5-31-16 – Huff ‘n Puff and Economic Stuff

by Chris Campion

A few months ago, the Huffington Post decided to try its hand at economics and was found wanting.  More specifically, this article by Carl Gibson on the Minnesota economy argued that Mark Dayton, Minnesota’s new governor as of January 2011, instituted policies of higher taxes that resulted in economic growth.  Which somehow, magically, destroys the argument that only lower taxes and lower wages (meaning being against raising the minimum wage) lead to economic growth.

Well.  While Gibson throws some good stats out, he’s missing a few things, like the economic context, and recessions, etc.  And reality.  But let’s let him speak for himself:

When he took office in January of 2011, Minnesota governor Mark Dayton inherited a $6.2 billion budget deficit and a 7 percent unemployment rate from his predecessor, Tim Pawlenty, the soon-forgotten Republican candidate for the presidency who called himself Minnesota’s first true fiscally-conservative governor in modern history. Pawlenty prided himself on never raising state taxes — the most he ever did to generate new revenue was increase the tax on cigarettes by 75 cents a pack. Between 2003 and late 2010, when Pawlenty was at the head of Minnesota’s state government, he managed to add only 6,200 more jobs.

Let’s start with jobs.  Pawlenty came into office in January 2003, in the middle of the post-9/11 recession.  As the FRED chart shows, the unemployment rate in Minnesota was already climbing prior to Pawlenty’s term, likely due to the post-9/11 recession.  A few years into office, and the unemployment rate actually decreases, but the 2nd recession then hits in 2008 and unemployment increases again.

minnesota unemploy

In Pawlenty’s final year, both the civilian labor force starts increasing, and the unemployment rate starts dropping – just in time for Gibson to make the claim that Dayton’s policies, not yet enacted, are responsible for the gains in Minnesota’s economy.  In fact, it’s more likely that the economy has improved despite the tax increase, rather than because of it.

That Pawlenty managed to add any jobs at all, post the 9/11 recession and a 2nd recession, is probably more noteworthy than a governor coming in during an economic recovery and claiming all economic success is directly attributable to him.

Between 2011 and 2015, Gov. Dayton added 172,000 new jobs to Minnesota’s economy — that’s 165,800 more jobs in Dayton’s first term than Pawlenty added in both of his terms combined.

Again, Dayton is benefiting from not being governor during a recession.  The unemployment rate started dropping during Pawlenty’s term – which means it’s the results of Pawlenty’s policies that Dayton is benefiting from, not his new taxes on the rich.  It’s unclear how raising taxes on the rich would actually create jobs, other than government jobs, but Gibson doesn’t bother himself with asking that question.  The fact that taking money out of the private sector and transferring it to the public sector doesn’t magically cause private-sector job growth – in fact, it’s just the opposite – seems lost on Gibson.

Where do rich people put their money?  In mattresses?  No, it’s invested, in savings, stocks, bonds, real estate, equities, etc.  What happens when dollars are saved in a bank?  The bank has more money to lend to borrowers.  What happens when dollars are invested in stocks?  Companies have more capital to spend on new projects, software, facilities, manufacturing plants, hiring, etc.  In other words, those investments are are fuel for the economy’s engine.

What happens when the government taxes more and spends more?  More government jobs are created, simply taken out of the private sector – and then must be funded again, next year, in next year’s larger state budget.

One presumes that if the core of Gibson’s argument is sound, you could simply tax the rich at 50% or 100% and job growth would therefore increase all the more – because he argues that the state is growing because of the tax increase.  If that were true, why not argue the state increase taxes to much higher levels, on everybody, since the net result is jobs?  Why not tax the poor, just a little bit, because it creates jobs?  Tax the poor, then give them a new job to pay the taxes that created their new job?

Now, to add just a touch of context, the year over year percentage changes in employment show that Pawlenty’s years, even during recessions, matched the highest year over year percentage increases that Mark Dayton is now enjoying.  Note that Dayton is not in a recession.  Pawlenty’s shown employment growth even during a recession.  How could Dayton not enjoy employment growth when he’s not in a recession?  He could do nothing and employment would improve.

