Growing Income Inequality

I’ve talked before about how the middle class is falling behind, due to rising income inequality. One way to measure inequality is the Gini Index. The Gini index is used to measure the distribution of income in a region. The higher the score on the Gini index, the greater the income inequality. A score of 1 means that all the income in a region is held by a single person, and a score of zero means that all income is held equally among the population.

In 2008, West Virginia’s Gini Index score was 0.453, below the national score of 0.467. The states overall ranged from .403 in Alaska to .503 in New York. So compared to the rest of the country. West Virginia’s income inequality is about average. 
 
Gini Index by State, 2008
Source: U.S. Census Bureau
 
However, the trend has been growing towards more inequality. The Census Bureau first started measuring the Gini Index in 1967, and the national score was .397. Since then the score as steadily grown to its current level of .467, as inequality has grown. 
 
Most of the income growth over the past generation has been experienced by the those at the top of the income scale. Between 1979 and 2000 the real income of households in the lowest fifth grew 6.1%; the middle fifth by 12.3%; and the top fifth by 70%. Average income for the top 1% grew by 184%. Middle income families have kept their incomes rising in the past few decades in part due to the rising number of women in the workforce.
 
Other factors contributing to growing inequality are the falling value of the minimum wage, the erosion of unionization, the decline of the manufacturing sector, higher educational job requirements, and growth in executive pay. For example, in 1965 CEOs in major companies earned 24 times more than the average worker; by 2000 the ratio had grown to 300.
 
Families in West Virginia and throughout the country continue to work hard to make ends meet and improve their lives. However, they are seeing less and less of the benefits of their work. When we get out of the Great Recession and begin to see real growth again, it will be because of the hard work and productivity of working families, hopefully some more of that growth will reach them.

Another look at West Virginia employment

Ted pointed out that West Virginia’s employment level is at its lowest point in 14 years. A closer look shows that West Virginia’s employment situation has been pretty bad for decades. One measure of how well a state or region provides employment is the employment-to-population ratio or employment rate. This ratio is the number of persons employed divided by the total working age population (16 years old and older). Whereas the unemployment rate uses only those actively searching for employment, the employment-to-population ratio, also called the employment rate, includes everyone of working age regardless of their employment status. According to the Bureau of Labor Statistics, West Virginia has had the lowest employment to population ratio of all states for 34 consecutive years! 

US and WV Employment-to-Population Ratio 1976-Present
Source: Bureau of Labor Statistics
 
Currently only about 48.6 percent of West Virginia’s working age population is employed, compared to 58.6 percent for the U.S. overall. And as the chart shows, the ratio has been in a nose-dive since the recession began, for both West Virginia and the rest of the country.
 
And while the recession hasn’t help West Virgina’s employment situation, it wasn’t that great to begin with. For starters, West Virginia relies on declining  and weakening employment sectors, with little economic diversity. 22.5 percent of West Virginia’spopulation between 21 and 64 is disabled, the highest rate in the country, a byproduct of an unhealthy population and the dangers of the mining industry. West Virginia also has second oldest population in the country, and as the population ages, the workforce shrinks.
 
The recession has only exacerbated West Virginia’s already troubled labor market. Going forward, West Virginia must be able to diversify its economy, educate and retain its population, and invest in making itself an attractive place to both live and work.

Beckley Register Alters My Commentary with "Clean Coal"

The Beckley Register decided to have some fun with my commentary this morning. Instead of reading it as a statement about moving away from coal (i.e. “transition”),  they injected their own political opinion (perhaps for publication purposes) by creating an artificial headline that says “State should seize opportunity of clean coal energy.” 
 
For the record, and I don’t want to be vain about this, I think “clean coal” is an oxymoron and that it’s a waste of precious resources and time. However, at the same time, we need to cap carbon emissions, make investments in renewable energy, and protect and revitalize West Virginia communities. And if this means that the only way to do this is by throwing money at CCS then so be it.  I can live with that. 
 
