Wednesday, December 23, 2009

The return of the Northwest Republican?

Like the Northeast, the Northwest was once characterized by the strong presence of moderate Republicans. Three term Governor Dan Evans was the poster child for Republicans who respected government, managed it well and tried to pragmatically balance opposing interests. Olympia's triumvirate of Lt. Gov. Joel Pritchard, and Senators Evans and Gorton represented the majority in the middle. Oregon was represented by moderate and pragmatic Bob Packwood and Able Lincoln liberal Republican Mark Hatfield in the U.S. Senate.

Republicans changed not the electorate. Slade Gorton, a long time environmental advocate was frustrated by the lack of recognition by the environmental community for his accomplishments in wilderness protection, clean air and clean water. He moved abruptly to the only side that consistently backed him - timber and rural interests. On issues like spotted owl and old growth forests he moved from solving the problem to using the problem as a symbol for rural Washington versus Seattle. He mounted a new Republican strategy called "surround King County" that focused on a coalition of economic conservatives, rural business interests and the religous right built on populist opposition to elitists and special interests in the city. On the old growth forest issue he even managed to suck in the Bush administration. Unfortunately, this new coalition was no longer a majority.

The Gingrich revolution swept into power a more extreme right group of Republicans united by far right religious ideology and rigid free market doctrine. As their majorities slipped away, the ideologues maintained control of the party caucuses and moderates like State Senaors Rodney Tom and Fred Jarret changed parties.

Today, Republicans represent only the two most rural congressional districts and only a third of the state legislature. These small minorities work against them. The remaining members represent only the purest districts generally rural and socially conservative. Lacking any swing districts in their caucus, their caucuses gain their energy from focusing on opposing environmental regulations, religious opposition to gay rights, and pro life. Out of touch with middle.

Obviously, this course isn't sustainable. Democrats have controlled the Governor's mansion in Olympia for 27 years now and at some point Republicans are going to attract a candidate who can rebuild a majority or come damn close. Attorney General McKenna appears to fit the bill.

McKenna manages hundreds of government attorneys in Washington State who represent state agencies and protect consumer interests. More than any other statewide elected official, McKenna commands the respect and admiration of his staff. My friends and neighbors in the A.G.'s office in Olympia believe that he listens to them and does his job well. Think about it for a minute. Government lawyers in Olympia are pretty much liberals right out of the box. This is no small feat and the mark of an excellent manager.

The man is bright, articulate and like the iconic Northwest Republican Gordon, he comes off as a bit serious perhaps even nerdy. His focus is laser picking up simple, symbolic issues which generate a lot of heat but not controversy; open government, public records, Internet safety, I.D. theft, methamphetamine abuse, and consumer protection.

McKenna does this without cutting his ties to the right. He recently sided with another 12 Republican Attorney Generals in calling the President's health care reform unconstitutional because it "buys off" Nebraska Senator Ben Nelson's with a special Medicaid subsidy for that state.

Environmentalists argue that he also parts company with traditional Northwest Republican moderates on environmental issues. While on the King County Council he was known by many as a strident property rights advocate.

The question is can McKenna appear to stay in the Center and win the in the primary? If Republicans manage to block a more conservative primary opponent he won't have to face the consequences of moves to the right to win in the primary hurting him in the general. How many of his more conservative King County green votes will count against him in the general?

McKenna is not the only successful Republican who has recently held statewide office. Former Commissioner of Public Lands Doug Sutherland was an excellent manager and a policy mediator in the Northwest Republican tradition. Secretary of State Sam Reed has resisted efforts to use his office to tip the political balance to the right and has followed the tradition of his true blue Northwest Republican Ralph Munroe who managed the office effectively and efficiently.

The bottom line is that Washington State likes moderates and will elect long as Republicans are able to nominate them. Right now, surveying the field for the 2012 Governor's race, McKenna fits this bill better than any other name mentioned in both parties.

Sunday, December 6, 2009

Why it is wrong to tax business services

There's a lot of talk about taxes in preparation for the next legislative session. Given the nearly $3 billion deficit on top of last year's bigger budget cuts, this isn't surprising. But this should take some serious thinking. Taxes actually can have a positive or a negative effect on an economic recovery.

I can think of two positive effects. One would be taxing things that aren't good for us. These are called sin taxes and raising their price actually decreases their sales. Cigarettes are a good example. A 50 cent per tax would cut consumption but still raise money.

The other positive effect is the impact of a tax on net spending. If you put a tax on wealth where let's say 2/3 of it are spent and the other 1/3 saved, and then used the money for funding general assistance to the poor, the economy would have a net boost in spending and we would be better off.

There are lots of taxes that would have a very negative effect on the recovery. One would be a sales tax on services like lawyers, accountants and architects. The logic is that these services are retail sales like buying clothes are a car.

This is doubly wrong. Most business services simply are not retail sales. They are sales from one business to another. A small software company in Redmond would likely by all three business services mentioned above from other small businesses. This is double taxation and provides a disincentive to go out of the firm and purchase these services. Double taxation distorts economic decision-making and is simply unfair.

The biggest wrong is the impact of a nearly 10% tax on the competitiveness of the business services. The state input output model shows that over half of business services are exported out of the state. Since we would be the only state taxing them we would have a 10% higher cost than any other state or country. One hell of a disincentive. Seattle's biggest industry is business services and it is one of highest paid sectors of the economy. Bad idea.

Wednesday, December 2, 2009

The Bottleneck in the Recovery

As our economy is beginning to grow again we are finding that the new jobs that are growing not the same as the jobs that have been lost. The new drivers of our economy are green jobs, technologically transformed health care and high value business export services like accounting, engineering and architecture.

However, to make the transition to this new economy we are going to have to close the skills gap in those new fields. Workers in the job that have been lost need to be retrained to fill the jobs that are growing. Even during the depth of the recession, we already saw unfilled vacancies of 10,000 jobs in health care fields, 2,500 in IT and and 500 in accounting and financial services in Washington State. As the economy picks up the skills mismatch will get worse.

What happens when employers can't find the skilled workers they need? In 2007, 4,000 firms reportedly moved at least some of their operations out of state to get the work done. Of 15,000 firms surveyed, 20% indicated that lack of skilled workers reduced their output, a third said it lowered productivity and and 14% indicated it reduced quality.

The problem is that there is no room at the inn. Washington State's Community and Technical Colleges run the Worker Retraining Program that provides money for instruction, tuition and fees for unemployed workers seeking new skills. The program is swamped with participants serving nearly twice as many students as the colleges have capacity and an equal number of students are unable to find openings in programs that they need to get a job.

Lack of capacity at our state's community and technical colleges to retrain workers for the jobs of the future could be the bottleneck that slows the recovery.

Sunday, November 29, 2009

An Early Economic Indicator You Can Count on

The Wall Street Journal reported this week that overtime increased 6.5% from September to October and 14% from the previous quarter. This is a clear sign that the economy is on the move and is a fair substitute for employment growth. In fact, a measure, aggregate hours worked, might be a better indicator to watch then employment growth itself. Firms generally increaes overtime before they are confident enough to hire workes to meet increased demand for their products. That is why unemployment is a lagging indicator and can continue to decline or stagnant even as the economy moves forward.
That doesn't rule out the possibility of a W recession. The problem in housing is no longer sub-prime loans. The problem is after a long period of unemployment, workers have difficulty making mortgage payments while only earning unemployment benefits. With unemployment not expected to peak until next summer, these loans could create the worst wave of foreclosures yet.

Saturday, November 28, 2009

It is time to debate legalization of marijuana

Marijuana is perhaps the nation's fourth largest cash crop with an estimated value to growers of $15 billion to $20 billion a year and a street value twice that. In Washington State, just the value of crops seized by law enforcement made it our state's 8th largest crop.

