylvania’s economy, according to the annual Rich States, Poor States published by ALEC. The 2013 edition ranks Pennsylvania 34th in economic outlook, up from 40th last year and the highest economic ranking since the index’s creation.
Rich States, Poor States considers 15 factors heavily influenced by state policies to predict how a state’s economy will perform. While the commonwealth’s high tax burden and lack of worker freedom continue to hinder growth, a slowdown in state spending and continued phase-out of the capital stock and franchise tax have helped the state move from the bottom third to the middle-of-the pack.
But middle-of-the-pack isn’t good enough. To continue to attract jobs and investment, Pennsylvania will have to tackle big cost drivers like Medicaid and the pension tsunami. Continued tax reforms will help too, such as Governor Corbett’s latest proposal, which we estimate will create more than 2,500 new jobs by 2018 if enacted.
Earlier this week, GE announced plans to move 950 jobs from Erie, Pa. to Texas. What is one of the key reasons Pennsylvania continues to lose jobs and population to states like Texas? Economic freedom.
The Mercatus Center's latest edition of Freedom in the 50 States underlines the problem hindering the opportunities available to Pennsylvanians. The study ranks the Keystone State 31st overall on its freedom index. The reasoning:
The state's ranking remains mediocre on fiscal policy. It has higher-than-average taxes but performs much better than most states on government spending and employment. However, it has high government debt and is not as fiscally decentralized as most states.
Not only are Pennsylvanians taxed too much, but we are neck deep in government debt. The analysis also scored our state below average in business regulations and tort abuse.
Study after study finds that economic freedom results in higher quality of life. States with more economic freedom see higher rates of GDP growth, lower unemployment, and lower levels of state and local debt. Economic freedom also leads to higher incomes, less poverty, better environments, and even longer lives.
This short video from Duquesne University professor and CF Scholar Antony Davies underscores the benefits of economic freedom.
Critics, and likely election challengers, of Gov. Tom Corbett point to the singular fact that the state's unemployment rate is higher than the national average (though not significantly, nor significantly changed from last year). These critics claim this is the result of fiscal restraint in the last two state budgets. But focusing on this one data point ignores the broader economic trends found in the same Bureau of Labor Statistics data.
To begin with, the unemployment rate is determined by calculating the number of "unemployed"—those actively seeking work—by the total labor force (those with jobs plus unemployed). Thus the "unemployment rate" can rise if people lose jobs, or if more people enter the labor force by starting to look for work or move to a new state. The latter is the case in Pennsylvania—more people are entering the labor force, and most are getting jobs.
Here are some facts about Pennsylvania's growth:
- The number of employed persons grew by 143,537. Pennsylvania's growth rate was more than double the national average.
- Over the past year, Pennsylvania nearly matched the other 49 states combined in new labor force participants. PA's labor force growth rate was 17 times the growth in the other 49 states.
Last Two Years
- The number of employed persons grew by 165,997. Pennsylvania's growth rate was slightly higher than the national average.
- Pennsylvania's labor force growth rate was 4.5 times the growth in the other 49 states.
Corbett's Two Years vs. Rendell's Second Term
- Job growth (reported by employers, which differs somewhat from household survey data described above) was 91,100 over the past two years. From January 2007 to 2011, Pennsylvania lost 136,600 jobs.
- Pennsylvania's unemployment rate is down 0.1 percent since January 2011. It had grown 3.8 percent in the prior four years.
This trend shouldn't be surprising. The historical evidence demonstrates that government spending doesn't stimulate economic growth. Pennsylvania's jobs record demonstrates the old axiom that you can grow the economy or you can grow the government, but you can't grow both.
Will Bunch's column in the Philadelphia Daily News last week takes a very negative view of Pennsylvania's economic climate, based on the premise that the state unemployment rate is higher than the national average. My single quote in the piece bears expanding upon, as recent data shows Pennsylvania's labor force and the number of people employed is growing faster than the rest of the country.
The most recent state unemployment data from the Bureau of Labor Statistics—which showed Keystone State's unemployment rate fell 0.3 percent last month—rank Pennsylvania among the nation's employment leaders. While the number of unemployed persons has risen over the past year, so has the number of persons employed.
More dramatic is Pennsylvania's growth in labor force, defined as the number of people working or actively looking for work ("unemployed"). While the labor force has been stagnant nationally, Pennsylvania's labor force has been expanding. In fact, the commonwealth nearly matched the other 49 states in labor force growth over the past year.