At any rate, here’s the op-ed: 
 
August 26, 2010

State should seize opportunity of clean coal energy

At his 1961 inauguration, Gov. Wally Barron declared, “Coal remains the hub of our wheel. No other industry affects the economic picture of West Virginia as much as does the production of the mines. There has been a swift and steady decline in the number of men working in coal. In the past 10 years, employment in mines of the state has dropped … The net result has been the migration of thousands of West Virginians to other states where employment opportunities are better.”

These words remain as true today as when they were spoken 50 years ago. In 1975, the industry directly employed 55,000 workers and accounted for about 20 percent of our state’s economy (gross state product). Today, the coal industry directly employs only 19,000 workers and makes up just 6 percent of our state’s economy.

According to recent forecasts by the U.S. Energy Information Administration, the situation is only going to get worse in West Virginia, especially in our southern coal counties that already are showing signs of economic struggle.

Over the next 25 years, West Virginia’s coal production is predicted to decline by 35 percent. Today, we mine 165 million tons of coal in the Mountain State — by 2035, this number is expected to drop to 107 million. The southern coal counties will be hardest hit, with an EIA projected decline of 58 percent.

Amazingly, the EIA’s predictions do not factor in potential regulation of mountaintop removal or a federal cap on carbon emissions. The projected decline is based primary on economic forces out of the state’s control, such as increased production costs and competition from other coal producing regions and from other energy sources like natural gas.

In the face of further erosion of coal-related jobs, which threatens to send even more workers out of state, we must develop new strategies to diversify and transition our state’s economy. This begins with our congressional leaders working to pass a comprehensive federal clean energy and climate change bill. As the old political saying goes, we must be at the table to avoid being on the menu.

A federal energy bill, for example, could ensure that new investments and programs specifically target the communities most affected by reduced coal production. This starts by guaranteeing that no coal miner or retiree will lose pension or health care benefits as a result of climate change legislation.

Transition assistance could include not only ample wage supplements and benefits, but also free college or vocational education for displaced workers seeking new careers.

Our congressional leaders could also push for the creation of a Community revitalization trust fund that would provide economic development grants to create jobs and business opportunities for displaced workers and community members. Such legislation would create new industries and jobs while ensuring that we protect against the devastating effects of climate change.

Instead of viewing clean energy and climate change legislation as a barrier to West Virginia’s economic livelihood, we should seize the opportunity to strengthen our communities and to move toward a more sustainable economic future for our state.

— Ted Boettner is executive director of the West Virginia Center on Budget and Policy.

State Employment Lowest Since 1994

Since the national recession started in December 2007, West Virginia has lost 18,200 jobs or 2.4 percent of its job base. West Virginia’s job deficit – or the total number of jobs needed to keep pace with the working age population growth since the recession started –  is about 25,600. 
West Virginia’s seasonally adjusted unemployment rate was 8.6 percent in July, up 0.1 from June.  Total July non-farm employment stands at 742,500, with a decline of 4,500 jobs from last month, with about two-thirds coming from seasonal losses in local government. The good news was a small gain of 300 jobs in manufacturing and mining. Despite this positive sign, West Virginia’s private sector has created only 700 jobs since last July  – the date many believe to be the official end of the recession. Even more troubling is that 28,200 workers have left the labor force during this period. 
 
While non-farm employment has been growing (ever so slightly) this year, the number of state residents employed continues to decline. In July, only 709,500 state residents were employed –  its lowest point since March 1994 (seasonally adjusted). This helps explain, to some extent, why new jobless claims still remain high
 
The central reason why we’ve seen little in the way of economic expansion is a lack of consumer demand and the unwillingness of Congress to pass a larger, more serious, jobs creation package. Absent this action, the economic doldrums will continue here and around the country. 

