Tag Archives: Jobs

New York’s Buffalo Billion initiative has been underwhelming

New York’s Buffalo Billion plan has come under fire amidst an ongoing corruption probe looking into whether some contracts were inappropriately awarded to political donors. The investigation has led to funding delays and there are reports of some contractors and companies rethinking their investments. But even without these legal problems, it is unlikely that the Buffalo Billion initiative will remake Buffalo’s economy.

Buffalo, NY has been one of America’s struggling cities since the 1950s, but before then it had a long history of growth. After it became the terminal point of the Erie Canal in 1825 it grew rapidly; over the next 100 years the city’s population went from just under 9,000 to over 570,000. Growth slowed down from 1930 to 1950, and between 1950 and 1960 the city lost nearly 50,000 people. It has been losing population ever since. The Metropolitan Area (MSA), which is the economic city, continued to grow until the 1970s as people left the central city for the surrounding suburbs, but it has also been losing population since then. (click to enlarge figure)

buffalo-population

Buffalo’s population decline has not escaped the notice of local, state and federal officials, and billions of dollars in government aid have been given to the area in an effort to halt or reverse its population and economic slide. The newest attempt is Governor Andrew Cuomo’s Buffalo Billion, which promises to give $1 billion of state funds to the region. The investment began in 2013 and as of January 2016, $870.5 million worth of projects have been announced. The table below lists some of the projects, the amount of the investment, and the number of jobs each investment is supposed to create, retain, or induce (includes indirect jobs due to construction and jobs created by subsequent private investment). This information is from the Buffalo Billion Process and Implementation plan (henceforth Buffalo Billion Plan).

buffalo-billion-projects

The projects listed have been awarded $727 million in direct investment, $150 million in tax breaks and $250 million in other state funds. The total number of jobs related to these investments is 9,900 according to the documentation, for an average cost of $113,859 per job (last column).

However, these jobs numbers are projections, not actual counts. This is one of the main criticisms of investment efforts like Buffalo Billion—a lot of money is spent and a lot of jobs are promised, but rarely does anyone follow up to see if the jobs were actually created. In this case it remains to be seen whether reality will match the promises, but the early signs are not encouraging.

Executives of the first project, SolarCity, which received $750 million of benefits and promised 5,000 jobs in western New York, appear to have already scaled back their promise. One company official recently said that 1,460 jobs will be created in Buffalo, including 500 manufacturing jobs. This is down from 2,000 in the Buffalo Billion Plan, a 27% decrease.

The SolarCity factory is not scheduled to open until June 2017 so there is still time for hiring plans to change. But even if the company eventually creates 5,000 jobs in the area, it is hard to see how that will drastically improve the economy of an MSA of over 1.1 million people. Moreover, page eight of the Buffalo Billion Plan reports that the entire $1 billion is only projected to create 14,000 jobs over the course of 5 years, which is again a relatively small amount for such a large area.

Contrary to the local anecdotes that say otherwise, so far there is little evidence that Buffalo Billion has significantly impacted the local economy. Since the recession, employment in Buffalo and its MSA has barely improved, as shown below (data are from the BLS). There has also been little improvement since 2013 when the Buffalo Billion development plan was released. (City data plotted on the right axis, MSA on the left axis.)

buffalo-employment

Real wages in both Erie and Niagara County, the two counties that make up the Buffalo MSA, have also been fairly stagnant since the recession, though there is evidence of some improvement since 2013, particularly in Erie County (data are from the BLS). Still, it is hard to separate these small increases in employment and wages from the general recovery that typically occurs after a deep recession.

buffalo-county-wages

The goal of the Buffalo Billion is to create a “Big Push” that leads to new industry clusters, such as a green energy cluster anchored by SolarCity and an advanced manufacturing cluster. Unfortunately, grandiose plans to artificially create clusters in older manufacturing cities rarely succeed.

As economist Enrico Moretti notes in his book, The New Geography of Jobs, in order for Big Push policies to succeed they need to attract both workers and firms at the same time. This is hard to do since either workers or firms need to be convinced that the other group will eventually arrive if they make the first move.

If firms relocate but high-skill workers stay away, then the firm has spent scarce resources locating in an area that doesn’t have the workforce it needs. If workers move but firms stay away, then the high-skill workers are left with few employment opportunities. Neither situation is sustainable in the long-run.

