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NC Budget and Tax Center

While swinging from one crisis to the next for the last several years, we have often lost sight of some long-term trends that we can’t ignore forever. For the last several decades, the United States has been growing apart, not together. The middle class has been contracting, rising out of poverty remains difficult, and parents doubt whether they can provide a better life for their children than they had. The American Dream, an organizing article of faith that helped to build the most diverse and wealthy nation in human history, is in trouble.

2014 End of Year Charts_wage growth

Over the last 35 years, median wages have hardly moved while people at the top of the income distribution have enjoyed significant income growth. As can be seen in the chart above, after adjusting for inflation the top 20% of wage earners have seen their income grow by more than $5 per hour since 1980, while folks at the median have seen less than half of that growth. This means that less and less of the prosperity generated by the North Carolina economy is going to the middle class. It has been a slow process, and one with many causes, but the trend is clear, increasingly present, and dangerous. If the middle class slowly disappears, the American Dream will go with it.

The long-term trends do not just spell trouble for the middle class. As can be seen below, the last decade has seen an explosion in the number of North Carolina counties that are home to high levels of inequality and poverty. The share of counties with this troubling paring of high-inequality and high-poverty has doubled since 2000, going from roughly 30% to over 60%. This means that in more than half of the counties in our state, income growth is doing little to lift people out of poverty. Again, the sort of trend that saps energy out of the American Dream.

2014 End of Year Charts_inequality and poverty

The potency of the American Dream relies on hard work being rewarded, talent being recognized, and people sharing in the wealth they create. If poor and working North Carolinians’ piece of the pie created keeps getting smaller, we will lose the source of our greatest competitive advantage in the modern economy, the American dream.

Looking back a year end and ahead into the future, the Budget and Tax Center compiled a 2014 Chartbook, which looks at a range of critical economic issues facing North Carolina. The bottom line is that we still have a long way to go and the growth that we are seeing is not exceptional but rather in line with the improving national picture.  The recovery has been built on low-wage jobs resulting in the persistence of elevated poverty levels despite improvements overall. State policy choices, namely the decision to cut taxes for the wealthy few and profitable corporations, have made it impossible to strengthen the infrastructure of opportunity in the state.  The result is that the recovery is bypassing many North Carolinians and communities and contributing to the growing divide in experience of opportunity and prosperity.

Commentary, NC Budget and Tax Center

Talking about a single North Carolina “economy” doesn’t make very much sense. Whenever new labor market data comes out, there is talk about how the North Carolina economy , or the US economy, or the global economy, are doing. The macroeconomic perspective is important, and talking in broad terms is convenient, but the economy is not some monolithic abstraction, a disembodied thing that we can’t really see. Even in an interconnected global market, the day-to-day economies that human beings experience are local. The economies we see impacting our neighborhood, our circle of friends, our family, and our wallet, those are the economies that we live in.

2014 was a very mixed economic bag for local economies in North Carolina. As will be shown below, parts of North Carolina are growing quite nicely, but it is still very tough sledding in a lot of communities across the State.

2014 End of Year Charts_uneven recovery

Location, location, location warns the old business adage. That’s great if you’re in a hot spot, but as the map above shows, most of North Carolina is not booming. While the November data (see here for the latest county data) are not updated for this map, the fundamental story has not changed. On the one end, counties that are in or around metro centers have largely surpassed pre-recession levels of employment, with some counties posting 10% or greater gains. That sounds like healthy growth, and it is. On the other end, however, many counties have not experienced what anyone would consider a return to robust economic performance. Sixty of North Carolina’s 100 counties have not gotten back to their pre-recession levels of employment, and in fifteen counties current employment is more than 10 percent lower than it was in 2007.