Want to Help West Virginia’s Economy? Invest in Infrastructure

I’ve talked before about how tax incentives aren’t particularly effective in transforming the state’s economy. They might create a modest number of jobs in the short run, but tax incentives deplete resources available for public investments that can improve a region’s infrastructure and increase the skills of it workforce. Basic public investments can better improve a region’s economy because they can simultaneously have an impact on firms’ cost of doing business and the productive capacity of a region’s infrastructure. 

One of the arguments for supporting infrastructure projects is their short-term impact on jobs. Depending on the scale of the project, hundreds or even thousands of highly paid workers are needed to build and maintain the project. Some argue that despite the jobs created by a project, paying for it (taxes) can depress economic activity, and there will be no net gain in employment. However, state and local infrastructure projects typically leverage additional resources from the federal government and the private sector, which dampens the effect of their costs. The projects also employ local workers and use local equipment and materials to a greater degree than the economic activity that declines as a result of the taxes used to finance the projects.

A study by the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst found that infrastructure investments made by the federal government produce between 14.5 and 23.7 jobs per million dollars invested, depending on the type of project. Another study by PERI looked at the increases employment with state and local investments. They found that investments by state governments in New England will produce 13 jobs per million dollars invested. When investments made by New England states were matched with federal funds, like the “TIGER” (Transportation Investment Generating Economic Recovery) program, the impact jumps to 52 jobs per million dollars invested.

The jobs created by the construction of a project are not the only benefit to investing in infrastructure. There are also many long-term benefits. Infrastructure investments increase the income and competitiveness of regions by lowering the costs of doing business and creating new opportunities for investment and growth. Costs are reduced when people and goods are transported more quickly and efficiently and opportunities are created when investments create access to or revitalize regions. Numerous studies in economics have documented the tendency for public investments in infrastructure to increase productivity in the private sector.

Despite the importance of infrastructure investments to the economy, West Virginia has allowed its infrastructure to deteriorate. For decades, West Virginia’s rate of investment has been declining. Between 1966 and 1975, West Virginia’s annual growth in per-capita public capital stock was 7.3 percent. That number had fallen to 1.3 percent for the years 1996 to 2006. As infrastructure investments declined, the list of critical infrastructure in need of replacement and repair has grown. 
 
According to the American Society of Civil Engineers, 39 percent of West Virginia’s bridges are structurally deficient or functionally obsolete, 37 percent of West Virginia’s major roads are in poor or mediocre condition, and 30 of West Virginia’s 360 dams are in need of rehabilitation to meet applicable state dam safety standards.The updating and repair of West Virginia’s infrastructure represents an important economic development opportunity. Not only is the investment needed for safety reasons, but it is also an opportunity to create jobs and more the state more competitive.

WV Economic Expansion? Not Until New Monthly Jobless Claims Are Under 6,500

The Department of Labor is showing that monthly jobless claims (a.k.a. Unemployment Insurance Initial Claims) rose to 500,000, a nine-month U.S. high. This is not a good sign for the economic recovery. Most economists maintain that new monthly claims need to be below 400,000 for us to see a substantial uptick in hiring. 
 
So, what does this mean for our state’s economic recovery? For West Virginia, this means new monthly jobless claims need to be in the neighborhood of 6,500 for us to be on our way toward full economic recovery.  The Chart below illustrates this point by tracking July initial UI claims and the unemployment rate over the last 21 years. The data allows us to look at two previous recessions, thereby helping us gauge where our initial claims need to be in order to for us to be in another expansion. 
 
 
As you can see, new unemployment claims in July were a little over 8,300, an increase of over 1,000 from June.  The average new monthly claims during this period was about 7,400. During expansionary July months – when the state wasn’t in a recession – the average was almost 6,500. During recessionary months, the average was about 8,100. Therefore, based on historical patterns, don’t expect to see any signs of  strong economic expansion until new jobless claims are the 6,500 mark.  
 