The use of targeted incentives to attract firms, as in the aforementioned SolarCity project, has been shown to be an ineffective way to grow a regional economy. While such incentives often help some firms at the expense of others, they do not provide broader benefits to the economy as a whole. The mobile firms attracted by such incentives, called footloose firms, are also likely to leave once the incentives expire, meaning that even if there is a short term boost it will be expensive to maintain since the incentives will have to be renewed.

Also, in order for any business to succeed state and local policies need to support, rather than inhibit, economic growth. New York has one of the worst economic environments according to several different measures: It’s 50th in overall state freedom, 50th in economic freedom, and 49th in state business tax climate. New York does well on some other measures, such as Kauffman’s entrepreneurship rankings, but such results are usually driven by the New York City area, which is an economically vibrant area largely due to historical path dependencies and agglomeration economies. Buffalo, and western New York in general, lacks the same innate and historical advantages and thus has a harder time overcoming the burdensome tax and regulatory policies of state government, which are particularly harmful to the local economies located near state borders.

Buffalo officials can control some things at the local level that will improve their economic environment, such as zoning, business licensing, and local taxes, but in order to achieve robust economic growth the city will likely need better cooperation from state officials.

State and local policy makers often refuse to acknowledge the harm that relatively high-tax, high-regulation environments have on economic growth, and this prevents them from making policy changes that would foster more economic activity. Instead, politicians invest billions of dollars of taxpayer money, often in the form of ineffective targeted incentives to favored firms or industries, with the hope that this time will be different.

Discovering an areas comparative advantage and creating a sustainable industry cluster or clusters requires experimentation, which will likely result in some failures. Local and state governments should create an environment that encourages entrepreneurs to experiment with new products and services in their region, but they shouldn’t be risking taxpayer money picking winners and losers. Creating a low-tax, low-regulation environment that treats all businesses—established and start-up, large and small—the same is a better way to grow an economy than government subsidies to favored firms. Unfortunately the Buffalo Billion project looks like another example of the latter futile strategy.

Healthcare: Searching for Steve Jobs

Steve Jobs transformed technology, bringing affordable smart phones and personal computers to households across income levels and around the world. In a 15-minute podcast Dr. Robert Graboyes asks why health care hasn’t seen this kind of innovation and explores the potential for health care under free markets. Click here to listen or subscribe.

 

Do Energy Efficiency Regulations Create Jobs?

Earlier this year, the Department of Energy (DOE) finalized a regulation setting energy efficiency standards for microwave ovens. At the time, Heather Zichal, the Deputy Assistant to the President for Energy and Climate Change, had this to say about the regulation:

…in his State of the Union Address this year, the President set a bold new goal: to cut in half the energy wasted in our homes and businesses over the next 20 years. Part of how we will achieve that goal is by making appliances more energy efficient. Not only will that help Americans keep more money in their pockets, it will also curb pollution and spark innovation that creates jobs and ultimately brings better products to the marketplace. That’s why we are proud to announce today that the Department of Energy has finalized new energy efficiency standards for microwaves… (emphasis added)

I’ve written elsewhere about why Americans should be skeptical of the environmental benefits from this regulation, as well as other energy efficiency regulations emanating from the Department of Energy. Putting that aside for a moment, I’d like to focus on the last part of Ms. Zichal’s comment, that energy efficiency regulations will create jobs.

As an example, let’s look at the microwave oven regulation that Ms. Zichal cites in her blog post. According to the Department of Energy’s own employment analysis, the employment effects of this regulation are negligible. Since American consumers import roughly 99% of microwaves purchased, the DOE expects that effects on domestic production jobs will be virtually zero.

In addition, DOE models indirect employment effects on other industries as a result of changes in consumer behavior and investment decisions resulting from the regulation. While these numbers are highly uncertain given the inherent difficulty in predicting these things, the DOE estimated the rule will probably eliminate jobs in the short term, estimating between 551 jobs destroyed and 17 jobs created by 2016. In the long run, employment effects may be positive, with the regulation potentially creating between 153 and 697 jobs by 2020. However, the DOE notes there are limitations inherent in its model when calculating these effects, especially when trying to predict jobs created years in the future. For example, the DOE states:

Because [the agency’s model] does not incorporate price changes, the employment impacts predicted by [the model] would over-estimate the magnitude of actual job impacts over the long run for this rule.