One could argue that some of the shifts seen here are simply the result of increasing urbanization, a trend that goes back well before the Great Recession. As more and more working age people move toward urban centers, the employment level in many rural areas should naturally drop. However, the losses in employment that many counties have experience cannot be entirely explained by urban migration. Based on data from the North Carolina State Demographer, there are only 23 counties in North Carolina where the change in employment between 2007 and 2014 outpaced the change working age residents. Put another way, the growth of employment has not kept up with working age population in more than three-quarters of the counties in North Carolina.

2014 End of Year Charts_barriers for communities of color

Geography is not the only knife dicing up the North Carolina economy. As can be seen above, the recovery is less complete in communities of color around the state. Unemployment remains higher than it was before the recession for all ethnic groups, so there’s still cause for concern across the board. However, unemployment remains even more elevated for black and Hispanic North Carolinians. The unemployment rate for African-Americans remains 2.2 percentage points above pre-recession levels and for Latinos   1.7 percentage points compared to 2.7 and 1.3 percentage points nationally for both groups respectively.  While African-Americans in North Carolina are doing better than the national average, the change in the unemployment rate for this group is nearly twice that for whites in the state who saw their unemployment rate increase by just 1.4 percentage points above pre-recession levels.

Of course this is hardly an exhaustive analysis of the geographic and social lines that shape the economic landscape of North Carolina. But when we start to look more closely at specific local economies, we see very different stories about different parts of our state. While we celebrate the economic bright spots, we can’t let struggling North Carolina communities fall into shadow.

Commentary

New from the good people at the Budget and Tax Center:

Five years into the official economic recovery, there were signs of a strengthening recovery in North Carolina albeit uneven and insufficient to deliver improved economic well-being broadly. The result is far too many North Carolinians remain without jobs or working for low-wages. Poverty levels have remained high and inequality has grown, both contributing to a less sustainable economy in the long-term. Here are 12 charts that tell the story of North Carolina’s economy in 2014.

Click here to see all twelve.

Commentary, NC Budget and Tax Center

The ballooning cost of recent state tax cuts is one of the key stories of 2014. While state leaders argued over how to pay for increasing teacher salaries, it was easy to forget that the 2013 tax cut package was a huge part of the reason that funds were so hard to come by. The 2013 tax cuts, which largely went to the wealthiest North Carolinians, are forcing us to make unnecessary choices between funding schools or roads, healthcare or economic development, local governments or state services. It didn’t have to be this way and, as the charts presented here clearly show, the costs of the 2013 tax cuts are becoming increasingly clear.

Many proponents argued that the 2013 tax cuts would stimulate new economic growth and, as a result, the cost of reducing rates would be largely offset because there would be more economic activity to tax. The idea that tax cuts will actually increase revenue is based on a simple intuition popularized by Art Laffer. Laffer’s thought experiment holds that lowering the cost of doing business will cause people to invest and spend more, so the total economy will grow, which will ultimately result in government collecting more revenue. Like many exercises in theoretical economics, the “Laffer Curve” is just a mathematical equation. It looks nice on a napkin, and has an pleasantly simple logic, but the real world is often allergic to this kind of treatment and refuses to behave as theorists’ models expect. Unfortunately, the consequences of putting faith in the Laffer Curve are anything but theoretical. As this economic experiment on North Carolina continues, the results are not looking good for the subject.

2014 End of Year Charts_tax cuts dig a hole

While sober analysis always showed that the 2013 tax cuts would reduce revenues, the hole keeps getting deeper every time we look at it. As can be seen in the chart above, initial estimates projected a roughly $500 million reduction in state tax revenues for the 2014-15 fiscal year. Estimates released this month have the cost rising to almost $900 million and, according to our analysis, the bill could top $1 billion. Thus far this fiscal year, actual tax collections have been lower than was expected even with the cost of the tax cut included. The December state revenue update shows that we are $190 million short of projections. We will know the real fiscal impact after sales taxes from the Christmas shopping season known and income tax returns are filed next year, but all indications to date are that the 2013 cuts will blow an enormous hole in current and future state budgets.