Health Care Reform Boost to West Virginia Community Health Centers Could Create 5,000 New Jobs

According to a recent study by the Center for American Progress , new federal funds from the recent health care legislation should create nearly 5,000 new jobs in West Virginia, thanks to significant investment in community health centers.

The Affordable Care Act will provide $11 billion nationwide to build new community health centers and improve existing ones. Most of the money ($9.5 billion) will allow for expansion and improved operations at the existing centers, while the rest ($1.5 billion) will go toward new construction.
 
Community health centers provide predominantly low-income, rural West Virginians with comprehensive health care services, regardless of ability to pay. They work closely with members of high-risk communities to appropriately tailor their services.
 
 
In addition to expanding health services to patients around the state, community health centers are a potent source of economic stimulus. The federal dollars granted through health care reform will create a ripple effect, supporting neighborhood industries that sell their products to the centers and subsequently create jobs. The following example illustrates how community health centers have direct, indirect, and induced economic impacts on their surrounding areas:
 
Imagine a health care center that purchases waiting room chairs from a local furniture store (direct effect). The furniture store in turn purchases paper from an office supplies store to print receipts and a truck from a car dealer to make deliveries (indirect effect). The furniture store, the office supplies store, and the car dealership all hire staff and pay them salaries to help run the various businesses. These employees spend their income on everyday purchases such as groceries, clothing, cars, and TVs (induced effect).
 
Funding from health care reform to community health centers will create 4,733 additional jobs around the state — 418 for every 1,000 residents. This influx will create an estimated $517 million in raw economic activity, as well.
 
We already know, thanks to the nonpartisan Congressional Budget Office, that the recent health care reform will reduce the deficit by $143 billion over the next decade and expand health care coverage to 32 million Americans. But despite a lack of publicity, the implementation of the Affordable Care Act will also greatly stimulate West Virginia’s local economies and expand care through prudent investment in community health centers.

The middle class in West Virginia is losing ground

West Virginians have had no shortage of economic challenges over the past few years. Jobs have grown scarce, health care costs have risen, and financial insecurity has grown. One economic challenge, however, stretches back for decades, slow income growth for middle class families.

For the first half of the 20th century, the middle class grew along with the overall growth of the economy. But a troubling trend began in the latter part of the century that continues today. This chart compares inflation adjusted personal income per capita with median family income for West Virginia from 1974 to 2008. The numbers are indexed to their 1974 levels to facilitate the comparison.

Personal Income per capita and Median Family Income (family of 4), 1974-2008
Index: 1974=1
Source: U.S. Census Bureau and the Bureau of Economic Analysis
 
The chart shows that since the late 1970s, median income growth has been slow compared to overall growth in the economy. Since 2000, there has been almost no improvement in median family income, despite increasing growth in the economy.
 
If median family income had grown in sync with personal income per capita, then the median family income in 2008 would have been almost $80,000 compared to the actual level of $58,000.
 
The gap between overall economic growth and middle class income is due to rising inequality. In the past several decades much of the national economy’s growth has gone to those at the top of the income distribution. This trend is also happening in West Virginia. And as working West Virginians’ incomes remain stagnant, their economic hardships continue.

The Apples & Oranges of Public And Personal Finance: Putting Deficit Spending Into Perspective

Howard Swint’s recent commentary in the Charleston Gazette rails against government spending in the wake of the greatest recession since the Great Depression. There’s really no shortage of targets for Swint’s ire: the Emergency Economic Stabilization Act of 2008 that created the Troubled Assets Relief Program (TARP), Bush’s infamous tax cuts, supposedly mismanaged pension plans.

To some extent, it’s easy to see how deficit spending during a recession could seem counter-intuitive. After all, as private individuals, we’ve all been tightening our pursestrings over the last few years — most of us, not by choice. Accordingly, demonizing government spending has been a very effective tool in channeling populist rage.
 
And yet, this frustration signals a widespread, fundamental misunderstanding about the distinctions between public and personal finance. Comparing the two, particularly in the midst of a deep recession, is a classic case of apples and oranges.
 