You have to admit that we haven't had much luck stopping the harvesting sale and ingesting of the drug. The $10 billion in annual law enforcements doesn't seem to have done much good. On top of that, medical marijuana has resulted in a near legalization of the product that makes enforcement of other criminal laws confusing at best.

But all of the income from this crop goes to criminals. Many of them dangerous gangs and local mafia who use revenues to support more heinous crimes. And none of it is taxed. There is an estimated 400,000,000 pounds of marijuana produced in Washington State. If the state were to regulate and tax the stuff it could collect another couple of billion dollars a year in revenue.

The mid-term revenue picture for Washington state is pretty bleak. If you think government is too big and we need to cut back on the services government offers that's a good thing. But there is a good argument to make that we cannot support our higher and K12 education system or health care for children and mental health services within current declining revenues.

The alternative would simply mean raising taxes. The chance of getting an income tax passed by the voters is small and even if voters approved, a positive review by our current elected supreme court is next to nil. We already have a 9.5% sales tax in Washington State and another tax hike would take us up over a scary 10%. It's hard to argue for increasing business taxes when sales are low.

We at least have to have a debate about the need for government services, a fair tax system and the legalization of marijuana. Like alcohol, marijuana has many problems that need to be considered. But you have to ask the question can we deal with these things better if it is regulated. We need to debate this.

Saturday, October 24, 2009

A Rocky Road Ahead

We have a long way to go if we are going to create enough jobs to get us back to where we were before the four quarter of 2007. Since that time the economy has shed 7.2 million jobs.

The most recent forecasts (from the Washington State Revenue and Economic Forecast Council) would indicate that it would take us until the end of 2012 to replace those lost jobs (Using the most recent economic forecast by our state's Economic Forecast and Revenue Council for 2009-2011 and assuming 3% growth in 2012). Unfortunately, the labor force will continue to grow during this period - probably by nearly another 6 million jobs - thus unemployment could continue to be high.

The Wall Street Journal paints an even more dire picture. For them, assuming today's slow growth rates it will take us to 2016 to replace lost jobs - a very unlikely scenario. (perhaps poorly thought through).

There are two scenarios here. One is that the forecasts are wrong. That employment growth will be more similar to previous recoveries growing at 4 to 5% each year over the next couple of years. For example, using the 1982-85 employment growth rates, we would be very close to the pre-recession employment rate by the end of 2012.

If the forecast is right, we need to be aggressive about unemployment insurance policies, the safety net and job creation. As aggressive as we have ever been before.

Friday, October 23, 2009

Science and the American People

Ok. now I'll tell you what I'm really nervous about. Science and the American people.

A Pew Memorial Trust poll on climate change released yesterday indicated that the percentage of Americans who believe that the climate is warming has fallen dramatically in the past year. Now only 53% believe there is evidence of warming down from 75% a year ago. More importantly, less than 40% believe it is human caused.

This stacks up with other polls that indicate that only a third of of Americans indicated in a CBS News poll believe in natural selection. Pew points out that both of these numbers contrast with polling of scientists who all believe the climate is changing and 84% believe it is human caused.

97% of the scientists surveyed accept the theory of natural selection.

Science and the scientific method is what separates us from superstition and barbarism. This is a problem we need to think about.

Science and the scientific method is perhaps the most

The Political Economy of Recovery

As the 2010 elections near, Republicans are trying to argue that the stimulus was a failure and today's high unemployment is the proof. The fact of the matter is that the economy is starting to pick up but employment growth always lags overall economic growth. Jobs are the last thing to pick up as employers try to meet rising demand with what they've got. As I pointed out in my previous blog, the last big recession, 1980-82, had high unemployment for four years after it ended.

The current recession started mid-way through Bush's second term - in the fourth quarter of 2007 and may have ended in the third quarter of 2009. The recession started and was the longest lasting recession in decades when Bush left office.

The irony is that as the 2010 elections are looming, unemployment is likely to peak at 10.5% next summer and could still be at or above 10% around election time. This could be very bad indeed for Democrats throughout the country and it could be very bad for the entire country.

First of all, the party of the Presidency almost always loses seats in the off year election. In Washington State, the party of the president lost seats in 23 of the last 29 off year elections

Secondly, even if the economy is starting to grow, 10% unemployment will touch a third of the population and probably enough to tip key races in swing districts.

This is bad for the country because this recovery is likely to remain fragile for the next year or so. As Republicans blame the high unemployment on the failed stimulus and rail against big deficits, public support for renewal of stimulus spending is likely to wane. We could then find ourselves in the second V in W shaped economic recovery if the economy falters.

How can Democrats head this off? Obama has already started off in the right direction looking at extending unemployment benefits and the first home buyer tax credit as well as some lending incentives for small business. State legislators could look at unemployment benefits as well.

Democrats could also try and meet Republicans half way and look at some tax breaks that actually work. Senator Derek Kilmer proposed a job creation tax credit last session that gave small businesses a $3,000 tax credit for each new job they create. Washington state actually taxes the labor used in construction at nearly 10% a temporary tax credit could incentivize investments. Years ago, Congress enacted a Investment Tax Credit that allowed companies who invest within a short period of time a 20% tax credit. GAO research indicated that this was a tax break that actually stimulated investment.

Thursday, October 22, 2009

The Big W recovery

There actually was a worst recession since the great depression than the current one. That was the recession of 1980-82. This was a double dip recession where inflation-adjusted personal income in Washington state fell by 11% in the first quarter of 1980, recovered for a year and then dropped again by another 13.7% through the end 0f 1982. This is the famous W recession that some economists are now predicting for the U.S. The economy drops, recovers and drops again. A W recession could last for another year.

The recovery from the 1980-82 recession was a jobless one. Unemployment peaked at over 12% in the last quarter of 1982 and exceeded 20% in many rural timber counties. Unemployment didn't fall below 10% for over a year after the official end of the recession and remained above 8% for another three years.

Economists are expecting a similar scenario for the current recovery and many expect it to be worst. China appears to be the force that is actually lifting the world out of the downturn. India, the Far East and most of Europe are clearly on the upswing. We are lingering behind but exports to the rest of the world are likely to increase new business investments and expand exports. This should at least increase the number of hours each employee works and perhaps create new jobs as well.

But we may soon see a new wave of foreclosures, not related to sub-prime loans but from extended period of unemployment. Furthermore, the nature of unemployment has changed as well. The percentage of the unemployed who are considered by employers "permanently unemployed" is the highest in history. On top of that, the average length of unemployment is now 26.2 years - higher than than both the 75 and 80-82 recession. This combined with a lack of political will for a second stimulus package could be the second V in the W.

Monday, October 12, 2009

A new way of doing things

My mother lived for 34 years in Fond du Lac, Wisconsin. A few years ago, the Sisters of St. Agnes built a new college from scratch named Marion University in that town. What I remember the most about the college is that the President of the College didn't build the sidewalks until a semester after the school opened. He waited to see what paths the students actually took and then he paved them over.

We could learn a lot from his efforts in the world of social services. The confusing and complicated maze of "help" we provide to citizens in tough spots requires folks to go to at least four different locations to find the services that might help them out. Once they get there, the staff in those offices are only able to deal with the programs that they actually work for and can only refer them on to other forms of assistance. A women with kids whose husband ran out on her leaving her with nothing might take an hour to get to a state welfare office. But the person in the office might not be aware of the job services that might be available at a state job service center or the opportunities for scholarships and living expenses to go back to school at a state community college.

A lot of people give up and end up dependent on a form of assistance that just might not be right for them. And it's pretty damn expensive to serve someone at four different locations.

This problem is getting worse. More and more people are slipping into the safety net at the same time budget cuts are tearing it. We need to rethink how we do this.