The DOE goes on:

…in long-run equilibrium there is no net effect on total employment since wages adjust to bring the labor market into equilibrium. Nonetheless, even to the extent that markets are slow to adjust, DOE anticipates that net labor market impacts will be negligible over time due to the small magnitude of the short-term effects.

Creating jobs should never be the primary reason for justifying a regulation.  In most cases, jobs created by regulations are compliance jobs, which constitute a cost of regulating, not a benefit. More importantly, these types of predictions about jobs created and destroyed ignore the true employment costs of regulation that occur when individuals lose their jobs because of a rule. These costs include things like lost earnings, loss of health insurance, stress, additional health effects, etc. Despite this, by the DOE’s own estimates job creation does not appear to be a solid justification for this particular energy efficiency standard.

A Hidden Opportunity Cost of Regulatory Compliance: Management Time

At the federal level, regulators in many agencies attempt to estimate the impacts that new regulations would have on businesses, even if the average quality of these analyses is typically poor.  But these impact analyses rarely consider a conceivably major cost: the opportunity cost of business owners or managers who have to spend their time dealing with regulations.

One of the simplest costs that regulators consider, for example, is paperwork: how much more paperwork will be imposed on businesses as a result of a new regulation?  Indeed, the paperwork burden is sometimes the primary cost considered in these analyses, as was the case in this rule proposed by the Department of Labor towards the end of 2011.  This proposal addresses requirements for affirmative action and non-discrimination that apply to federal contractors, proposing, among other things, to “strengthen the affirmative action provisions, detailing specific actions a contractor must take to satisfy its obligations. [The proposal] would also increase the contractor’s data collection obligations, and establish a utilization goal for individuals with disabilities to assist in measuring the effectiveness of the contractor’s affirmative action efforts.”

Just consider one part of the summary of that proposed rule: “increase the contractor’s data collection obligations.” If you read on in the Federal Register notice (search for the term “12866” to get to the analysis section), you’ll find that the Dept. of Labor assumed that contractors have people in place to perform the increased data collection obligations. So for the analysis, the Dept. of Labor simply added some paperwork time to each contractor, and calculated how much the extra employee time would cost each contractor.

But here’s the catch.  What if the contractor has to hire a new employee to handle this?  The costs of searching for a new employee can be substantial.  A recent post in the St. Louis Business Journal featured Steve Baden, president of Royal Banks of Missouri, discussing the difficulties in finding and hiring a compliance officer – an employee whose job it is to oversee regulatory compliance, which certainly includes vast amounts of paperwork.  Baden said that the process of hiring a compliance officer took him “a year of interviews to find someone qualified and cost [him] six figures.”

Management time is expensive.  Business owners are the entrepreneurs that help create economic growth through innovation.  When they have to spend their time searching for compliance officers or filling out paper work, they are not spending their time finding new ways to improve their businesses or starting new ones.  This is a real cost of regulation, and one of the reasons that the accumulation of regulations can stifle an economy.

Furthermore, any employee’s time—whether it’s a new employee or one who already worked for the contractor—is also valuable time.  When Steve Baden has to hire a full-time compliance officer in order to navigate the paperwork maze created by regulations, that individual hired to ensure compliance will not do some other productive activity with her time.  How valuable is it to society to have highly skilled individuals spending their time collecting data or filling out paperwork to show compliance with regulations?  Time used on regulatory compliance is necessarily not time used elsewhere. Without the million-plus restrictions created by federal regulations, countless compliance officers would be gainfully employed in roles that create better value in the economy.

One of my mentors once stated that he could create jobs by hiring people to trim his lawn with toenail clippers (warning: links to a Penn & Teller episode, and they do not refrain from using vulgar language).  But that’s probably not the most productive use of their time.  The fact that an action creates jobs does not mean the skills and efforts of individuals are used in the best possible way, nor does it mean that there is necessarily a net gain in jobs.  The creation of a regulatory compliance job may be offset by elimination of one or more jobs elsewhere because of increased operating costs.

What is a Job? What is Work?

