Losing Touch With Reality

In recent meetings with the editorial boards at the Helena Independent Record and the Billings Gazette*, gubernatorial wannabe Greg Gianforte has laid out a plan for tax cuts and infrastructure spending that frankly loses touch with reality. A former businessman, Gianforte is a Republican outsider with no experience in governing, which may explain how he has come up with a proposal that would make a complete mess out of the state’s budget.

According to Gianforte, the state has a surplus of “almost half a billion dollars.” With that  money, he figures, we could eliminate the business equipment tax, which he claims is the “most regressive” tax on the books. We could also adopt a measure to cut income taxes that made it through the 2015 Legislature, only to be vetoed. And after both of those tax cuts, Gianforte figures, we would have enough left to spend $200 million on infrastructure projects.

Consider Gianforte’s claim that we have a “surplus” of half a billion dollars. He appears to be referring to the $455 million the state had in the bank at the start of the current biennium. But he doesn’t seem to realize that by the beginning of the next biennium, that cash on hand is expected to be reduced to $357 million. It’s only then that Gianforte, if elected, could begin to put his tax and spending proposals in place, so he would be doing that with about $98 million less to work with than he thinks.

But it gets worse. Right now, the amount of ongoing revenue the state takes in just about equals the amount that it spends. The budget is currently balanced; there is no surplus or deficit. The money that’s in the bank is not a current surplus; it’s a reserve that has been set aside out of past surpluses. So if Gianforte really did cut taxes and increase spending, the state would run a deficit, and the only way we could pay for it would be by eating up our reserves.

And with Gianforte’s plan, those reserves would disappear very quickly. Assuming that the state would make up for the loss to local governments, eliminating the business equipment tax would cost at least $160 million over the next biennium. Depending on the details, cutting the income tax could easily cost another $100 million.** And then there’s the $200 million Gianforte says he will spend on infrastructure. All that adds up to $460 million, which means that we would blow through our $357 million cash reserve well before the biennium was over, and would still be running a serious deficit with no way to pay for it. Needless to say, running a deficit and cannibalizing our reserves would obliterate the track record for sound fiscal management put up by Steve Bullock. And the state’s credit rating, which right now is excellent, would go in the tank. Nobody would want to lend money to a state that had lost all sense of fiscal discipline.

Quite aside from being fiscally irresponsible, Gianforte’s proposal to eliminate the business equipment tax is misinformed.  Several past legislatures have already substantially reduced the tax, and in 2013, eliminated it entirely for 60 percent of Montana’s small businesses. The bulk of the tax is now paid by large businesses. How Gianforte concludes that that makes it the most regressive tax around is a mystery to me.

Another big problem with eliminating the business equipment tax is that it puts a major dent in the budgets of local governments, which means that they either have to cut services or shift the tax onto other taxpayers, mainly homeowners. To prevent that from happening, the legislature would have to make up for the loss of local revenue with state funds. That's what it's done in the past, and it works, but it simply means that the dent moves over to the state budget.

Gianforte’s taxing and spending plans don’t pencil out, but you shouldn’t let that worry you too much. Because even though Gianforte doesn’t seem to know it, the state constitution requires the budget to be balanced. So his plan is simply unworkable. There’s some comfort in that, although it’s alarming to think that there is a candidate out there who doesn’t seem to know or care that he is pitching a plan that can never get off the ground.

* You can see video of these meetings here, for the Independent Record and here for the Gazette.

** Gianforte says he would have signed the income tax cut bill that Steve Bullock vetoed. Since the governor in fact vetoed three such bills, it’s anyone’s guess what Gianforte is actually talking about. The three bills (SB 171, SB 200 and HB 166) would have cost, in lost revenue, $22, $112 and $85 million respectively. The Republicans were only serious about the first one, SB 171. The other two were obvious budget busters that were sent to the governor so that he would have to veto them, which would give Republicans a chance to go after Bullock in his re-election campaign. And sure ‘nuff, that’s what Gianforte’s doing.

Good Job Dreams

Greg Gianforte, whose grasp on the facts always seems a bit tenuous, has been trying to make the case recently that Montana’s economy is a disaster. And David Parker, over at the Big Sky Political Analysis blog, has called him out on it.

If you’ve heard one thing from Gianforte lately, it’s the claim that Montana is “49^th.  in wages.” That sounds pretty bad, but as Parker, who teaches political science at MSU, noticed, it doesn’t seem to square with what we know about the state’s rankings in household and per capita income, the unemployment rate, and employment growth, all of which are really pretty decent. So Parker did some digging around, and it turns out that the measure of “wages” that Gianforte is relying on, and at which we appear to be so miserable, is, to put it mildly, deeply flawed.