Tomorrow morning at 10 a.m. at North Seattle Community College we are going to see a ground breaking on a building that will allow us to do things more efficiently and more effectively.

After several years of concerted effort by the agencies and the state legislature, work is about to begin on a new project to provide seamless services that will have all four agencies in the same building, working together with the single goal of getting people back to work.

We are going to ask the people who work for all those agencies to work together to figure out the pathways that the people they serve actually walk. What do people actually need? What would be most helpful?

The all-in-one location will streamline services related to employment services, basic skills education, career training, unemployment insurance, food stamps, child support, transportation services, welfare, health care and other state aid. Metro has even taken steps to re-route a bus to take people right where they need to go. There will be a Sound Transit station across the street. These are new and better paths.

Thursday, October 8, 2009

The Worthy an the Unworthy

My previous blog was about the "vulnerable" and the "newly vulnerable". To many Americans another way to describe this would be the worthy and the unworthy. The worthy are those hard working Americans who work hard, play by the rules but just lose their jobs or their homes through no fault of their owns. We out it to give them a hand up. The unworthy are those people who have ongoing economic struggles above and beyond the recent recession. They made bad decisions and are now paying the price. Giving them a hand out would merely make it worse.

I'm sure there are cases of people who are just lazy who are looking for a free lunch. But most of the people who receive social and job services in normal times are people who struggle with mental issues, suffer a form of disability or found themselves stranded by an abusive husband or bankrupted by health care costs or other unforeseen events. Recently attending a meeting on siting a homeless shelter near downtown, a cop told the audience that he would break this population down into thirds. A third are people who just had bad luck. Temporary economic problems that will likely get back on their feet again. A third were people with treated or untreated mental problems who just couldn't put it together. And a third were criminals or vagrants who didn't want to work.

I'm not sure that last third figure is fair but you get the idea. The problem is political. The bottom line is that in America the poor are not popular. Republicans have successfully demagogued against Democrats by linking them with the unworthy poor. Look at the recent health care debate. Republicans have picked up a lot of support by arguing that extending health care to the "poor" will result medicare benefits being cut, or middle class health care costing more. Listen to any of the town hall meetings and you will hear people get up and talk about "the poor choices those people made".

Republicans have capitalized on the "face of the poor" since George Wallace was so successful in winning over blue collar Democrats in the mid to late 60s (see the Emerging Republican Majority by Kevin Phillips). The poor simply don't look middle class. They are often darker, less likely to speak English, and in the case of the mentally ill they just don't look right. An easy target for sure.

Democrats from tough districts know that being seen as helping the poor or the vulnerable is political suicide. What's curious is that despite the negative ramifications, most Democrats persist. At a recent State Senate Democratic retreat, Sen. Darlene Fairley described her values as "making sure those at the bottom don't get screwed." That was clearly the most widely shared value at the retreat.

A lot of the political budget game in the legislature has been Republican efforts to expose Democratic investment in social services that would be better spent on tax cuts or k12 education spending. Perhaps the best example of this has been efforts by right wing Democrats and Republicans to require that 50% of the budget be required to be spent on education. These legislators knowing full well that this effort would result in a 20% cut from the rest of the budget - namely social services.

The Vulnerable and the Newly Vulnerable

One of the state's most respected public policy and anti-poverty advocates is Troy Hutson, the head of the state department of Social and Health Services Economic Services Division. Troy is from Guyana and is an attorney and an RN who created a a model education and jobs program with the Washington Hospital Association.

We are in a very tough situation right now where the state is making sharp and painful cuts in the safety net at the same time more and more people are falling out of the middle class and into the torn net. Troy pointed out that the inability to serve these "newly vulnerable" isn't the only problem.

Another problem is that the "existing vulnerable" populations of struggling families, mentally ill, disabled and other citizens are being displaced by a new wave of people previously ineligible for services - the "new vulnerable".

Community college classes targeted towards students struggling to move up the job ladder into higher wage jobs are now competing with better qualified students who have lost their jobs in more traditional industries. I'm told that 30% of the students entering the one year Licensed Practical Nurse Program already have Bachelor's degrees. Students trying to move up from 6 week Certified Nursing Assistant programs are being displaced by better qualified students.

New immigrants, the disabled, mentally ill and people who struggle with addiction or who are trying to recover from other misfortunes are now competing with better educated and savvier folks who recently lost their jobs.

I'm not suggesting that we caps these programs but we need to think this through. Clearly, one thing we need to do is rethink how we operate and fund our social net.

Sunday, September 20, 2009

Reasons to Be Cheerful Part 2

The economy is on the rise. The Dow finally passed 9800 and all the leading indicators are up. As one would normally expect, lagging indicators like unemployment will continue to rise even as the economy recovers as employers wait for greater certainty before increasing hiring. But in the mean time, business investment, and exports are on the rise.

Another reason to be cheerful is the decline of unproductive labor in the finance industry. Over the past decade, some of the best and brightest minds of our generation went into the financial services industry to create products that duped people into thinking they could afford them. The percentage of workers in the finance sector doubled between 1996 and 2006 and as recently as 2007, 40% of the graduates of Harvard and 30% of MIT graduates went into the finance industry because that is where the big money was. Now less than half that number is going into that unproductive industry.

This could be a real boon for the economy. Innovation is what drives our economy forward. If our our best and brightest brains are engaged in the creation of new businesses that make new products that fullfill real demand we have one more reason to be cheerful.

Monday, September 14, 2009

Questions of 2009: What does it mean for 2010?

The most consistent trend in American politics is that in economic terms, the bottom third of voters vote Democrat and the top third votes Republican. Despite all the recent rhetoric about the so-called, "liberal elite", the trend has only strenthened in the past decade or so as better information has moved allegiances away from family and region to ideology.

Consistent with this voting trend is the values of the underlying parties. Democrats tend to support government policies that help the middle class and those at the bottom. Republicans tend to support policies that minimize governments' role in the economy. Not surprisingly, Democratic values are more consistent with labor unions and Republicans with Business.

Given these facts, it should be no surprise in 2010 if the Democratic legislature moves to compensate for some of the "bad labor votes" that were taken in the 2009 session. Boeing has made it clear that state policy is no longer the issue in terms of their future plans and as the state emerges from the recession, unemployment not business climate could become the big issue.

The other boomerang issue is obviously going to be budget and taxes. With the shackles of Initiative 960 off, legislators are free to raise taxes without a vote of the people. There are good reasons to be believe that increases in sin taxes like alcohol or cigarettes would be popular and could go a long way towards reducing cuts to essential programs. However, anything beyond that will have to face up to the very tough election coming up in 2010.

Senate Democrats have at least four tough races coming up and House Democrats at least twice that many. While control is unlikely to be threatened, the current majorities may not be sustainable at today's levels. More importantly, off-Presidential year elections are tough for the party in the White House. In Washington state, in 23 of the last 29 elections, the party in power in White House has lost seats in the legislature. This is going to make it hard for legislators from tough districts to take risks.

Whether or not the ending fund balance from the 2009 session is going to hold up or require more cuts in truly an open question. The last revenue forecast indicated that even bigger cuts would be needed. More recently, revenue collections were down a bit. However, there are 3 more forecasts till the legislature leaves town and the economy is likely to be looking up. My guess is a wash.

Sunday, September 13, 2009

Big Questions of the 2009 Session

The other major question that loomed over the 2009 legislative session was whether or not Boeing would begin to move their operations out of state. The previous Fall, Boeing and the Machinists engaged in a strike that cost the company billions of dollars and left workers in the lurch for weeks on end. Boeing's top brass told the Governor and legislative leaders that "Chicago" (company headquarters 'out of state') was considering moving at least some of their operations to South Carolina. They indicated that the bad labor climate and the cost of doing business in Washington was making the state "uncompetitive". The local brass told leaders that they were fighting the move but needed some evidence to convince "Chicago" that things were changing.