2014 End of Year Charts_underfund the recovery

The result of the ballooning revenue shortfall, is that state spending has not recovered to pre-recession levels. When the economy collapsed in 2008, it dramatically undermined state revenues, forcing a series of unusual measures to try to fill the gap. Under normal conditions, the return to positive economic growth brings in more revenue, allowing departments and divisions in state government to address needs they had put off during the squeeze. As can be seen above, this is the pattern for each of the last three recessions dating back to the early 1980’s. Each recession initially forced North Carolina to spend less than was anticipated when revenues fell, but spending bounced back within a few years allowing North Carolina to get back to business. Policy choices in the recent recovery are a departure from previous budgetary practice. We have usually seen reduced state spending during the initial downturn, followed by accelerated investing during the recovery to make up for lost ground and restore the state’s public service infrastructure. We are seven years removed from the onset of the Great Recession and, because of the 2013 tax cuts, state revenues remain roughly 10 percent below their pre-recession levels.

All of this means undercutting the future of North Carolina. The state still has a backlog of expenditures that were put off during the recession, positions unfilled, buildings overdue for repair, roads and bridges that need fixing or expanding, local governments who have lost state support for key services, and much more. We also face an increasingly competitive global marketplace. Many of the people who lost their jobs during the recession still need help retooling their skills and the challenge of preparing children to survive in the 21st century economy keeps getting more complex. As the legislative session gets started in 2015, remember that the choice to reduce taxes on the most fortunate among us is a major reason that key investments for the rest of North Carolina are not being made.

Commentary, NC Budget and Tax Center

Economists and politicians both talk about job numbers a lot. Of course the number of jobs is a vital indicator of how well the economy is working, but simply knowing how many jobs there are does not tell the whole story. Understanding the health of the labor market also requires knowing how many of the new jobs can pay for the necessities of life, support a family, and provide the basis for a long-term career. One of the most distressing aspects of the last few years is how many of the middle-class positions lost during the recession were replaced with low-wage employment, part time work, and jobs with few opportunities for career advancement.

2014 End of Year Charts_recovery based on low wage jobs

Probably the most glaring problem with the current recovery is how few decent-paying jobs have been created. As can be seen in the chart above, the majority of jobs created since the start of the recession do not pay a living wage. There are both long and short term trends that are at play here. Many industries that supported middle class wages in North Carolina, most notably manufacturing, use more machines and fewer people, eliminating lots of jobs in the process. Many of the jobs created since the recession are in service sectors that generally pay much lower wages than the blue color jobs that have been lost. This shift toward low-wage jobs is undermining the economic stability that many families in North Carolina had built over the preceding decades.

2014 End of Year Charts_recovery has not reduced poverty

This concern is bolstered by the fact that the current recovery has not done anything yet to reduce poverty, as can be seen above. Even as total employment grew over the past few years, the amount of poverty in North Carolina has actually increased, a sure sign that there are many working people who do not earn enough to escape poverty.  This runs counter to prior recessions when economic recoveries not only resulted in growth but also reduced hardship at the same time.

As noted above, we have both short-term and long-term issues to address. We still need more total jobs because wages remain depressed, in part, because there are still so many people looking for work that there is little upward pressure on wages in many industries. We can do more to ensure that North Carolina’s economic development programs are tied to wage standards so that the jobs we do attract will actually support a family. We still need to help mid-career people whose jobs disappeared during the recession, and are not likely coming back, also need help in transitioning into new occupations and careers. And certainly, long-term we need to prepare North Carolina’s children to negotiate an increasingly dynamic and competitive job market.

Anyone who is willing to work hard should not have to live in poverty, but that basic American promise isn’t going to keep itself. Public policy helped to build the middle class, and a lack of public policy vision can destroy it. If we don’t honestly look at what policy changes are needed to ensure that hard work pays, the economic damage of the recession will become a permanent reality for many North Carolinians.