MN unemploy percent

All that said, Minnesota’s economy has improved – remarkably so, as Gibson details:

By late 2013, Minnesota’s private sector job growth exceeded pre-recession levels, and the state’s economy was the fifth fastest-growing in the United States. Forbes even ranked Minnesota the ninth best state for business (Scott Walker’s “Open For Business” Wisconsin came in at a distant #32 on the same list). Despite the fearmongering over businesses fleeing from Dayton’s tax cuts, 6,230 more Minnesotans filed in the top income tax bracket in 2013, just one year after Dayton’s tax increases went through. As of January 2015, Minnesota has a $1 billion budget surplus, and Gov. Dayton has pledged to reinvest more than one third of that money into public schools. And according to Gallup, Minnesota’s economic confidence is higher than any other state.

But Gibson makes the causal argument that there’s a correlation between two small, unrelated policies, as the impetus for the state’s growth:

The reason Gov. Dayton was able to radically transform Minnesota’s economy into one of the best in the nation is simple arithmetic. Raising taxes on those who can afford to pay more will turn a deficit into a surplus. Raising the minimum wage will increase the median income. And in a state where education is a budget priority and economic growth is one of the highest in the nation, it only makes sense that more businesses would stay.

Or lowering spending would turn a deficit into a surplus, and keep the dollars in the private sector where true job growth can occur.  Imagine the numbers above if the state had trimmed spending instead of taxing people more – you’d get twice the bonus in your deficit reduction and increased job growth.

Raising the minimum wage increases median incomes, very slightly for those still employed, but will increase unemployment at the lowest end of the economic scale.  In other words, it will make the economic situation worst for those least able to absorb a job loss.

It doesn’t “only make sense” that businesses will stay, as Gibson argues above.  If you raise the cost to do business – by raising the cost of labor – that increase has to be passed on to the consumer buying the product or service.  When prices go up, demand goes down, and fewer products or services are purchased – which means fewer people will get hired.

There’s no free lunch here.  Minnesotans at the top end of the scale that have their income taxes increased – whether they can “afford” it or not, as determined by a politician – will inevitably start making economic choices about where to put their dollars.  Dayton’s policy is arguing that increasing state spending on the backs of a small number of people is fine, and that there will be no consequences to behavior or revenues.

So what happens if the rich move?  Where will next year’s magical increase in tax revenues come from?  From the wallets of struggling journalists who are OK with increasing the taxes on other people, just not themselves?  Will they, the journalists, pick up the slack in revenues out of their own pockets because they’re convinced it creates jobs?  Following Gibson’s thinking, will he be willing to toss in a few thousand more per year so someone else can have a job at his expense?

That’s where Gibson’s logic leads.  That there is no end to the benefit of taxation, and that the dynamics of behavior will remain the same, and that there is always universal net benefit by the government spending other peoples’ money.  If that were true, we could tax everyone at 100% and everyone would have a job, with zero unemployment, and I look forward to Gibson providing a real-world example of that in action.

Oh, and that statement about plowing dollars into education?  Dayton cut it, in 2015.  Even Pawlenty didn’t do that, during a recession.

mn education

Oh, and Dayton’s increasing spending at double-digit rates over the biennium (Minnesota’s budgeting operates on a 2-year cycle).  That growth in spending is probably somewhat higher than median household income growth.  Oh, look.  It is!

mn median household income

So jump spending by 10% while incomes are going up between 2% and 5%. Makes sense. It’s good science.

Dayton’s philosophy is not a new one.  Demonize the rich, and he’s OK with that because he was one, but now he’s going to spend their filthy lucre, which will create jobs.  That same idea is being realized now in countries like Venezuela.  I’m assuming most Minnesotans aren’t finalizing travel plans to move there just yet.

{ 2 comments… read them below or add one }

Jim Bulmer June 5, 2016 at 12:57 pm

If raising taxes is such a panacea, why is Vermont’s economy in the tank, why are folks leaving, why are our youngest and brightest seeking employment elsewhere, why is our health exchange screwed up, why are there so many empty store fronts in the center of Woodstock????? Why? Because the super majority facilitated by a brain impaired governor have RAISED taxes!!!! As for Minnesota, the governor is thriving on the momentum he inherited. As the man once said, “I’d rather be lucky than good!!!!”