 Measuring state wage levels in a way that means something is tricky, and different measures mean different things. For example, if we want to know what kind of living a Montanan can provide for herself by working – and that’s what I think we're talking about here - then average annual wages per worker seem like a pretty good index.* But as Parker discovered, the measure Gianforte is using, which was calculated by an outfit called Transactional Records Clearing House (TRAC), is not that at all. It is, rather, the total wage income reported by Montanans on their 2013 Federal tax returns, divided by total number of returns. If you are interested in annual wages per worker, that number is going to be way too small.

Why? Well, as Parker notes, some wages get left out of this calculation when self-employed folks – and we’ve got a lot of them in Montana - report wages as business income rather than listing them on a W2 form. And then there’s the fact that there are more returns than there are workers earning wages, because people with non-wage income have to file too; that means wages per return are smaller than wages per worker.

Now Gianforte could argue here that sure, TRAC’s wage figures are too low, but they’re too low for every state, so however you calculate it, Montana probably still comes in in 49^th. place. That’s plausible, but not helpful, because it reminds us that rankings really don’t tell us much. Sure, being 49^th. sounds awful, and it suits Gianforte’s purposes for you to think it sounds awful, but if the actual dollar difference in wages between Montana and the rest of the country  is  small, why should we care?

None of this is meant to deny that wages in Montana are below the national average. That’s a fact of life that’s been with us for a long time. And it’s important to understand how far below average we are, and why.

The way Gianforte tells the story, Montana wages fall so far behind the rest of the country’s because we don’t have enough “good jobs.” The notion is that compared to the rest of the country, we have too many people collecting the minimum wage by flipping burgers, or greeting people at Walmart, or loading chairs at Snowbowl, and not enough well paid people mining coal, or drilling for oil, or writing computer code or performing brain surgery. And what Gianforte wants us to believe is that if he is governor he can create a lot of those good, well paid jobs – after all, he’s done it before! – and haul Montana out of the wage basement. Exactly how the guy flipping burgers is going to make the transition to brain surgery is a little murky, but I guess that’s a detail we can work out.

How Gianforte’s going “create good jobs” isn’t clear either – at this point he’s adhering to the old time Republican religion of deregulating businesses and slashing their taxes – but the real problem with his strategy for raising Montana’s wages is that it simply won’t work.

To see why that’s true you can go to this very handy data set from the Bureau of Labor Statistics. It lists, for Montana, the average annual wages per job, and the number of jobs, in 574 different occupations. There’s a total of almost 428,000 jobs spread across all those occupations, and in 2014 the average wage for all jobs was $39,752. The list obviously contains both good jobs – chemical engineers, for example, who average $95,000 a year – and not so good ones, like veterinary technicians, who average $24,600.

The data set also provides this information for the country as a whole. It turns out that nationally there are 129 million jobs in this same set of occupations, and the 2014 average annual wage for all those jobs was $47,175, so there’s a $7,423 wage gap between Montana and rest of the country. Now Gianforte attributes that gap to the fact that in Montana we work at relatively more bad jobs and relatively fewer good ones than other Americans. He doesn’t seem to recognize another possibility, namely that all jobs in Montana – good, bad, or indifferent – pay less than their national counter-parts.

To sort this out, we can engage in a little thought experiment. What if we held the wage for each occupation constant at its Montana value, but changed the distribution of jobs among occupations so that we had exactly the same mix of good and bad jobs as everybody else? What would happen to the $7,423 Montana wage gap? Well, according to Gianforte, it should largely go away.

But if you run the numbers, that’s not what happens. The average wage would rise by $1,596. That ain’t chickenfeed, but it means that Montana would still be $5,827 behind the rest of the country. Stated otherwise, the bulk of the Montana wage gap is there because pay levels are generally lower in all occupations, and not because we are cursed with a lack of good jobs.

There are lots of reasons why Montanans tend to earn less than their occupational counterparts in the rest of the country, not all of which are necessarily bad.** But if we really think we’ve got to close the wage gap, it’s not enough to fantasize about “creating good jobs.” It may seem like common sense and make for a good political soundbite, but it just isn’t going to work.

* But it gets complicated.  There are workers who only want to work part time, for a whole bunch of reasons, and they will drag the average wage of all workers down, which will understate the earning opportunities of people who work full time. There is also a lot of data available that refers to wages per job, which sounds like the same thing, but isn’t, because a worker can hold multiple jobs, or a fraction of one job. If you really want to contemplate the grizzly details, you can consult Post-Cowboy Economics: Pay and Prosperity in the New American West, which Tom Power and I published back in 2001.

** Again, take a look at Post-Cowboy Economics for an extended discussion of this issue.

Royally Bamboozled

The way I see it, a whole lot of Montanans, including Sen. Doug Kary, have been royally bamboozled.

In a guest column that’s appeared in several Montana newspapers, Kary, a Billings Republican, cites a recent study by the Bureau of Business and Economic Research to claim that closing the coal fired power plants at Colstrip would be an intolerable disaster for Montana’s economy. And so, he argues, in implementing the Clean Power Plan, the state should do whatever is necessary to keep Colstrip up and running.

