NC’s budget gap growing; national think tank calls for more federal aid to states

Yesterday in his comments at the Budget & Tax Center’s legislative briefing in Fayetteville, Senator Rand said that the he has been told by legislative fiscal staff that state tax revenues are behind projections by $90 million through the end of October. In the grand scheme of things that is not too much money. What is troubling about this is that the state’s revenue forecast assumes that the worst months would be at the beginning of the fiscal year and after that things would begin to head slowly upward. Moreover, the budget for fiscal year 2010-11 assumes that revenues will grow at a rate of 2.8%. If revenues continue to fall behind the forecast the Governor will be forced to take painful mid-year actions to address this year’s gap and the General Assembly will be forced to make another round of budget cuts sooner rather than later.

On a related note, the Center on Budget and Policy Priorities, just released a new report that looks at how states around the country are faring. It turns out they are not faring well at all and state budget gaps are a major drag on the fragile economic recovery. In addition to assessing the fiscal state of the states, CBPP’s report looks at why the federal government should consider another round of aid to state and local governments to mitigate the drag that state budget gaps are having on the economy and to prevent more harmful budget cuts.

Expanding the federal Homebuyer Tax Credit is not a good idea

Congress is currently considering whether or not to extend, and even expand, the Homebuyer Tax Credit. The current credit which gives up to $8,000 to new homebuyers (singles earning up to $75K and couples earning up to $150K) will expire on December 1st. Leading the fight to have the credit extended and expanded is (big suprise) the National Association of Realtors. They are proposing that the credit be increased to $15,000 and be available to all homebuyers, not just first-timers. This is an expensive proposition that will do very little to encourage home buying that wouldn’t have occurred otherwise. What it will do is cost $75,000 for each home purchase that it actually incents, temporarily inflate home values to the good of the sellers and not the buyers, and cost the federal treasury $15 billion that it does not have.

For a great analysis of the proposal including a full explanation of why it should not be considered by Congress check out this new report from the Center on Budget and Policy Priorites.

NC unemployment by race plus one idea to save and grow jobs

No one and no one group has been spared the wrath of the current economic slump. Not surprisingly, however, the unemployment rate for blacks is much higher than that of whites and the rate of increase in unemployment for black workers has been greater than the increase for whites. Here’s a chart that shows unemployment in North Carolina by race since the recession began through the most recent quarter and even into the 2nd quarter of 2010 when unemployment is expected to peak (using projections). NC UE by race

The unemployment rate for blacks when the recession began (4th quarter 2007) was 8.2%. By the 3rd quarter of 2009 that rate had climbed to 14.9%, an increase of 5.9 percentage points. The unemployment rate for whites was 4.0% in the 4th quarter of 2007 and by the last quarter it had reached 9.6%, an increase of 5.6 percentage points. Otherwise stated the gap in unemployment between whites and blacks was 4.2 percentage points when the recession began and is now 4.5 percentage points.

So what are the policy implications of this? First and foremost it is critical to provide basic supports to these workers and their families. The good news is we can do that and stimulate the economy at the same time. Congress is considering extending the length of time that unemployed workers can claim unemployment benefits – this would support these families directly and every dime will be spent in local communities. For more on the campaign to convince the Congress to do this you can go here.

Next to job creation which is a much trickier subject although there are plenty of ideas out there. Americans don’t seem quite ready to discuss the need for an old-fashioned yet very efficient WPA style public employment surge so we’ll leave that one out for now. The Center for Economic Policy Research has put forward one idea for spurring private job creation that is worth considering. CEPR proposes that the federal goverment should create a job sharing tax credit that would reduce layoffs and increase labor demand. Here’s how they describe their proposal:

Job sharing is a mechanism that could maximize the employment from each dollar of stimulus. The basic point is simple: job sharing would use tax dollars to pay firms to shorten the typical workweek or work year, while keeping pay constant. If workers’ purchasing power is held constant even as they work fewer hours, then labor demand will be held constant. This should cause employers to want to hire additional workers to make up for the fewer hours worked by their incumbent work force. For example, if the firm had all of its workers putting in 5 percent fewer hours, then it should want to hire approximately 5 percent more workers. Or, alternatively, if an employer was facing the difficult decision to layoff workers, this tax credit would provide an incentive to decrease total hours worked, rather than letting individual workers go. 2 The effects of this tax incentive could be dramatic. If employers of 60 million workers reduced work hours by an average of 5 percent, then it should lead to the creation of 3 million new jobs – before taking into account any multiplier effect. In principle, these jobs could be created quickly and would be in the private sector. (A similar payment, comparable to the tax credit, could also be extended to state and local governments.)

You can read the full report here.

Dell plant closing despite $280m in potential subsidies: We told you so.

Dell Computers, Inc. has announced that it will shutter its Winston-Salem plant over the next few months, laying off all of the factory’s 905 workers. With roughly six applicants for every opening in the current job market the re-employment prospect for these workers is bleak. Out of respect for these workers and their families and to prevent this from happening again in the future the state should seriously consider enacting major reforms to its business subsidy programs. There are already a few good places to find recommendations for how to make NC’s subsidy deals more accountable and more effective (hyperlinks to these reports below).

In media reports about the closing representatives site the steep decline in desktop sales as the chief reason. That may be true but consider the fact that in determining how much to award to Dell in state subsidies the factor that weighed most heavily was, in fact, sales projections. This flaw in the state’s economic model (relying much too heavily on what company sales might be 5, 10, and even 15 years down the road) is the most serious flaw in the state’s method for determining how much to offer companies. To read more about these flaws and others, and to see more details about the assumptions the state made about the Dell facility, read our report from 2007, “GETTING OUR MONEY’S WORTH? An Evaluation of the Economic Model Used for Awarding State Business Subsidies.”

In addition to overhauling the ecomomic model used to determine the optimal bids for these deals, the state needs to substantially increase the wage standards for the subsidized jobs (Dell got a $280 million deal despite only paying its workers on average $28k per year) and target subsidies to distressed areas. Coincidentally, these recommendations were made earlier this year by UNC faculty researchers in their report to the North Carolina General Assembly Select Committee on Economic Development Incentives.

Business climate rankings are meaningless

An article posted this week on the governor’s office websites states that “North Carolina continues to have a top-ranked business climate.” That is certainly true. Unfortunately for the governor, however, doing well in business “climate” rankings will do absolutely nothing to improve the state’s economy. In fact, it could worsen it. Here’s what I mean.

“Climate” studies, indices, etc. are basically lists of characteristics that someone somewhere thinks businesses would like but that are not proven by research to actually correlate with economic growth. Most business climate rankings heavily favor states with low regulations such as “right to work states” and states with low minimum wages and states with low taxes (ignoring the fact that taxes pay for public investments like education and transportation that have actually been proven to grow the economy). Case in point, two weeks ago Forbes magazine released its rankings of “best states for business.” Virginia topped the list. North Carolina ranked 3rd – as in only two states are better for business.

I performed a quick test of the Forbes model by comparing the average employment loss, in percentage terms, in the ten states that are supposedly the “best states for business” with employment losses in the ten states with the worst business climates. Low and behold, the states that rank in the top ten for business climate have lost, on average, 4.9% of their jobs since the current recession began. The ten states with the worst business climates have shed, on average, 4.1% of their jobs. Time and time again these rankings prove to be hollow predictors of state economic performance. They are more like big business wish lists than they are genuine economic predictors. For more on how these various indices work and to read about their flaws, you can check out this book.

For a meaningful list of economic indicators and predictors check out CFED’s Assets and Opportunity Scorecard of states that was also released recently. Seeking to be number one in CFED’s scorecard might actually improve our state’s economic performance, particularly when it comes to improving prospects for working families. Seeking to be number one in the Forbes ranking and others like it is not likely to pay off for NC. Incidently, NC’s grade from CFED is a D which does seem to correspond with the fact that only ten states have lost more jobs, in percentage terms, than NC since the recession began.