Either large numbers of disgruntled workers are deciding to reenter the labor force and look for jobs, or people are coming to Pennsylvania to find employment. Perhaps we are doing something right after all.
Can Americans afford slower economic growth and a lower standard of living in the future? That will be the impact of growing government debt on the economy, according to a a policy brief released by the Stanford Institute for Economic Policy Research.
Michael J. Boskin explains:
How does a high debt-GDP ratio slow growth? Higher debt ratios eventually crowd out investment, as holdings of government debt replace capital in private portfolios. The lower tangible capital formation reduces future income. To the extent the reduced capital formation slows the development and dissemination of new technology, this effect will be amplified. Every dollar borrowed requires future interest be paid, whose present discounted value equals the debt. So future taxes must go up to cover the interest unless future spending is cut. The prospect and then reality of higher tax rates, plus increased uncertainty about future fiscal policy, slows growth and also raises the specter of higher inflation eroding the value of the government debt and/or a financial crisis, which might sharply raise interest rates.
So despite what some politicians claim, more government deficit spending and debt actually hurts the economy. What's needed for economic growth is private investment, not government investment.
What does lower economic growth mean? If the U.S. government continues to recklessly run up the debt, projections have the average family losing as much as 30 percent of their potential income by 2050. That is, families would be one-third poorer because of the burden of government debt.
Politicians like to set up a false choice between fiscal austerity and stimulating the economy, when in reality, the two aren't mutually exclusive. Debt or prosperity? It's our choice.
Last week saw the release of September state jobs data from the Bureau of Labor Statistics (BLS). Media coverage of this jobs report focused on the unemployment rate only, which shows an uptick in the state unemployment rate contrasted with an unexpected and surprising decline in the national unemployment rate.
However, looking beneath the headlines, the data shows Pennsylvania's job market actually outperformed the rest of the nation.
Keep in mind the jobs report uses two sets of surveys: One of 390,000 establishments (businesses) which is used to determine the number of "jobs," the second of 50,000 households used to calculate the number of persons employed, unemployed and in the labor force, along with the unemployment rate. These surveys often show different trends.
- In terms of jobs (establishment data), Pennsylvania added 17,800 jobs in September. This was the second highest in U.S. behind Texas. This represents an increase of 0.3 percent—triple the increase among all 50 states and D.C. (0.1 percent).
- Switching to household data, BLS shows Pennsylvania added 23,227 employed person in September, the 8th largest growth in nation. This is an increase of 0.4 percent, more than the 50-state growth of 0.3 percent.
- The data on the unemployed persons is where Pennsylvania trends diverge from the national average. According to BLS, Pennsylvania added 5,407 unemployed individuals, whereas the 50-state total shows 268,054 fewer unemployed persons (see footnote for some questions about this trend).
- However, what may really surprise readers is the growth in Pennsylvania's labor force. This is defined as the number of people employed or officially "unemployed" (meaning they are actively seeking work).
- In September, Pennsylvania added 28,364 individuals to the labor force. This was the third highest in U.S, and represents a growth rate four times the rest of the nation.
- Over the past year, Pennsylvania's labor force grew 130,400. Not only is that the second highest in U.S., the growth rate of 2 percent means the state labor force has grown at 18 times the national rate of growth.
- Over the past year, Pennsylvania was responsible for 74 percent of the 50-state labor force growth.
That is to say that Pennsylvania's unemployment rate is growing while the state is adding jobs because of growth in our labor force. Pennsylvania is one of few states where more people are actually trying to look for jobs, which includes those who had previously given up, and those coming to Pennsylvania to find a job, given our relatively strong jobs market.
 For comparison, I used the total of all 50-states plus the District of Columbia from the state and local employment and unemployment series, rather than the national employment and unemployment series, as there are data differences between the two sets. For example, the national unemployment data (which includes Puerto Rico and the Virgin Islands) show 500,000 fewer unemployed persons than the state and local data set-lending credence to Jack Welch's claim that the BLS unemployment rate is unreliable.
In three separate studies on the state's economic competitiveness and business climates, Pennsylvania remains near the bottom of the pack.