There was a lot of talk about this. Mostly negative and quite awful. But again, it came down to one simply question. In the midst of the deepest recession in 28 years, do we risk losing our state's oldest and largest industry? Countless discussions and meetings bantered back and forth as to whether Boeing was just bluffing and trying to extort another billion or so out of the State or whether the threat was real. For the most part the debate was not ideological. It was real. People didn't know the answer.

There was a lot at stake. Labor had been pushing a bill that essentially banned companies from requiring workers to attend meetings on union issues when unions didn't have the same access (that wasn't the on the surface debate but that's what it boiled down to) . Boeing argued that given the recent strike, that if the legislature passed this bill it would be difficult to keep the company here. The unions argued that it was a matter of choice and privacy. In the end, many of the elected officials were simply unwilling to take the risk that Boeing might not be bluffing.

The other issue had to do with unemployment benefits. The legislature had just passed legislation providing a major increase in unemployment benefits to workers as an economic stimulus. Despite the recession the unemployment trust fund was still healthy and business demanded a tax cut as well. Labor was wiling to stay neutral on a tax cut but wanted to reclaim cuts in benefits they endured from previous legislative sessions. The impact of labor's proposal would have been to significantly reduce tax cuts for business. Labor argued that in a recession, spending, not tax cuts was the best stimulus. Business would just sit on the money from the tax cuts. Boeing argued that unemployment costs in Washington were uncompetitive.

In the end, a majority of legislators (perhaps a third of the Democrats and all of the Republicans) again decided they were unwilling to call Boeing's bluff.

Labor has not forgiven legislators or the Governor for backing off of either of their proposals. In the end, we still don't know what the right answer is. Boeing still could move a lot of their operations despite the strong support they received from the legislature in Washington.

A very important side question has to do with Boeing's 747 debacle. Their biggest investment, which the state of Washington plunked down a couple of billion dollars to support, was way behind schedule. They fired the VP for their commercial airlines division last week. But it's also beginning to look more and more like the union and the state business climate could be a another scapegoat for their own outsourcing and management errors.

The definitive questions of the 2009 session - Budget and Taxes

Thirteen legislative sessions have taught me that to really understand has happened or is about to happen during a legislative session is to find what the big questions are. The populists among us believe that you just have to figure out what the special interests want and then figure out who buys who and who sells out to who. Others like to see it as a battle of political wills as political leaders both houses, both parties and the executive branch vie for power to enact their own agenda.

I think it's a lot simpler than that and a hell of a lot less interesting. Quite frankly, most of the issues before us come from somewhere else and just land on our lap. Last session was the rule not the exception. A deep recession resulted in both job losses and a deep decline in revenues.

There were a lot of zero sum game type questions on the budget. Like how much do you cut the items you actually have discretion over. The House cut Higher Education and social services more and the Senate did less in education. These sorts of little battles were important but not definitive.

The definitive question was do you give the voters the opportunity to cut less and raise taxes a bit or do you cut deeply and then leave town. Many House and Senate Democrats believed it was just plain wrong to cut tens of thousands of people off health care and to send homeless people back into the streets. At the same time labor groups wanted to mitigate the impact of cuts on teachers, prison guards, college faculty, home care workers and nurses.

Legislative leaders started meeting with stakeholders as early as November and did a half dozen polls between January and mid-April. What was fascinating was the results, spread over that time period, with three different pollsters yielded consistent but indeterminate results. No matter what the tax was and what it funded, a solid 45% was against it. And no matter what the tax was and what it was used to fund, 49% to 54% of the public supported it. Making things even more determinant was the the only 15% of the public were strongly supportive of taxes. The anti-tax sentiment wasn't much stronger.

In mid-stream, several major stakeholder groups looked at the results and put their cards down and folded. They didn't see a referendum to the people worth the investments. Others wanted to do more polling and trying wording the questions differently and changing the tax or dedicated fund. Nothing changed and ultimately, most of these groups came to the same conclusion. Possible but not likely. Legislative leaders polled their members and results were close but mixed as well. It was all pretty logical and in the end damn boring.

Wednesday, August 26, 2009

Searchers and Planners

William Easterly's 2006 book, "The White Man's Burden" is an excellent guide to the problems and opportunities of western foreign aid to the developing world. He also develop a great analytical tool for public policy in general.

Easterly sets the stage by dividing into planners and searchers. Planners start at the top, set goals and develop global blue prints to achieve them. Searchers look at the problem from the bottom up, and seek specific workable solutions to the specific problems.

For Easterly, planners announce good intentions but don't motivate anyone to achieve them. Searchers find things that work and get some reward. A planner thinks he knows the answers and develop technical engineering solution to achieve them. A searcher hopes to find the answer only through trial and error and experimentation. Searchers could find ways to make a specific task work if they could concentrate on the task itself instead of the big plan.

I think that Easterly's nomenclature is a great analytical tool for public policy at all levels. Obviously, few policy solutions fit perfectly into each category. However, the answer does not lie somewhere in the middle.

Action and experimentation are the only ways to actually test an idea. And look at a problem from the ground level is the only way to develop the idea. Let me provide an example. In higher education policy, we have been trying to find a way for financial aid to effectively get students through college. We could start at the top and figure out how much it costs a student to get through college and then look the income level of the student and then multiply that number times the number of students. This would be a very expensive number.

Or you could start at the bottom and figure out what is happening with individual customers when they try to figure out how to access a college education. You will find that the amount of aid available is a huge problem. But probably not the place to start. College financial aid staff on the ground level are tearing their hair out trying to figure out who is eligible for what. And students often give up in frustration figuring out what they are eligible for and how to find it. The biggest problem reported by students is lack of guidance.

A large part of the problem is it is too complicated and discouraging. A solution would lead you to spend a lot of time figuring out how to simplify it and how to market it to people so it motivate them to make to take advantage of what's available.

There is a connection between searching and planning. That might be best practices. Learning from what works on the ground and sharing it with others could provide ideas that could be adapted to similar problems elsewhere. The danger is that funders might be tempted to create a cookbook of cookie cutter approaches that determine what approaches they will fund in the future. This would discourage way to many new and good approaches to solving problems.

Tuesday, August 25, 2009

What does the Movie Pineapple Express, and Financial Markets have in common?

I recently saw a funny movie called the Pineapple Express. In one scene in the movie, the guys trip on a twig, startle themselves, get scared, run into a tree and fall down a hill. These guys are of courses stoned out of their minds.

This reminds me a lot of financial markets. Oh my God, unemployment claims are up. Sell, sell. Oh no, now the stock market is down. The economy is going to hell. Sell, Sell. GDP growth isn't falling as fast as it was. Buy, buy. Oh no inflation could be a problem. Sell.

Here's the problem. Theses guys aren't stoned. Sure, a lot of them create the roiling market in order to profit from the changes one way or another. But them and the rest of those short term thinker having been killing us.

Economists have been predicting since last Fall that the economy will hit bottom in June and then pick up slowly. Nothing has changed. However, the concern is now business and consumer confidence. What is creating the jitteriness? Maybe these guys should get stoned. It might actually calm them down.

Monday, August 24, 2009

Lost in the maze of higher education

A few years ago I sat in a seminar room discussion with a dozen or community college workforce deans and financial aid officers along side of a group of executive and legislative higher ed staffers. The financial aid officers described how they were tearing their hair out trying to figure out how to fit students into a financial aid puzzle that would work for them. They felt the programs were confusing and complicated. The staffers responded that it really wasn't a problem. For them, the financial aid folks just didn't know how to do their jobs.

