Deceitful Job Claims

In a recent guest column that appeared in the Missoulian and the Billings Gazette, PPL Montana spokesman Gordon Criswell claimed that his company’s coal fired power plants in Colstrip have a very small negative impact on Montana’s environment and a very big positive impact on its economy.  To some of us, these claims sounded pretty outlandish. Writing in response to Criswell, Wade Hill, a Bozeman nurse, described the severe threat to public health posed by the Colstrip plants, and UM economist (and my former colleague) Tom Power and I questioned both the size and significance of the economic impacts that Criswell described. (Here are links to the three pieces: Criswell, Hill, and Barrett and Power).

Reading all the competing numbers and claims in these columns, you might be tempted to conclude that all they amount to is a large and messy academic dispute of no real consequence. When Tom and I said in our column that Criswell had exaggerated the importance of the jobs supported by the Colstrip plants, a Missoulian reader sent us a long and thoughtful email arguing that we had missed the real point: in this economy, we should realize that every job is needed and important.  We certainly agree with that, but there’s more to it.

All sorts of interests (businesses, non-profits, trade associations, schools and universities, developers, etc.) regularly use economic impact analysis to bolster the claim that unless they receive some kind of preferential treatment from the public, many, many jobs will be lost. That’s something that of course nobody wants, especially right now, and the public and policy makers need to take a threat of job loss seriously. On the other hand, preferential treatment can come at very high cost, in the form of weak environmental regulation (that seems to be what PPL is after) or selective subsidies and tax cuts that compromise important programs and reduce public sector employment.

Policy makers need to be very, very careful when weighing claims of job loss against the cost of preferential treatment, because the sad fact is that the losses are almost always overstated. Claiming to be important and to create a lot more  jobs than you really do in order to wrest concessions from the public is, frankly, deceitful and does us all a profound disservice.

Montana's Tax Climate is Good, But It Doesn't Mean Much

As Chuck Johnson reports in today's Missoulian, the Tax Foundation just released a report ranking Montana number eight among the states in providing a business friendly tax climate (you can read Chuck's story here). That sounds pretty good, but unfortunately, it doesn't mean very much. Even Webb Brown, the president of the Montana Chamber of Commerce, told Chuck that our ranking should be taken with a grain of salt.


For one thing, if the tax climate has anything to do with business performance in a state, it's because of the impact of taxes on costs. As the story goes, businesses will move from, say, Idaho to Montana if tax costs are lower here than in our neighbor to the west. Of course, there are lots of different costs of doing business, so even if Montana levies lower taxes than Idaho, businesses may not come here if in some other respect -  labor costs, for example -  we're the more expensive state. In other words, what counts, if anything, is not whether our taxes are higher or lower than our neighbor's, but how much lower. And that's why rankings don't tell us much. True, they tell us who's above us and who's below us, but not how far.  Consider an extreme case in which all states had pretty much identical taxes - some just a little lower and others just a little higher than average. These small differences would clearly have almost no impact on where companies decided to do business, but nevertheless we could use them to rank the states. It's just that the rankings wouldn't mean anything.


So if we want to figure out how taxes affect business performance, the first thing we should do is junk the tax cost rankings and look at the tax costs themselves. That's what the Tax Foundation tries to do (albeit not very well) when it calculates a business tax climate index for each state. Unfortunately, when economists have studied this issue in the past, they have had a hard time showing that differences in state tax costs have much of an impact on state business performance. There are any number of reasons this might be true, but one important one seems to be that interstate differences in tax costs are pretty small when compared to interstate differences in other costs, such as labor, rents or transportation. And those bigger cost differences outweigh taxes in business location decisions.


You can get an idea about just how little the Tax Foundation's tax climate index tells us by calculating the correlation coefficient between the value of the index for each state and some measure of state business performance; I did this using the 2011 value of the Tax Foundation index and the growth of wage and salary employment between 2008 and 2010 as my performance measure. In other words, I was trying to find out if its tax climate had anything to do with how badly or well a state did on the job front during the Great Recession. Correlation coefficients range between -1 and +1; if a good tax climate leads reliably to good job performance, the correlation coefficient should be close to +1. But the one I calculated turned out to be -.07. The negative sign means states with better tax climates actually tend to have weaker job performance! But don't worry! It's not really that bad; the value of .07 is so small that statistically it's no different from zero. In other words, there is no correlation - none -  between a state's Tax Foundation score and how well it does in creating jobs or holding onto jobs in a major downturn. 


Republican legislators take note: during last year's session, you argued that the best way to create jobs in Montana was to eliminate regulations and improve the tax climate for businesses. Every indication is that that's an argument you'll be making again in this year's campaigns. You probably don't want to be confused by the facts, but the fact seems to be that that strategy simply won't work.

Job Creation or a Race to the Bottom?

Republicans filing to run for seats in  the  Montana Legislature last week predictably touted their success in passing “job creating” legislation in the 2011 session. As usual, they were referring to bills to cut business taxes, eliminate “burdensome” regulations, and reduce workers compensation costs (and of course benefits). All of this is supposed to improve the business climate and make Montana more competitive with its neighboring states. Naturally, that’s going to create a lot of  jobs.

Except that it won’t.  As Louis Jacobson points out in a recent bulletin of the National Council of State Legislatures, most economists agree that “states can do a few things, though not a lot, to help create jobs.” (You can read on the on-line version of Jacobson’s piece here.)  That’s obviously discouraging news, and it suggests that all of us running for office should be realistic about claiming we can create jobs. And we need to understand why we are limited in what we can do.

One of the problems is that the Great Recession resulted from a collapse in demand. As the housing market collapsed and the value of household assets crashed, families reduced spending on consumer goods. And as credit markets froze up, business firms reduced purchases of capital goods. Under the circumstances, what was called for was increased government spending to fill in the holes left by the collapse of private sector demand. But for a couple of reasons I’ll discuss in a future post, that’s tough for states to do; Federal government spending provides a lot more demand stimulus, dollar for dollar, that state spending does. For right now just remember that Republicans generally oppose any stimulus by any government. 

The Republican solution is rather to try to bring jobs to Montana by lowering taxes and relaxing regulations.  And who knows? For a little while, it might work. But as Jacobson notes, the effect of these measures is not really to create new jobs, but rather to move jobs from one place to another. In other words, it’s beggar your neighbor job creation, and the trouble is (besides its not being particularly neighborly) your neighbor is going to respond in kind. The result is a race to the bottom that dismantles state environmental protections and slashes state revenues (or shifts taxes away from businesses and onto families) and a stalemate in the zero sum competition for jobs.