The sudden increase in public debt is a direct response to a recession that was driven by the rapid decrease in private debt following the bursting of the housing bubble. Basically, the decline in private debt means that consumers and businesses are trimming their budgets, putting less of their money into the economy. 
 
It doesn’t help that tax revenues are down, as well. Double-digit employment and fiscally unsound, plutocratic tax policy will do that to a government. This is the one nail Swint hits on the head.
 
However, he’s misguided in attacking TARP, which although it may not have been the best option, certainly stopped the bleeding, preventing the country from despairing into a deeper, perhaps irreconcilable depression. TARP prevented the loss of 8.5 million more jobs and an additional 11.5 percent in GDP.
 
And then there’s Swint’s failure to distinguish between the national and public debts. The two are not synonymous, so when his argument against all things government mentions that the national debt is now 90 percent of the GDP, he appears to conflate the two. In reality, public debt constitutes only a portion of the national:
 
 
 
It helps to look at history, too. In the process of successfully guiding the country through two of its most trying challenges — the Great Depression and World War II — the Roosevelt Administration reached a public debt of 108.7 percent of GDP, the highest level ever recorded. In 1956, a decade later, economic growth, reduced defense spending, and the rise of a vibrant middle class had reduced the measure by 56 percentage points. The economy didn’t pay down the debt, it grew out of it.
 
    
 
According to Swint, we should mind “the free market benefits of . . . economic sacrifice such as [that] realized from [the] restructuring of failed firms.” The thing is, governments and countries and economies are not private firms. They have different interests in mind and different tools at their disposal. 
 
Moreover, lauding the “free market” seems odd, considering its irresponsibility and predatory practices precipitated the bursting of the housing bubble, necessitating massive government intervention in the first place. 
  
The moral of the story is to calm down about deficit spending and view it not as a sign of the apocalypse, but as a tool to use in times of economic turbulence. If Keynesian economics can defeat the Great Depression, it can handle our current woes. When there is no demand (debt) in the private sector, the public sector must spend to create it. That’s Public Finance 101.

Hoppy, just say you want to privatize Social Security

Hoppy Kercheval’s commentary today about how politicians are “raiding Social Security” illustrates his long confusion with the program and his desire to privatize or gut the program. Hoppy seems to be getting his inspiration from this Wall Street Journal article.

As we’ve illustrated here and here, Social Security is a basic means of survival for many of our elderly. Not to mention that those near retirement who have very little in wealth will be depending more on the program.

 
According to the Social Security Trustees Report, and much to Hoppy’s chagrin, the trust fund will be able to keep paying full benefits through 2036 without any changes in the program. At this time, Social Security could still pay 75 percent of the scheduled benefits for many decades after this date. Modest changes in taxes and benefits to the wealthy could put the program on sound footing indefinitely. 
 
Hoppy notes correctly that 2010 is the first year since 1983 in which the program’s total expenses exceed its tax income. The reason for this imbalance is the current recession. The actuaries predict that this imbalance will shrink dramatically in 2011 and pretty much disappear in 2012 (although it will return in 2015). The good news is that during this period the trust fund will grow because of the interest income the trust funds will receive from the Treasury bonds they hold. 
 
As for “raiding” Social Security money, let me paraphrase economist Dean Baker. It makes about as much sense to say the Daily Mail raided my bank account as to say the government has been “raiding” Social Security. As Baker notes

There was absolutely nothing improperly done with Social Security money. It was used to buy government bonds. Readers of a business paper like the WSJ Daily Mail may have thought that its reporters  commentators understood how U.S. government bonds work.

The Social Security trust fund will redeem the bonds when they are needed to pay benefits, just as private citizens and corporations often buy bonds and then sell them off when they need the money for some other purpose. In the meantime, the government used the money it borrowed for other purposes. That is the way government bonds and other bonds work. It is also exactly how the law was been written, and it has been followed.