Every two years the state Workforce Education and Training and Coordination Board does a participant survey of students at Washington's Community and Technical Colleges. Not surprisingly, students were least satisfied with the advice they received on selecting programs (interestingly enough, the time and location of the classes was not nearly as difficult a problem).
In the same survey, the services students felt what they were truly missing were financial aid, job search assistance and career counseling. If my memory serves me correctly, college and career counseling has shown up as the top concern in these surveys for at least the last decade.

As part of the initial design of the Oopportunity Grant Program, the legislature asked the Workforce Board to survey financial aid officers, WorkSource Staff and students as to the main barriers to enrollment and retention of students in workforce programs. Overwhelmingly, the major barrier identified was financial aid followed by information on career possibilities and advise on how to navigate the college system.

Until recently, little attention was paid to this problem. In 2006, through the Opportunity Grant program, students receiving the grant also carried with them an FTE allotment to cover the costs of counseling and career placement as well as other support services. Student retention more than doubled during the first year of the program. More recently, the Gates Foundation, SkillUp (A Seattle Workforce funding collaborative) and even the President's Council of Economic Advisers have begun to focus their thinking on dealing with this issue.

The President's advisers are looking at focusing Federal Job Service Centers (WorkSource in Washington) and federal Workforce Investment Act programs (Workforce Development Councils in Washington) more on long term career coaching and less on short term job placement.

The whole notion of career pathways is beginning to take root at the Foundation, Federal and Community College level. This is not only an effective model for student success but in the end will save time and money as students are less likely to waste time in classes that don't give them what they need. Maybe, just maybe, the people who run the state's welfare program, TANF, will be paying attention as well.

Monday, August 10, 2009

Preparing for the Green Wave

Today’s economy is starting to recover. What are the forces that will begin to move our economy back into prosperity? Historically, periods of economic growth were created by new investments in entirely new economic innovations that spurred the economy forward by creating new demands for goods and services.

The most likely candidate for the next wave of economic growth is the green economy. An emerging consensus on the definition of the green economy is: “The green economy encompasses the economic activity related to reducing the use of fossil fuels, decreasing pollution and greenhouse gas emissions, increasing the efficiency of energy usage, recycling materials and developing and adopting renewable sources of energy.”

One of the main barriers to expansion of this sector is the lack of a skilled workforce. While the green sector is expected to grow 4 times faster than the rest of the economy, even in today's downturn, college classes are full and money for expansion is limited. While there is now very good data on the sectors and occupations related to green jobs, there is not a clear idea among educators and policy-makers about which new jobs and careers are just around the corner.

In Washington State there is an estimated total employment of nearly 50,000 direct green jobs which equals roughly 1.6% of state employment.

How to we maximize the benefit of the coming Green Wave? How do we ensure that all of our citizens benefit from it? How we position our society to best prepare?

If you look out on the horizon you can see some areas of the economy that are going to grow rapidly that are green driven. Nationally, Green Jobs are expected to grow by 52% over the next 7 years as compared to 14% for all other jobs.. Analysts believe that many of the jobs will be in commercial and residential energy efficiency where 70% of the new jobs will be in construction. Right now, any growth in this area will simply pull unemployed construction off the bench. But, within a year or so, as construction begins to recover, we will see significantly more job openings than we have workers.

This put us in an investment dilemma. Do we start pre-apprenticeship programs to ensure that disadvantaged kids can get the jobs and that we can actually start doing the work when the economy picks up? There's a risk. When will the jobs start to pick up?

Beyond this, there are already 1,700 job vacancies in engineering, architecture and installation and positions for environmental engineering technicians as well as electrical power line installers are already in high demand.

Other jobs that are expected to grow rapidly include:

  • Power engineers and computer technicians to design, manufacture and maintain new SmartGrid systems.
  • Machinists, electricians, operators and maintenance technicians for renewable energy production, operation and maintenance.
  • Farm workers and process technicians for the cultivation and processing of bio fuels and biomass
  • Alternative transportation designers and maintenance workers.
  • Recycling and waste management operators and technicians.
  • Organic farmers, farm workers, urban agriculture land use planners and green roof designers in sustainable agriculture and horticulture.

Community colleges and universities currently offer over 100 unique course titles and green jobs and 60 certifications programs for green jobs. However classes are already full. There is some new money from the U.S. Department of Labor that could be used to expand capacity as well as provide new offerings. However, the amount of direct aid for college classes is limited. At the same time, no new state money has been provided for green jobs and community college and university programs have been cut dramatically to balance the state budget.

If we are to get ahead of the curve here it is absolutely essential we start off by creating a dialogue between the scientists, investors and business leaders who are in the process of creating the new green jobs of the future and the educators who need to provide the professional and technical programs that can lead students to the career pathways for those jobs. This dialogue could include a review of recent research but more importantly gain insights into the "big ideas" that are likely to drive the future.

Once we have a firm understanding of the whole picture; both the existing data and research, and the futurists insights into what is coming up, we can outline the educational program needs. And most importantly, we can begin to inspire and engage young people to pursue green careers.

Thursday, July 30, 2009

The Jobs of Tomorrow

Mary Jean Ryan just sent me a link to an outstanding report from the President's Council of Economic Advisers entitled, "Preparing the Workers of the Today for the Jobs of Tomorrow." The report outlines the jobs likely to grow in the next five to ten years and makes recommendations as to how we can be prepared to take advantage of the opportunities in the global economy.

The Council points to a promising future for Washington State. First of all, we are well positioned to take advantage of the jobs of the future.

First of all, the authors project that a higher household savings rate will hamper aggregate demand. However, other types of spending will fill the breach namely exports and business fixed investment. Trade deficits will narrow and exports will increase. Washington state is the most trade dependent state in the country. Increased exports will bolster our state's aerospace, software, woods products, business services and metals industries.

Overwhelmingly, health care dominates the projected job growth over the next decade. This bodes well for both Spokane and Seattle who are both regional health care centers and Seattle a hub of medical research. Even in today's deep recession, there are nearly 10,000 job vacancies in health care in Washington State.

Strong growth is also expected in construction. Much of that growth will be related to clean energy and environmental protection. Environmental related jobs are expected to grow by 52% as compared to 14% for all other occupations. Jobs such as environmental engineering technicians and electrical power line installers and repairers are already going begging. Some 81,000 new jobs in energy efficiency are expected in Washington State over the next 30 years with construction accounting for nearly 3/4.

The third area of growth the report focuses on is air transport and aerospace. Aircraft mechanics, service technicians, aerospace machinists, service technicians and mechanical drafters are expected to see significant job growth. The trick here will be to figure out how to ensure that Boeing's commercial airline production continues to center in Seattle.

The report emphasizes that the job most in demand are in occupations that require an associates degree or a post-secondary vocational award. Employment growth in those arena's exceeds that of jobs requiring a bachelor's degree or higher. Contrary to conventional wisdom the Council argues that these jobs yield similareconomic returns as bachelors degrees.

The report touts Washington state as a national leader in workforce education pointing to the state's worker retraining program and the I-Best program which combines ESL and basic skills with job specific training.

The recommendations echo many of conclusions reached by other researchers and practitioners within the last year:

First of all, the system needs to be simplified. Everything from financial aid, to career planning as well as the design of federal programs is so complicated it is amazing they work at all. Financial aid officers at Washington Community Colleges and WorkSource centers tear their hair out trying to sort through financial aid or support service opportunities.

Secondly, education and training should be linked to jobs and job ladders that allow people to move up the career ladder over their lifetime. Career pathways can be mapped out as early as middle school and post secondary programs should help students navigate the course offerings that lead to a specific jobs. Obviously, for this to work, there have to be very close relationships with employers and educators.

