When Oregon had some good job numbers, I pointed out that Oregon’s economy was small and therefore volatile, and people should not put too much weight on the good numbers.

Oregon’s economy is still small, and therefore volatile. We shouldn’t worry too much about a weak number or two. However, Oregon has now had five quarters of very weak seasonally adjusted jobs numbers. It might be time to consider worrying.

If we don’t fall into a new recession, an increasingly problematic assumption, we expect the national recovery to be slow and inconsistent. California’s economy, which has large impacts on Oregon, is recovering much more slowly than the national economy. Thus, Oregon is unlikely to benefit from two traditionally major sources of economic growth. I think it’s time that Oregonians to develop an economic growth plan that does not depend on the United States economy or California’s economy.

California governor-elect Jerry Brown’s slide show supporting his “Budget Discussion” is an example. On slide 15 he shows state revenues per $100 of personal income with the headline “California Ranks 15th in Taxes and Fees Compared to Other States.” The implication is that California is a relatively tax-friendly state. It’s not.

Similarly, many Oregonians were encouraged when this report came out. Figure 2 ranks states by the ratio of business taxes to government expenditures, implying that Oregon is a tax-friendly state. It’s not.

With one caveat, average taxes don’t matter, whether expressed as a ratio to income, a ratio to spending, or in any of the myriad ways we see it. Businesses make decisions based on marginal tax rates, not average taxes. Averages are only useful in comparison to marginal rates, because a big difference between the two is an indication of a poorly designed tax system.  In particular, high marginal tax rates and low average revenues are signs that the state is both sacrificing revenue and hurting its economy.

Oregon has, along with Hawaii, the nation’s highest personal marginal tax rate, but it ranks low on average taxes. It is  clear that the state’s tax structure is flawed. Oregon’s major problem is that it has no retail sales tax. It could increase state revenue and economic activity if it implemented a retail sales tax while cutting its top marginal tax rates.

California has a different problem. It has among the nation’s highest retail sales taxes, and it has a very progressive personal income tax with high top marginal tax rates. California could increase state revenue and economic activity by lowering retail sales taxes and top marginal rates, while increasing property taxes and broadening its income-tax base by decreasing the progressiveness of its tax rates.

For states with inefficient tax structures, changing the tax structure can result in the equivalent of free lunch. A well-designed tax structure will increase revenues, decrease revenue volatility, and increase business activity. What’s not to like?

The Office of Economic Analysis blog has a nice picture that does a good job describing the torpedo the good ship Oregon took to her hull.

This is net receipts from February though April for the last 14 years. Note how Oregon is $400,000 in the red in 2010, meaning we refunded $400,000 more than we took in during that period, and this is with 66 and 67.

What is going on?

…preliminary numbers show that the biggest culprit was capital gains. Following a 60 percent decline in capital gains income from the 2007 tax year to the 2008 tax year, we were expecting an additional 10 percent decline for the 2009 tax year. This was in line with what many other states were projecting (5 percent to -20 percent) based on an informal survey conducted early last winter. Unfortunately, preliminary estimates show that capital gains income likely dropped at least another 50 percent for the 2009 tax year. Going forward we believe that we will see an uptick in capital gains income, but carry forward losses and low levels of business transactions will limit growth.

Sigh.

The tax increase was supposed to solve Oregon’s problem.  It did not.  Proponents will blame the economy, but people respond to incentives.  These results were predictable.  In fact, we warned Oregonians about this in January.

You can’t tax yourself to prosperity.

The 3,900 jobs gained comprised of 2,800 government jobs where 1,300 of these were Federal. The Federal jobs, of course, were likely related to the Census effort that is underway. That leaves 1,100 private sector jobs gained. The annualized growth rate for non-farm private sector jobs is 1.0 percent. These gains were brought by Personal & Maintenance Services (600 jobs), the Financial Services (400 jobs), Education & Healthcare (200 jobs), and Construction (100 jobs). While the job gains in Education and Healthcare are nothing new in this cycle, the gains in the other three sectors are new. Monthly data are intrinsically volatile. We will wait for at least two more months of similar data before claiming that a trend of improvement for Personal & Maintenance Services, Financial Services, and Construction sectors are underway.