On NPR’s Marketplace yesterday, NPR listener Shlomit Auciello offered this profound explanation:

Jobs provide pay and tax revenue, data for the Bureau of Labor Statistics and talking points for political candidates. Work — at least good work — provides needed goods or services, a sense of useful occupation and dignity, and a good night’s sleep at the end of a hard day. When the two come together, it is very good indeed.

This gets at the heart of a very common misunderstanding. Politicians of all stripes obsess about jobs as if the key to improving the human condition were simply to make sure everyone in the world had a job. But what if these jobs provided absolutely no useful goods or services to others? From the perspective of a worker, the point of a job is not simply to have a paycheck; it is to have a paycheck that permits one to buy useful goods and services. Imagine that a government program managed to employ 100 percent of the planet in a completely useless task (digging holes and filling them back up again). Then we would have nothing useful to spend our hard-earned money on and we would have wasted our time.

It is possible for a “job” and “work” to be the same thing. But as Ms. Auciello points out, the two concepts do not always come together.

“Where are the jobs from the Bush tax cuts?”

So asked Senator Franken (D-MN) in a press conference this week.

It is a good question.  From 1981 through 2000, real GDP grew at an average annual rate of 3.3 percent.  But from 2001 to 2008 (even before the Great Recession began), real GDP grew at only 2.1 percent per year.  Why did growth seem to slow after the Bush tax cuts?  There are a number of different plausible answers.  I’ll take a stab at two:

1.  Yes, all things being equal, some people believe that a deficit-financed tax cut should improve the economy.  But all things were not equal in the 2000s.  In just about every aspect other than taxes, economic policy in the 2000s moved in an anti-market direction.  One could cite monetary policy as John Taylor does.  One could cite regulatory policy as Mark and Nicole Crain do.  One could cite trade policy.  One could cite the increased reliance on counter-cyclical stimulus efforts (there were 4 such packages during the Bush years).  Lastly, one could cite the large increases in spending that attended two wars, the prescription-drug benefit, the farm bill, and other policies.  Indeed, according to the broadest measure of economic freedom over time, the “chain-linked” EFW score by Gwartney, Lawson and Hall, U.S. economic freedom steadily improved up until around 2000, whereupon it precipitously fell:

2.  Another reply might be: we didn’t have a tax cut.  By this I mean that a tax cut without a spending cut is not a tax cut; it is a tax deferral.  When I wrote earlier that some people believe that a deficit-financed tax cut will improve the economy, I linked to John Maynard Keynes.  This is because Keynesian models predict deficit-financed tax cuts will spur economic growth (they also predict that deficit-financed spending increases will spur growth).  But there are other schools of thought.  One theory holds that if uber-rational, forward-looking consumers know that Deficits Are Future Taxes (Professor Mike Munger uses the helpful acronym “DAFT”), then they will save for those taxes today, which means that they won’t spend, completely offsetting whatever government spending that the deficits pay for.  But as I’ve explained in a previous post, you don’t need to believe in such an extreme model of human rationality to arrive at the conclusion that deficit-financed taxes will fail to spur growth.  This is because deficits lower the nation’s capital stock, which over the medium-to-long-run also harms economic growth (see the link for more details).

The bottom line: Though he almost certainly didn’t intend it this way, Senator Franken’s observation that the Bush years were not massive growth years actually bolsters the case for both spending cuts AND tax cuts.

Job creation or job protection in California?

The Mercury Sun News editorial provides a strong critique of several pieces of new Sacramento legislation, claiming the bills are simply jobs protection measures for unionized employees.

The bills include Senate Bill 469 which requires cities to conduct an economic impact analysis before approving big-box stores that sell groceries. Unions are for it. Grocers and land developers are against it.

AB 646 and AB 455 involve labor negotiations with unions. SB 931 forbids local government from using taxpayer funds on lawyers or consultants advising on how to get around union rules – which could be interpreted in one of two ways – does it limit local spending or does it favor unions?

And AB 438 requires public notice before a city can withdraw from a public library and contract with a private provider while “barring lower pay rates and layoffs in a new system.”

If the editors’ analysis is correct, the bills show how public sector unions as a special interest can acheive their goals outside of the collective bargaining process. At least one California legislator has introduced a bill aimed at collective bargaining reform. It could be that these bills aimed at local government may be part of unions’  pro-active strategy to prevent layoffs or firings of public employees should local governments introduce competition to city services.