Finally, education and training needs to be more flexible. The vast majority of the workers our economy needs in the next 20 years are already in the workforce. Our education system needs to be accessible to people who are working full time and have family obligations. The pedagogy and the curriculum needs to tuned to different types of learners as well.

Washington state look well positioned to take advantage of the changing economy and it appears that we have already made many of the right decisions on how to get there.

Tuesday, July 7, 2009

An Opportunity Agenda?

Over the past five years I've had the privilege of working with Rep. Phyllis Kenney and Speaker Frank Chopp on a program known as Opportunity Grants.

Currently, the program is a pilot project that is serving nearly 4,000 students at community and technical colleges throughout Washington. The program has had a student retention rate of over 80% exceeding that of all other programs.

In this blog, I want to layout the overall vision of the program to share the initial plan in the hopes of jump starting thinking on how to move forward from here.

The original legislation funded two studies to identify the barriers to enrollment and completion in professional and technical education programs. Researchers interviewed financial aid officers, Work Source counselors and students

The research was pretty clear. The number one barrier was lack of financial aid. Number two was the lack of career coaching on college campuses. Students were unable to navigate the college system starting with figuring out the financial aid system, getting help with their studies and getting information on how to find a sequence of courses that would lead to a real job. The third barrier was a lack of support services.

In 2006, legislation was passed that provided $23 million in funding for Opportunity Grants. The grant is sort of a hybrid of some promising low income and TANF programs designed for low income students and Hope Grants in Georgia.

The original legislation had three components:

1. A basic grant was provided to cover tuition, books, tools and fees. The bill recognized that the costs of books, fees and tools most often exceeded tuition expenses. The idea was that the students could then use their Pell Grant for living expenses.

2.. An FTE enhancement for each student that went to the college to provide for career coaching and support services. Higher Education funding in Washington state assumes that the highest cost education is at research universities and the lowest cost at community colleges. The problem with that formula being that low income working adults face the biggest barriers to completion and the cost of effectively serving those students is not recognized in the funding formula. The Opportunity Grant provided an additional funding for each FTE in the program to cover coaching, counseling and support services.

3. The bill created Opportunity Partnerships that linked students receiving grants would link up with employers or apprenticeship councils that would provide internships, work-study or apprenticeships for participating students. This section of the bill was not funded and thus vetoed by the Governor in 2007. However, in 2009, Rep. Tim Probst sponsored HB 1365 that put the program in stautute.

As originally drafted, the bill was designed to be phased in from a pilot to a universal program. While taken out of the bill the bill that passed it had a life of its own in during the Governor's Washington Learns programs as a universal 13th year.

The program offers a funding model for much of the new thinking we are seeing at the state and national level. If you add two more components to the program you could have a comprehensive model.

The first addition would be to link the program to changes in curriculum, instruction and delivery of programs that embeds development education within professional and technical programs. Many students are unprepared for college level work but are unable to sustain the long period of time to complete developmental programs. Linking the two creates a career pathway that could be more effective.

The second would be to tightly link the grants to the needs of business. In 2002, we funded a study that interviewed businesses in each industry and region of the state on what colleges could do to more effectively meet the needs of business. Business leaders indicated that what they needed were college instructors who knew their industry. This research led to the The Center of Excellence program at the state community college board. The role of each cente was to identify for each major industry in every region of the state curriculum and instruction that is designed to meet the needs of industry.

Are we on the right track?

Monday, June 29, 2009

The Network Capital Index

I ran into Egils Milberg, the executive director of the state Economic Development Commission, at Starbucks today and as usual he had a great observation.

He is looking for some measure for the amount of network capital individuals or organizations have. Network capital would measure how much a person or company is working with or talking to people outside their own organization.

Egils has a national reputation in the field of innovation and economic development. I think his notion is that innovation comes from interactions between networks of people working in similar industries but for different companies or or in different occupations. They expose each other to new ways or thinking or new ideas which lead to creative solutions and help get themselves out of the same old rut in their thinking.

A measure of network capital could be something as simple as the percentage of e-mails you send that are outside of your organization or the amount of time you spend outside of your office working with other organizations.

This notion is definitely relevant to economic development. But it also makes sense in my small niche in the world. Running a legislative office, one of the characteristics I would like to see in staff people is the ability to learn things from people outside their normal routine. To get exposed to new ideas and hopefully develop new solutions that would not see in their normal everyday routine. Ideas are the lifeblood of politics and right now it sure looks like we are short of them.

Thursday, June 25, 2009

The Vanishing Wage Premium

From the 1980s through the 1990s, the returns to education rose steadily each year. The education premium, the increased earnings that students earned for additional years of education increased steadily upwards.

Since 2000, the wage premium for education has held up. Students earning bachelor's degrees are earning 2.1 times the salaries of those who haven't finished high school or 1.6 times that of high school graduates.

What's new in this decade is that the premium is actually shrinking. Between 2000 and 2008, wages for high school dropouts have actually increased above the rate of inflation. Wages for students with bachelor's degrees actually declined. The differential is small, less than 3%, but clearly the premium is no longer rising.

Business Week argued in an article last week that the decline could be due to the lack of innovation in our economy over the past eight years. Fewer new ideas and fewer new products is resulting in lower returns to education. Another argument is that competition from Indian and China in information technology and other knowledge industries has brought down the wages of American workers at the top end. Others argue that we are seeing an oversupply of baaclaureate degrees. Or it could just be a data flaw.

Wednesday, June 24, 2009

A Return to Innovation?

Business Week ran a frightening article last week entitled, "The Failed Promise of Innovation". Author Michael Mandel asks the question, "What if outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted? And if that's true, is there any reason to expect the next decade to be any better? "

Innovation is the ultimate leading indicator and our prosperity is dependent on being able to develop new and better products that can move the economy forward.

We have seen waves of innovation create jobs and growth starting with electricity, the automobile, and information technology. Unfortunately, the latest wave of investment was in financial "innovation".

I would argue that we are headed in the right direction. In the past decade it is has been the parasitical growth of the financial sector that has sopped business school talent, resources and time that could have been better spent investing in ideas that lead to real products and real jobs.

As we unwind the damage of the finance sector, we may return to innovation. Smart people will move to new sectors like clean energy, biotechnology or nanotechnology. Investors will spend time and money developing new products. There is a good reason to expect the next decade to be better.

Tuesday, June 16, 2009

What's Wrong with Private Sector Investment?

In the 2008 campaigns, in the recent legislative session and in Congress there has been a lot of discussion about stimulating the economy. Interestingly enough, almost all of the conversation was confined to either mitigating the impacts of the recession on the unemployed, or massive government spending on infrastructure. Stimulating private sector investment was rarely if ever mentioned.

Early on the Obama administration considered and the State Senate passed legislation to provide sizable tax credit for job creation during a limited time period. The whole idea was to provide an economic advantage to invest now versus waiting for a year or two. This would start moving the economy forward now and move us out of the recession into recovery when such assistance would no longer be needed. The Obama proposal was dropped and Sen. Kilmer's job tax credit bill died in the House.

In the past Democratic administrations have looked at one or two year limited investment tax credits where companies could get 10-20% credits from federal taxes for each dollar they put in new investments. The state of Washington could have gotten much bigger bang for buck for forgiving sales and B&O tax credits for new investments for that short time period as well. Sales taxes at nearly10% could be a make it or break it question for some investors. Another time limited approach would be to temporarily suspend regulations or expediting permitting for all projects that begin in the next two years.

Instead, all of the effort was on the demand side of the equation. Policies to increase unemployment benefits or create job by building public projects were designed to increase consumer spending.

What was missing were trade, tax and regulatory policies designed to provide an incentive for private sector investors to step off the sidelines and back into the real economy. There are a couple of reasons why this makes sense.

