Educational Attainment in the Coal Mining Industry

Over at Coal Tattoo, Ken Ward started an informative discussion about economic development and the mining industry in West Virginia. Ken asked, “If coal is so good, then why it W. Va. so poor?” A great question, and one that has been around (at least) since John Alexander Williams asked it several decades ago.

As we showed in our recent report, there is a correlation (not causation) between high concentrations of county mining employment and county impoverishment. One reason given by scholars that might help explain part of this phenomenon is ‘rational underinvestment” in education in areas with high concentrations of coal mining. The theory is that counties with high concentrations of mining employment do not to make investments in higher education because mining employers seek a labor force with relatively lower (formal) education skills, which leads to a lack of economic competitiveness and impoverishment. As we know from countless business surveys, the #1 reason businesses chose to locate to a specific area is the availability of a skilled labor force.

So this begs the question, what is the educational attainment of the coal mining industry? The chart below looks at educational attainment for the coal mining industry (defined as NAICS 2121) in the U.S. and West Virginia. As you can see, in West Virginia about three quarters (74.9%) of those employed in the mining industry have a high school degree or less. This is pretty consistent with the national figures that show that only one-third of those working in the coal industry have above a high school degree. It is also import to  note that many of the workers in NAICS 2121 are engineers and managers, which tend to have higher educational attainment and higher wages.

As we noted in Booms and Busts (the title still makes me laugh), “highly educated workers
tend to be more productive and innovative, making them more valuable to employers, attracting a diverse range of industries to an area.” While educational level does not explain the whole economic story, it definitely helps explain why some counties have fallen behind in the post-industrial age more than others.

Government Spending Has Fueled Economic Recovery in WV

As we have noted before, West Virginia has weathered the recession better than most states. The state is one of only eight  that did not project a budget shortfall for FY2012.  In fact, we ended this year with an astonishing surplus of $330 million (although this has more to do with setting overly pessimistic revenue estimates, but that’s another story, for another time). And although our unemployment rate has doubled since the beginning of the recession, we have lost a smaller percentage of our job base, 1.5% compared to the U.S. average of 4.3%, and our real GDP has grown by 4 percent from 2009 to 2010.

While many are quick to attribute this economic vitality to our mining (including the Marcellus Shale ‘play’) and rebounding manufacturing sectors, this is not where the state has seen the most income growth over the last couple of years. In fact, the biggest sources of income growth derive from federal government outlays

From the 1st quarter of 2008 – roughly when the national recession started – to the 1st quarter of this year, personal income has increased by $6.1 billion (not adjusted for inflation). Of that $6.1 billion, approximately 55 perent or $3.4 billion was in the form of federal transfer payments – which includes Social Security, Unemployment Insurance, Medicare, Medicaid, and other federal payments. On top of these federal transfers, earnings from government jobs increased by 9 percent or $544 million over this period. This means government has been responsible for almost two-thirds of all income growth since the recession started.

Mining sector earnings- which includes coal mining, natural gas extraction, and support industries – increased by 12 percent or by $732 million from 2008 to 2011. The health care sector, which is the largest employer in the state, saw earnings increase by 13% or $782 million. As we showed in the March and April Jobs Count, the mining sector and the health care services sector are the fastest growing industries in the state over the last three years.

While these two industries have definitively been an important piece of the state’s economic recovery, their importance is dwarfed by the role of government expenditures (mostly all federal) in fueling economic recovery.

As the U.S. Bureau of Economic Analysis (BEA) pointed out a couple of weeks ago, almost one third of (30%) federal transfer payments over this period was due to the federal stimulus (ARRA) passed in March of 2009. Pushing aside the high fiscal policy multipliers of federal transfers, the federal stimulus is responsible for about 17% or $1 billion of all personal income growth since the recession started in 2008. 

Given the large and important role the federal government played in helping the state weather the recession, you would think ideas like this one and this one would be off the table – but they’re not.

While it is often hard for someto admit that fiscal policy (i.e. Keynesian/demand-side economics) played a large role in our country’s economic recovery,  the number clearly show that it did.

Let’s Hope our Congressional Delegation Heeds Romer’s Call…

Economic View

The Rock and the Hard Place on the Deficit

DEALING with our nation’s gaping budget deficit is going to hurt. So here is a question for policy makers: What would hurt more, raising taxes or reducing spending?

Mike Austin

The Republicans who walked out of budget negotiations the other week think they know the answer. They insist that higher taxes would threaten our fragile economic recovery and do serious long-term damage. Better to cut federal spending, they say.

President Obama pressured Republicans last week to accept higher taxes, in addition to reduced spending, as part of a plan to pare the deficit.