The April Oregon unemployment rate remained at 10.6 percent, unchanged from the May level. This was driven by the fact that the labor force grew, which offset the jobs increase. This phenomenon might continue in the next few months: a slowly recovering economy might bring sidelined workers back into the labor force, but job growth might not be strong enough to absorb all of them, keeping the unemployment rate high. It is also possible that the unemployment rate might subside, but only slowly. This is likely to be the pattern that exists for most of 2010.

The State’s Year-over-year job losses are improving a bit, from a loss of about five percent in November to a loss of 4.3 percent in December.  The seasonally adjusted unemployment rate rose about three tenths of a percent, from 10.7 percent to 11.0 percent.  The seasonally-adjusted non-farm job growth rate was actually up 0.2 percent in December, the first increase month-on-month in four months and one of only two cases of an increase during all of 2009. 

As with other areas that we cover, the year-on-year declines are in all sectors except (private) Education and Healthcare where this is being driven mainly by Healthcare.  For a variety of reasons, including overall population aging and inelasticity of demand, Healthcare has been somewhat resistant to the gale-force winds of this Great Recession.  The hardest-hit sectors in December were: Construction, Manufacturing, Retail Trade, Financial & Real Estate, Professional & Business, and Leisure & Hospitality.

We interpret the Oregon December jobs report as indicating the State is still “Bumping Along the Bottom”.  If the improvements in job growth continue then the status might change to “Recovery”.  Given the intrinsic volatility of monthly data, we will wait until a couple more months of data to verify that. 

“ Cutting state spending reduces in-state aggregate demand, virtually dollar-for-dollar. Some forms of state spending, particularly in the area of health care, bring matching federal dollars into the state’s economy. So cuts to certain public services result in even bigger reductions in aggregate demand because they prevent federal dollars from coming into Oregon’s economy.

Tax increases targeted at high-income households and corporations also reduce demand, but not as much as cutting state services. High-income people typically don’t spend all their money, and some of the money that they do spend is likely to be spent outside Oregon. In addition, the deductibility of state income taxes from federal taxable income means that a fraction of state tax liabilities are, in effect, shifted to the federal government. Therefore, a tax increase on high-income Oregonians does not reduce aggregate demand in Oregon dollar for dollar. And since a significant fraction of Oregon’s corporate taxes are paid by out-of-state, multi-state corporations, the corporate tax measure also does not reduce demand dollar for dollar in Oregon.”

This is the tired old Keynesian argument that the government spending multiplier is larger than the tax multiplier. It comes from the Keynesian Cross, an unfortunate construct that has led to lots of bad policy.

Mankiw, a New Keynesian, discussed the debate in a NYTimes article last January. Here are his key paragraphs:

“MIGHT TAX CUTS BE MORE POTENT? Textbook Keynesian theory says that tax cuts are less potent than spending increases for stimulating an economy. When the government spends a dollar, the dollar is spent. When the government gives a household a dollar back in taxes, the dollar might be saved, which does not add to aggregate demand.

The evidence, however, is hard to square with the theory. A recent study by Christina D. Romer and David H. Romer, then economists at the University of California, Berkeley, finds that a dollar of tax cuts raises the G.D.P. by about $3. According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases.

Why this is so remains a puzzle. One can easily conjecture about what the textbook theory leaves out, but it will take more research to sort things out. And whether these results based on historical data apply to our current extraordinary circumstances is open to debate.”

I’d put my money on the evidence. Keynesian theory is appealing. It offers a free lunch. Unfortunately, free lunches are hard to find in the real world.

Retirees work like an export industry for a community. They live in the community, but their income is from a retirement fund completely independent of the community. That’s good, but all is not sweetness. The article hints at some of the problems:

“Migrating boomers don’t necessarily care about school quality or the local job market, but they want pretty scenery, affordable housing, cultural amenities and things to do.”

That quote gets it slightly wrong.

Retiring baby boomers will be moving to a community because they like it just the way it is. They do care about school quality and the local job market, but in a perverse way. They don’t want to see an improving economy. That would be growth. That would be change.

To the extent that improvements in school quality or an improving job market creates change, boomers will actively resist the improvement. They have the time and resources to make that resistance effective. Boomers will put in place laws, regulations, and procedures that will limit any change. Good change or bad change, it doesn’t matter. Boomers will fight all change.

Eventually, as the article points out, the baby boomers will no longer have the vigor to enjoy the rural life style. Then they will leave. They will leave a legacy that will retard economic growth for a generation or more.