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alpha754293 December 15, 2016 at 8:51 pm

“It’s unclear how raising taxes on the rich would actually create jobs, other than government jobs, but Gibson doesn’t bother himself with asking that question. The fact that taking money out of the private sector and transferring it to the public sector doesn’t magically cause private-sector job growth – in fact, it’s just the opposite – seems lost on Gibson.”

a) Doesn’t Minnesota have government-funded problem (like job search and employment agencies that help people find and get paired with jobs)? What about government-sponsored training problems so that people who are unskilled can get a little bit more skill(s/ed) like how to use a computer for example for job search? (e.g. https://mn.gov/deed/job-seekers/disabilities/counseling/ as just ONE example)
or…how about this: https://mn.gov/deed/job-seekers/workforce-centers/
Funny…Campion doesn’t seem to mention either of those.

b) If you look at the unemployment rate in Minnesota from like January 2001 to present, there’s an inflection point around January 2014. Why?

So…let me see if I get this straight – Dayton passes a law in 2013. And in Janaury 2014, there’s an inflection point in the RATE of decrease of unemployment – but Campion doesn’t say or mention ANYTHING about that – and rather, instead, makes the semi-rhetorical statement of “gee…I don’t know how raising taxes on the rich would actually create jobs” (except that it didn’t take long for me to google “minnesota employment agency job skills” (programs that are often government funded).

c) “….The fact that taking money out of the private sector and transferring it to the public sector doesn’t magically cause private-sector job growth – in fact, it’s just the opposite – seems lost on Gibson.” And yet…again, if the private sector was so great at it, then why was there an inflection point around January 2014 in the rate of decrease of unemployment?

Again, if the private sector (as Campton appears to be arguing for), then why hasn’t that inflection point shown up sooner (Jul 2010 through Oct 2010 – unemployment rate stayed at 7.2%). If the private sector was so great, why did the unemployment rate stay steady during those months?
SOMETHING doesn’t add up with arguments like these. He argues that taking money out of private sector and putting it into public sector doesn’t create jobs, but as the data also shows, PREVIOUSLY – BEFORE the money was taken out of private sector and put into the public sector – the unemployment plateaued during two distinct periods. So…if the money STAYED IN the private sector and the RATE of unemployment change was ZERO for months, that means that his assertion DOESN’T hold true for EITHER end of the spectrum – a point that Campton doesn’t address.
Why?

“What happens when dollars are saved in a bank? The bank has more money to lend to borrowers. What happens when dollars are invested in stocks? Companies have more capital to spend on new projects, software, facilities, manufacturing plants, hiring, etc. In other words, those investments are are fuel for the economy’s engine.”
That’s a VERY simple-minded person’s way of looking at it, which is only, at best, partially correct.
Borrowing money means you need to pay it back with interest. Where does the money for the interest comes from? Campton doesn’t ask that question in his op-ed. (And while it may not have been the point of his op-ed, he also gives NO consideration to it either any more than Gibson gives consideration to the things that he’s asking about).
Only a fraction of the money from an IPO or sale of stock is used for the things that he talks about. That way if the shareholder wants their money back, you have a way of giving/getting it back to them.

Furthermore, that’s also only largely true for companies that are large enough to be traded on the stock exchange. The reality is that there are probability a lot more companies that AREN’T traded on said stock exchange, and there are also a LOT more small businesses that don’t have ANY stocks at all.
Campton fails to mention THAT as well in his simple-minded view op-ed.

“What happens when the government taxes more and spends more? More government jobs are created, simply taken out of the private sector – and then must be funded again, next year, in next year’s larger state budget.”
…except that we KNOW that training for BASIC computer and resume skills and interview skills, for example, ISN’T given by companies anymore.

When was the last time large corporations have skilled trades apprenticeships anymore?
Nowadays, if you want to work say in manufacturing, but have no experience with say how to operate a CNC – the chances and probability of you being TRAINED on said job, by a company, is VERY slim.
Funny – Campton doesn’t seem to mention THAT either.

That means that either you have to pay for the training yourself (a la vocational school) or *gaspsss* you get it from one of these government subsidized programs because the government has figured that training people in these skills will actually BENEFIT companies – a point that Campton also fails to grasp.

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