First of all, stimulus comes from both consumer spending and in business spending on new investments. The latter has a greater long term effect by inducing spending now that will benefit the economy in the long run. Secondly, private sector in key export industries creates new jobs from sales to consumer and businesses overseas. This has the added effect of lowering interest rates via the trade deficit but also improves our position in the global economy in the long run.

Some remarkable progress was made in helping stimulate investments in clean energy and the green economy. This could very well become the next big wave to drive the economy forward. But Washington has competitive advantage in many other industries that we cannot afford to ignore.

Sunday, June 14, 2009

Unemployment, Foreclosures and Homelessness

Foreclosures appear to be more related to unemployment than to the cost of mortgages. A paper last week posted the National Bureau of Economic Research argues that when it comes to foreclosure, how expensive homeowners’ mortgages mattered – but not as much as other factors.

The paper compares the impact of high debt to income ratios at the time the home was purchased to unemployment as a factor in foreclosures. The study found that ten percentage point increase in a household’s mortgage debt increases the chance of delinquency by 7% to 11%. A one percentage increase unemployment income ratio increases ups the odds to 10-20%.

The longer unemployment is high, the greater the chance of foreclosure. Although we may have reached the bottom of this recession, foreclosures could continue to rise since unemployment is generally a lagging indicator.
We may not have seen the worst of it yet.

The ultimate lagging indicator may be homelessness. I have been unable to find research relating changes in unemployment and foreclosures on homelessness. However, it seems logical that the toxic combination of high unemployment and foreclosures could drive those at the margin into homelessness.

“What do these findings suggest for foreclosure-reduction policy?” the economists write. “One suggestion would be to focus a program on the effects of income volatility, helping people who lose their jobs get through difficult periods without having to leave their homes.”

We need to reexamine the safety net to meet this challenge.

Saturday, June 13, 2009

Wisconsin and Washigton: : Same budget problem, different response?

Washington state is often compared to Wisconsin. Both states have comparable populations, income levels and a similar rural/urban divide. Wisconsin too is struggling with a huge budget deficit. State revenues in April 2009 are 35% below collections one year ago. Washington's decline is a bit less.

After finishing my last piece of walleye at the fish fry last night, I picked up a copy of the Milwaukee Sentinel and got a pretty good idea of how they might be different.

The State Assembly yesterday began moving a budget that includes a new tax bracket of 7.75% for those individuals with income over $225,000 and couples over $300,000. The budget includes a cigarette tax hike of 80 cents a pack and a new tax on oil companies that raises a quarter of a million dollars. These are all ideas that were considered in Washington but perhaps blocked by Initiative 960.

They also made some bigger cuts. State workers not only were denied COLAs and steps but the assembly budget would cut pay by requiring 8 furlough days per year.

Perhaps the new taxes made the difference, but what most important divergence was how Wisconsin handled access to health care at a time where unemployment is over 9% and private health care coverage is declining. The assembly budget will increase access to their health care plan by 100,000 people. Similar plans have been proposed by the Governor and the State Senate. Meanwhile, in the State Senate they continue to labor away on comprehensive health care reform.

The whole thing isn't cooked yet but they seem now to be going down a different path.

Thursday, June 11, 2009

The move to federalism

Friends reporting back from D.C. can't believe the tremendous amount of energy and hope they feel in our nation's capital The old timers say they haven't seen anything like this since the Kennedy days.

This contrasts sharply with the aftermath of the last legislative session in Olympia. Obviously, one big problem is that we can't print money. Massive budget cuts hurt and take all the wind out the sails for policy initiatives.

I believe that enthusiasm and hope are more powerful than the money. When believe they can do something they often find the way to do it. This is probably the key driver of the return to federalism.

But there still may be some hope at our state capital. Several individuals and organizations are starting to take a hard look at tax reform. State Senator Karen Keiser is coordinating with the Obama administration on a state approach to health care reform and we are starting to see some action on green jobs in Washington state.

But for now, the energy, the money and the enthusiasm is in the other Washington

Monday, June 8, 2009

A Return to Federalism?

There are two contradictory motions going on in government in the U.S. At the federal level we are seeing a policy leadership, innovation and huge fiscal investments. Meanwhile, states are undoing much of the federal stimulus by massive cuts in the safety net, and cutbacks in higher and K12 education. State dreams for innovative financial aid for colleges, health care reform, tax reform, education reform and climate changes have taken a back seat to simply salvaging what they have from budget cuts.

The federal impetus has been driven by necessity and a major change in the mood of the nation (not mention the ability to print money). Necessity is the mother of invention. The financial collapse and consequent recession has the forced the Federal government to act swiftly and decisively. This action was enabled by a major change in the mood of the country. The fruits of deregulation and devolution led to financial collapse and public opinion moved decisively towards and larger role for government in stimulus and regulation. In the midst of this downturn we have seen the election of the most activist and proactive president in nearly 50 years.

These conditions and the deteriorating financial situation of states is could lead to a return to federalism. The Reagan Administration started a downsizing of the federal government and a devolution to the states which has gone on for some 25 years. In the next 25 years we could see it again in reverse.

Wednesday, June 3, 2009

The Future is So Bright (I gotta wear shades)

Washington State may be in it's current fiscal crisis for a few years to come according to the Rockefeller Institute and a Wall Street Journal analyst. Donald Jay Boyd, senior fellow from the Nelson A. Rockefeller Institute of Government was quoted in today's Wall Street Journal , that "State tax collections could take five years of more from when the recession began in December 2007 to recover to precession levels."

Journal writer Amy Merrick modeled the course of state tax collections after the start of the recession in the above chart. In 1981, 1991 and 2001 recessions revenues did not return to the precession level for as long as five years. Since population, school enrollments, nursing home slots and overall human service caseloads will grow during that period, our budget deficit could increase.

I blogged earlier on the recovery of unemployment rates in recessions. Looking at the most recent deep recession of 1980-1982, unemployment remained above 9% for three years after the recovery began. Not surprisingly revenue recoveries mirror the course of unemployment rates.

We also face the problem in Washington that our shortfall fixed by federal money ($3 billion) and other one time fixes (roughly $1.6 billion). Cuts amounted to a drastic $4.3 billion reduction.

This of course means that we could start off in a $5 billion hole in the next biennium given current conditions. If the Rockefeller Institute and Wall Street Journal analysis applies now our plight could be worst.

Sunday, May 24, 2009

Another tax reform idea

The property tax is supposed to be a tax on wealth. The idea is that the more wealth you have, the more you pay. But it isn't. For individuals, the tax only applies to the wealth or assets each taxpayers has in their home. For most Washingtonians, almost all of their assets are in their home.

Most of the assets in our state are held in the form of financial assets such as stocks and bonds. Unlike the value of assets held by individual homeowners, the vast majority of these assets are owned by those at the top. The top 1% in America owns 42% of the financial assets and the top quintile owns 92.5%. This form of wealth is known as an intangible asset (as compared to the tangible asset - your home). Guess what? Intangible wealth is exempt from the property tax.

One approach to tax reform would be simply take away the exemption. Since the valuation of financial assets on an annual basis is difficult to measure, the tax would take the form of an in-lieu property tax. The tax would be based on a proportionate value of the income to the asset. This is exactly how are state leasehold excise tax is applied to property that is leased. Since it is difficult to apply the property tax to the value of leases, the tax applied to the in-lieu income from the lease. This tax is constitutional by any measure.

The end result would be a tax system that is fair. The problem would be that the tax would fall disproportionately on senior citizens whose income is entirely based on their savings. This would require a property tax exemption that evens the playing field.

If you're worried that this is some kind of soak the rich populism, take note that a 3% tax on intangible income would be lower than the income tax paid in all of our neighboring states including the People's Republic Of Idaho where they would be 7%.