The 2012 Alec-Laffer Economic Competitiveness Index, ranks states economic performance and outlook (1 being the best, 50 the worst). According to the index, the Keystone State ranks 40th in economic outlook for 2012 thanks to several factors, including:
- 50th in Top Marginal Corporate Income Tax Rate
- 32nd in Top Marginal Personal Income Tax Rate
- 50th in Levying Estate/Inheritance Tax
- 45th in Remaining Tax Burden (additional taxes beyond those already ranked)
- 41st in Recently Legislated Tax Changes
Another study by ChiefExecutive.net placed the Keystone State as the 43rd best state for business—a four position drop since last year. CEOs found, "Pennsylvania...is regulation heavy even for very small 1-2 person businesses," this despite a "positive" ranking in the development trend indicator as a result of the natural gas boom.
The general business climate is one thing, but how is the outlook for small businesses? The Thumbtack.com/Kauffman Foundation Small Business Survey found that Pennsylvania's small business climate is mediocre, earning a C for overall friendliness to small businesses. Although the survey gave business start ups a C+, the commonwealth received a C- for hiring regulations, and a D in jobs training programs.
Pennsylvania remains a relatively unattractive place to begin or operate a business. Crippling taxes, heavy regulation, and burdensome bureaucracy have held back the Keystone State's economic growth.
Pennsylvania is close to adopting Missouri's 40 year old failed land banking policy. House Bill 1682, which has already passed the House and the Senate's Urban Affairs and Housing committee, would enable local governments to establish public entities that could acquire land, incur debt, and develop vacant properties. However, these entities often block development.
Missouri' Show-Me Institute discovered St. Louis' land bank refused almost half of all purchase offers from 2003 to 2010. It even rejected a charter school company offering $300,000 for 13 abandoned parcels back in 2005. As of April 2011, all 13 of the parcels remain vacant. Check out the video below to learn more about St. Louis' experience.
Philadelphia, already anticipating the passage of HB 1682, introduced ordinances to create a land bank that would give the district Council member authority over development. The Show-Me Institute also had a stern warning about this practice in yesterday's Philadelphia Inquirer:
One rundown St. Louis building had offers from four different buyers, all rejected by the land bank. But when the area alderman showed up at a land bank meeting and asked that it be sold to another buyer, it was.
Unfortunately, the same policy has been written into Philadelphia's land bank bill. In its current form, it would forbid the bank from entering into a transaction without the approval of the district Council member. This will almost certainly thwart development.
The Bureau of Labor Statistics has updated their employment data by state through the end of 2011 (subject to revision).
Looking at December job data ("not seasonally adjusted") over the past couple decades reveals some interesting trends:
- 2011 saw the largest one-year growth in private sector jobs in Pennsylvania since 1999, according to Bureau of Labor Statistics data.
- Manufacturing job growth in Pennsylvania was higher than any year since 1990.
- From 2000 to 2010, the private sector lost 116,400 jobs, while government jobs grew by 30,800.
- In 2011, government jobs declined by 20,200, but the private sector grew by 79,000 jobs.
The Pittsburgh Tribune-Review reports that Pennsylvania lawmakers are pushing a special tax deal to attract a "cracker" plant to the state. The proposed Shell cracker—which breaks down natural gas into ethylene, used in plastics—has been much talked about, with the Keystone State reportedly a finalist with Ohio and West Virginia. The plant would create thousands of jobs, at least by internal estimates.
The proposal would expand Keystone Opportunity Zones, exempting certain businesses from taxes (primarily targeted to the cracker). What's wrong with a KOZ? Well for one thing, tax breaks for a few require higher taxes, spending being equal, on all other businesses. Further, a Legislative Budget and Finance Committee report finds that the KOZ program has little accountability, and the promised jobs often failed to materialize. Most importantly, tax breaks and corporate welfare don't actually generate economic growth, they simply shift resources.
Rather than expanding corporate welfare, here is what lawmakers need to do to make Pennsylvania more attractive:
- Enact a natural gas policy that removes the political uncertainty stemming from the Frack Attack, and provides predictability for the gas industry.
- Improve Pennsylvania's business climate for all businesses. Indeed, lawmakers should take the lesson from the Keystone Opportunity Zones—that businesses are attracted to lower taxes—and apply it statewide.
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The Commonwealth Foundation is Pennsylvania's free-market think tank. The Commonwealth Foundation crafts free-market policies, convinces Pennsylvanians of their benefits, and counters attacks on liberty.