The economic evidence doesn’t support the anti-tax view. Both tax increases and spending cuts will tend to slow the recovery in the near term, but spending cuts will likely slow it more. Over the longer term, sensible tax increases will probably do less damage to economic growth and productivity than cuts in government investment.

Tax increases and spending cuts hurt the economy in the short run by reducing demand. Increase taxes, and Americans would have less money to spend. Reduce spending, and less government money would be pumped into the economy.

Professional forecasters estimate that a tax increase equivalent to 1 percent of the nation’s economic output usually reduces gross domestic product by about 1 percent after 18 months. A spending cut of that size, by contrast, reduces G.D.P. by about 1.5 percent — substantially more.

Some in Washington and in the news media have seized on a study I conducted with David Romer, my husband and colleague, that they say shows tax increases having a bigger short-term effect on the economy than spending cuts.

They are mistaken.

Our study, which examined only federal tax policy, found that conventional analysis underestimates the effect of tax changes on the economy substantially. The key problem we address is that changes in taxes are often linked to what is happening in the economy.

A tax surcharge in 1968, for instance, raised taxes because output was rising rapidly and was expected to keep surging. That the economy’s growth rate was about average even after that step might be interpreted as evidence that the surcharge did little. But considering the motive for it, and the fact that the economy had been predicted to continue growing quickly when it was introduced, this tax increase appears to have had a substantial chilling effect on the economy.

If there were a similar study on government spending, it would likely show that spending cuts also have larger effects than conventionally believed. Like tax actions, spending changes are often correlated with other factors affecting economic activity. For example, large cuts in military spending, like those after World War II and the Korean War, were typically accompanied by the end of wartime taxes and production controls. Those probably lessened the economic impact of the spending cuts, leading many researchers to underestimate the reductions’ effects.

There is a basic reason why government spending changes probably have a larger short-term impact than tax changes. When a household’s tax bill rises by, say, $100, that household typically pays for part of that increase by reducing its savings. Its spending tends to fall by less than $100. But when the government cuts spending by $100, overall demand goes down by that full amount.

Wealthier households typically pay for more of a tax increase out of savings, and so they reduce their spending less than ordinary households. This implies that tax increases on wealthy households probably have less effect on the economy than those on the poor or the middle class.

All of this argues against any form of fiscal austerity just now. Even some deficit hawks warn that immediate tax increases or spending cuts could push the economy back into recession. Far better to pass a plan that phases in spending cuts or tax increases over time.

But if federal policy makers do decide to reduce the deficit immediately, reducing spending alone would probably be the most damaging to the recovery. Raising taxes for the wealthy would be least likely to reduce overall demand and raise unemployment.

What about the long-term health of the economy? Here, too, the relative costs of tax increases and spending cuts are often misstated.

Higher tax rates reduce the rewards of work and investing. This can have supply-side effects that lower economic growth over decades.

But a large number of academic studies has found that these effects are relatively small. An excellent survey due to be published in the Journal of Economic Literature found that raising current tax rates by 10 percent would reduce reported income — the end result of work and entrepreneurial effort — by less than 2 percent. That is far less than what was hypothesized by prominent Reagan-era supply-siders like Arthur B. Laffer. He and others postulated that raising taxes 10 percent would ultimately reduce income by more than 10 percent, leading to a decline in tax revenue.

Certain spending cuts may also have small effects on long-run growth. Entitlement spending on Social Security and Medicare could probably be slowed without reducing the nation’s productive ability. But as the bipartisan National Commission on Fiscal Responsibility and Reform emphasized in a report in December, such changes can and should be made in a way that protects the most vulnerable Americans.

Government spending on things like basic scientific research, education and infrastructure, on the other hand, helps increase future productivity. This type of spending often produces high social returns, but the private sector is unlikely to step up if the government pulls back. Case studies
described in a recent survey
found that less than half of the returns from research-and-development spending were captured by the private investor, so corporations shy away from such endeavors. Cutting federal funds for R.& D. would leave a void and could have significant long-run effects on growth.

These long-term considerations, like the short-run concerns, point to a plan for reducing the deficit that combines spending cuts and tax increases. The cuts should spare valuable investment spending. On the tax side, nearly every economist I know agrees that the best way to raise revenue would be limit tax breaks for households and corporations.

The fiscal commission proposed a concrete plan that would trim a wide range of credits and exemptions, including the preferential treatment of employer-provided health insurance. It would use part of the revenue to reduce tax rates and the rest to cut the deficit. This would help deal with the deficit while actually improving incentives.

The bottom line is that tax increases should be part of any comprehensive budget plan. Opinion polls suggest that many Americans understand this. It is time for policy makers to accept this economic reality.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.