If we were unable to pull off an intangible property tax we ought to at least take up the idea of a homestead property tax exemption. Most states exempt the first fifty to one hundred thousand or so value of a home from the property tax. Like the intangible property tax, this makes the tax system more fair and more progressive. Given our sales tax dependence which has made our tax system the most regressive in the country, this just make sense.

There is more than one way to tax reform.

Saturday, May 23, 2009

Tax Reform: If not now, when?

Washington's tax system is a disaster. Unlike other states, the tax system is based on inability to pay. Higher income residents pay a much smaller share of income in taxes than the lower income residents and every analysis shows that it is the most regressive tax system in the country. No state is as dependent on the sales tax as Washington since we have no income tax. The only other states without an income tax are significantly less depedent on the sales tax. These states get most of their revenues from oil and gas severance taxes or in the case of Nevada, revenues from gambling. Washington is the anomaly.

Meanwhile, the sales tax is highly volatile and grows more rapidly in a boom (creating more spending) and declines more rapidly in a bust (devastating government services). Furthermore, the portion of the sales tax base you can actually get at is shrinking as untaxed services have become a bigger proportion of the economy thus the tax is inelastic, not growing at the same rate as income.

Business taxes are regressive as well with a business and occupations tax that is imposed based on gross income rather than profits. New businesses are taxed heavily as they struggle to become profitable as they grow.

The income tax has become the third rail in Washington politics with politicians of both parties fearful of even saying the word. But clearly the biggest problem is the courts. In the past, the elected state supreme court has ruled that income is property and must follow the constitutional guidelines that property taxes must be uniform. Thus, reforming our tax system would require a 2/3 majority of each house and a vote of the people Likely story.

The argument that income is property is antiquated and bizarre. Before income taxes became the norm in the 1930s, state courts in many areas of the country ruled against income taxes making the same argument. Only Washington jurists may have "stayed the course".

There are several attorneys who argue that perhaps we should take another run at it. The court would have the opportunity to review the income as property argument and perhaps catch up with the rest of the country and perhaps even reviews changes in economic analysis since the 19th century. Maybe they will realize that in both economics and accounting there is a different than income and an asset. It's a least worth a try.

Sen. Lisa Brown made a valiant attempt to put income taxes on the agenda during the recent legislative session. While public opinion polling looked good, during the legislative session allies were unable to commit since revenues would come in far to late to stem the budget cuts this session. Setting up a progressive tax system would take over 18 months.

As the smoke clears from the legislative session, this could change. This could be the time.

Friday, May 22, 2009

Unemployment as retooling

David Wessel is the chief economic editor for the Wall Street Journa. In David's Thursday column he argues persuasively for unemployed workers to enroll in community college job training programs in lieu of looking for jobs that don't exist.

The biggest problem we are facing is that a record 46% of the unemployed have been on benefits for at least a half year. According to Wessel this is bad for the economy as their skills atrophy and employers balk at hiring people who have been unemployed for a long time.

He quotes Harvard economic Lawrence Katz, "But when people are out ff work for a long time, they become discouraged and stop thinking of themselves as the in the labor force. Keeping them connected to they think they're still workers is important."

Wessel points out the Barak Obama is pushing states to enact programs that encourage workers to enroll in professional and technical programs at community colleges.

Business Week reported earlier in the month that there are actually three million jobs that employers are actively recruiting for and are unable to fill. According to Peter Coy, "it's evidence of an emerging structural shift in the U.S. economy that has created serious mismatches between worker and employers. People in the shrinking sectors such as construction, finance, and retail lack the skills and training for openings in growing fields, including accounting and health care...As bad as it is now, the mismatch will create bigger problems when the economy begins to expand again. "

Washington State is way ahead of the curve here. The state's worker retraining program is the largest in the country now serving at least 14,000 students and providing programs designed to retool skills. The state also provide up to two years of unemployment benefits when workers are in retraining.

Sen. Jim Hargrove passed legislation this session that doubled the size of the program and linked it more carefully to the the federal Workforce Investment Councils. Since demand for the program has already stripped seats at colleges, Hargrove vows to do more next year.

Thursday, May 21, 2009

A flexible labor movement

Jonathan asked me to explain what I mean by the flexible labor movement described in my last blog. For me that means using what ever organizing and bargaining model that is sustainable and leads to an increase in union density

A good example is SEIU 925 who organizes both workers and owners to work in partnership to advocate for high quality child care. SEIU's home care division has broken new ground by creating a new framework for organizing and bargaining for a large number of home care workers who work as sort of independent contractors. Many unions have been successful with regional industry bargaining where the union signs a contract with employers but don't bargain over the contract till a majority of employers sign up. This ensures that employers who are union don't have a competitive disadvantage with nonunion employers.

A bad example might might be the IAM strike last Fall. While the objections of the union to the proposed Boeing contract might be justified, the strike in the midst of a deep recession cost the company billions and may have turned Boeing against Washington state as a location for future expansion.

Wednesday, May 20, 2009

Where are we headed as a state?

I had a provocative conversation today with my friend Denny Heck this morning on the future of Washington State. We wrestled with the question, where are we headed?

A few things jump out and set the stage for thinking about the question.

First of all, we are in one hell of a fiscal mess. The state does not have the dollars to compete in the future. We ended up this year with a record budget deficit that equalled about one-quarter of our maintenance level state budget. We filled the whole with about $4.0 billion in cuts, $3 billion in federal stimulus dollars and another $2 billion in short term fixes. The bottom line, we are likely to be in the same mess in two years as we are in now. Right off the bat, the federal stimulus dollars are unlikely to be there and the $2.5 billion in short term fixes won't work for four years in a row. In 2011, we are unlikely to find another $2.5 billion in short term fixes. We start off in a $5.5 billion hole. Can we grow out of this. I don't know.

Meanwhile we have cut shredded our safety net and damaged both our k12 and higher education capacity with cuts to college faculty, teachers, health care for the working poor and services to the mentally ill, disabled and the poor.

Secondly, our economy is down but we are well positioned for a recovery. We are well set for employment growth in the next big wave of green jobs and clean energy. Our information technology industry based on employers like Microsoft, Amazon, Adobe and many others looks stable and growing. Our health care industry is anchored in federal research dollars at the University of Washington, a strong research based biotech industry and a powerful health care cluster in Spokane. Our diverse and high value-added agriculture industry is likely to continue to be our state's biggest industry with value-added and wages rising as it becomes more tech dependent. Our industries have decades of experience in the global economy and we have become the most trade dependent state in the nation.

Thirdly, we face big questions with many of our traditional industries. Boeing has already moved their corporate headquarters out of the state. After a bruising strike last Fall, the Chicago company has threatened to move new lines of commercial airline production to nonunion states.

Weyerhauser and much of the forest products industry is facing a major upheaval that could transition more of the industry out of the state into the South, Russian and parts of Asia.

Finally, unemployment is likely to remain high for another two to three years. Income inequality in our state is at the highest level since statistics have been kept and cuts to the safety net threaten to make it worst. Our tax system is the most regressive in the country. But we have a highly trained workforce and excellent institutions of higher education who have the potential to counter the trend if we can find a way to restore the knowledge capacity we have just cut.

We have tremendous problems but we also have all the ingredients for success. I think there are five key steps that need to be taken in the next four years. We need to:

1. Reform our tax system and rebuild our fiscal infrastructure.
2. Restore cuts to k12 education and higher education systems and make smart investments in education reform and in higher education instruction.
3. Continue to clear the way for a strong clean energy and green jobs sector to grow into our industry of the future.
4. Build a stronger and flexible labor movement in our state that can level the economic playing field and do a better job of building more stable relationships with our major employers.
5. We need to provide stable and workable incentives to retain our state's traditional industries.

I'm hoping to focus future blogs on each of these issues.