Debunking Keystone Research

Member Group : Allegheny Institute

(November 16, 2011)–How to speed job growth in Pennsylvania?
According to the latest offering from the Keystone Research Center
(KRC), the Commonwealth and local tax levying bodies should raise
taxes and hire more employees. They don’t directly say "raise taxes"
but how else can the state, school districts and municipalities
already facing budget deficits afford to keep all their
employees–never mind hiring more? Unlike the Federal government
that has the ability to borrow money to fund current expenses, the
state and local governmental entities do not have that luxury.

KRC recently issued a report asserting that the recent reductions in
state and local government jobs are slowing private sector employment
gains in the state, claiming the cuts in government jobs had pushed
Pennsylvania to 47th in overall employment growth over the period
April to September 2011. Conclusion? State and local governments
should begin hiring more people.

There are several problems with KRC’s claim. The fact that the loss
of government jobs happened concurrently with the slowing in the
growth of private sector jobs is not sufficient to demonstrate
causality. Second, the selection of the April to September time
frame amounts to data cherry picking. April’s nonfarm jobs number was
clearly a suspiciously high number as it was well above both the
March and May employee counts. Third, the alleged slowdown in
private job gains over the period was limited to a few sectors with
much of the slowdown in the summer months and growth had resumed in
most by September.

The essential relationship between movements in public sector
employment at the state and local level and changes in private sector
jobs is not complicated. A moment’s reflection tells us why. When
the state and local economies and incomes are growing and throwing
off rising revenue, public employment can grow or remain stable
without increasing the relative burden on taxpayers. On the other
hand, when economies slide into a serious downturn, tax revenues will
also drop substantially. When tax revenues suffer a major drop off,
state and local governments have limited choices–use up reserves,
raise tax rates, levy a new tax, or make significant spending cuts.
And since employee compensation makes up a very large share of total
expenditures, it is a virtual certainty that large spending
reductions will necessitate layoffs.

Thus, finding that government spending and job reductions and
slipping private sector jobs often go hand in hand should come as no
surprise, and the causality is clear. It is the weak private sector
that is forcing public sector job cuts. KRC would have us believe
that the causality runs in the other direction. And they raise the
weakest of arguments to make their case by using the April to
September employment changes that purportedly show a softening
private sector jobs picture concurrently happening with layoffs of
teachers and state workers.

During the January to September period of 2011 private sector jobs
were up by 39,000. Over the same period in 2010, private jobs rose by
49,000 which would suggest a modest slowing. But looked at over a
yearly time frame the picture is quite different. For example,
private jobs in September 2011 were 70,000 higher than in September
2010. By comparison, private jobs in September 2010 were 54,000
greater than September 2009 suggesting that some longer term momentum
is still in place.

Bear in mind too that manufacturing employment has posted gains
throughout 2011, faster even than the 2010 increases. Private
education continues to add workers at an impressive pace, completely
unfazed by the public sector job cuts. Mining and logging, driven by
gas drilling, is still climbing although at a slower pace than in
2010 when the industry was getting into high gear across the state.
Accommodation and food services have boosted employment in 2011 at a
quicker pace than in 2010. And after a hiccup in the June to July
period, health care employment has resumed growing. Meanwhile, arts
and entertainment have seen a drop off and construction jobs are down
very slightly.

All in all, the improving numbers for many categories in September,
after a pause over the summer, suggest that Pennsylvania’s overall
jobs picture is holding up. Nonetheless, it is certainly nothing to
brag about given the 200,000 plus nonfarm employment loss between
late 2007 and late 2009.

Many of the private sectors showing some softening in employment over
the summer have little immediate connection with public sector
cuts–gas drilling, construction, and entertainment for example.
Likewise, the sectors showing strength such as manufacturing are
independent of short term changes in public employment. In short,
the evidence presented and the studies cited by the KRC report do not
make the case they are attempting to sell. Thus, their advocacy of
more government spending and public sector hiring as a way to boost
the economy is fallacy filled on several levels. Increased spending
and hiring would mean higher taxes. Higher taxes are not a growth
enhancer when the economy is already weak. It will not stimulate
private sector hiring or business expansion and very likely will make
matters worse.

This effort by KRC must be seen for what it is: an attempted
justification for putting union workers back to work, especially

Part of the confusion for KRC arises from three key factors that
affected Pennsylvania during the recession. One, Pennsylvania did not
have the housing boom and subprime bubble as did states such as
Nevada, Arizona, Florida, California and several other faster growing
sunbelt states. Thus, the housing market did not get hit as hard in
Pennsylvania as the nation as a whole. Housing and non-residential
construction were not massively overheated so that the construction
job losses were much smaller, foreclosures were fewer and price hits
not as dramatic.

Two, the Federal stimulus funds enabled the state and local
governments to hold off making layoffs and helped school districts
delay the reductions in staff they would otherwise have faced.
Indeed, between late 2007 and late 2009, not only were layoffs
forestalled but government payrolls in Pennsylvania climbed by
14,000, setting up the need for even bigger employee cuts later. Six
thousand teachers and other school employees were hired in 2008 and
2009 in the vain hope that the economy would turn around quickly or
that Federal funds would continue indefinitely. Neither happened and
the inevitable bullet biting had to occur.

Third, the advent of the Marcellus Shale gas drilling and production
surge in 2009 and 2010 helped stanch the loss of private sector
employment and generate net gains by creating thousands of direct
industry related jobs along with additional thousands of
transportation and other indirectly supported jobs such as hotel
employees and restaurant workers among others.

Overall, it is important to bear in mind some job creation basics. In
its latest Keystone Business Climate Survey, the Lincoln Institute
found that business hiring is stagnating as worries over uncertainty
spawned by the Federal government’s inability to rein in spending and
borrowing and the threat of tax hikes. Countless other surveys point
to business concerns over the unending flow of debilitating
regulations as reasons to postpone hiring and expanding.

If KRC is truly desirous of seeing the private sector start hiring it
should forget promoting government hiring and more taxes and work for
changes in the business climate such as reforming labor and
environmental regulations and advocate lower business taxes. When
the private economy is strong and growing, everybody wins including
government. When the private sector is being progressively weakened,
the long term outlook for the economy is not good and government
payrolls will be under continuous attack. Someone has to pay the
taxes that pay the salaries of government workers. That would seem
to be an easy to understand premise.

Jake Haulk, Ph.D., President

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