Whether or not the Colstrip plants should be closed is a decision that deserves a lot of careful thought and attention, but unfortunately that’s not what it’s getting from Kary, who so misunderstands the actual findings of the BBER study as to turn them on their head.

Kary says that the BBER forecasts that “Montana’s economy will shrink by $1.5 billion if the Colstrip facility is forced to close. Compare that with the $1.2 billion reduction in economic output Montana experienced between 2008 and 2009.”  Had Kary read the BBER study carefully, he would know that it predicts that even if all the plants at Colstrip were shut down, Montana’s inflation adjusted output would increase every single year from 2019 to 2050; it would never shrink as it did during the 2008 recession. The $1.5 billion shrinkage Kary cites, without putting a date on it, is how much lower the BBER projects output would be, in 2025, if Colstrip were closed down rather than left open. So the numbers Kary is comparing don’t measure the same thing. In fact, according to the BBER, between 2024 and 2025 output will rise about $1.7 billion, even if Colstrip is closed.

By the way, the “output” measure BBER is using when it computes the $1.5 billion shortfall is gross receipts (or sales) of businesses and other entities. This is not the measure economists usually use, because it overstates the value of output by allowing a lot of stuff to be counted twice.* Sales usually exceed the accepted measure of output, gross domestic product, by a wide margin – about 70% in the BBER model. Using GDP, the 2025 output shortfall is about $1 billion, rather than $1.5 billion.**

Kary says that if Colstrip is shuttered, “Montana will lose over 7,000 good jobs.” Again, he doesn’t say when this is going to happen. But the BBER study does not predict a decline of 7,000 jobs; it predicts, rather, that in 2025, with the CPP in place, there be 7,000, or about 1.1%, fewer jobs available in the state than there otherwise would be. Between 2024 and 2025, the number of jobs is projected to decline by 735, or one tenth of one percent.

Kary says that closing Colstrip would produce a “$145 million to $155 million a year tax hit” to the state, “about 1 in 10 of the dollars the state collects in tax revenue each year.” Actually, if he had read the BBER study carefully, he would know that $145 million represents the BBER’s estimate of how much lower state revenue from all sources (not just taxes) will be in 2025. In 2013, state revenue from those sources was about $8 billion. We don’t know what that revenue will be in 2025, but something in the neighborhood of $10 billion is a conservative estimate. In that case, $145 million in reduced revenue will translate into 1 out of every 69 dollars the state collects, not 1 out of 10, as Kary would have it.

Kary says that closing Colstrip will cause “double digit” increases in electricity prices without explaining what that means (10 percent? 99 percent?) but doesn’t recognize that  the BBER study predicts that despite increases in the cost of living, real per capita disposable income will increase every single year through 2050, even if Colstrip is entirely closed down. So will population, the labor force, real pay per job, real pay per worker, real gross state product, and real total personal income.

If you’re wondering how Kary managed to so badly garble the results of the BBER study, well, that’s where the bamboozling comes in. And the outfit doing the bamboozling is none other than BBER itself.

BBER wanted the impacts of a Colstrip closure to look as scary as possible, and presented its results so that would happen. It filled tables and graphs with calculations of what it called losses – the difference in what would happen with and without Colstrip being shut down – and suggested closure was a calamity in the making. And Kary bought it.

The only way Kary could have known that virtually every meaningful measure of economic performance would continuously improve, even after Colstrip was completely shut down, would have been to dig around in the numbers in an appendix, because BBER never bothered to point those results out.

The only way Kary could have known that the “losses” depicted in the study were not declines, and not comparable to real recessionary declines, would have been to read the fine print, because BBER itself didn’t succeed in avoiding that particular confusion.

The only way Kary could have known that the “losses” BBER attributed to closure were quite small in percentage terms, or that they would quickly be erased by normal growth, was again to have gone to the numbers in the appendix, because BBER never told him that.

The only way Kary could have known that real per capita income would continue to increase despite higher electricity prices was, you guessed it, to have gone to the numbers and calculated it for himself, since BBER never did it for him.

For a lot of people, including Doug Kary, whether or not Colstrip closes down is a make or break question when it comes to implementing the Clean Power Plan. That concern is not hard to understand, particularly when it’s coming from the people who live and work in Colstrip. But from a statewide perspective, it’s important not to go off half cocked here, and make decisions based on a contorted view of their consequences. None of us, including Doug Kary, is well served by having the wool pulled over our eyes.

*For example, when a farmer sells barley to a brewery, the barley is included in the economy’s output for the first time. When the brewery sells a keg to your favorite watering hole, the barley is counted again, transformed into beer. And when the bartender draws you a pint, it’s counted a third time.

** It’s hard to avoid concluding that BBER used sales rather than GDP because a “loss” of $1.5 billion sounds scarier than a loss of $1 billion.