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.

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.

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.

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.

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.

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.

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

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.

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.