Challenging Our Economic Assumptions In Supply Side Nevada

Blind faith can be a very good thing.  However, as in most situations in which human beings find themselves, Samuel Johnson’s quip — “Moderation is commonly firm, and firmness is commonly successful” — should be applied.  When speaking of the Nevada economy, sluggishly trending back to prosperity, a little moderation would be a firm handle to grasp.  Better surely than grasping at platitudes and assumptions.

Some Assumptions Need To Be Questioned

Why, for example do we measure our economic recovery by looking at the peak growth points in 2007?    The numbers in 2007 were artificial. We know that in retrospect.   Nevada was riding the Housing Bubble.   Therefore, should we assume our state’s economy won’t be fully recovered until we see employment and growth figures similar to the ones from 2003 to 2007?

Why, do we believe that a specified percentage of growth is the ideal target?  One look at a graph of the U.S. GDP since 1947 certainly doesn’t indicate that our GDP growth since World War II has been a steady march of progress.

If we take the numbers back to 1900 the historical average annual increase in the GDP is about 3.1%.  [DotL] What we’re looking for now is an annual increase in the GDP sufficient to reduce the current levels of unemployment.  By October 2011 we were seeing an increase in the Real GDP of about 2.5%, positive but not enough to cause a significant reduction in the overall unemployment rate.  What would the picture look like if we split out the components of the GDP?

This:  (click on the chart to go to the interactive version)

What we’re looking at is a flat line for personal consumption expenditures since 2010 Q1,  volatility in gross private domestic investment, and mostly negative public (government) consumption expenditures.   The yellow GDP line muddles along.  Notice that when government expenditures moved into “positive territory”  beginning Q2 2010 the GDP moved up to 3.8%.   When the government expenditures dropped 5.9% in Q1 2011, the GDP was barely in positive country at 0.4%.

If there is no specified ideal GDP number, only an increase in overall economic activity sufficient to reduce the unemployment rate, then can we assume that all government spending is wasteful?   Not if we’re all looking at the same graph.

Reviewing what what happening economically in the latter part of 2011 the EPI analysis seems both relevant and precise:

“The one-year rise in the market-based PCE deflator excluding food and energy—a closely watched indicator of potential future inflation—rose only 1.6 percent. This low inflation rate, combined with only a 1.6 percent GDP growth rate over the same period (third quarter 2010 to third quarter 2011), argues that this remains an economy plagued by weak demand. Measures to boost demand are by far the most effective tools to bring the economy back to health.”  (emphasis added)

Is tax rate reduction the best way to increase demand?  Nevada has experienced job growth during 2012 in every part of the state except Carson City.  If “cutting back on government” is the recipe for economic growth in the private sector, why didn’t private sector employment pick up the slack in the state capital?  Silly question? Not really.  What we have here is an illustration of the inter-connectivity of public and private spending and consumption.

The second chart from DETR shows us that every major sector in the Nevada economy grew in both FY 2011 and FY 2012 except construction. That’s to be expected.   However, if we’re assuming that this is because taxes were reduced, then the exclusive connection can’t be made. The 2011 Nevada legislature extended tax increases that were scheduled to expire to make its budget numbers, [NNB] and the job growth increased in two major sectors over 2011, and the construction numbers were “not as bad” as 2011, or putting a Happy Face on it were 1/2 as bad as FY 2011.  There’s yet another question to be asked.

If Nevada further reduced its taxation would an amount of personal income “remaining in individual pockets” be enough to drive economic growth toward the level necessary to reduce unemployment?  Probably not.  We have no personal income tax.  We have the aforementioned Modified Business Tax, we have sales taxes ranging from 6.85% to 8.10%, we have Sin Taxes, excise taxes on insurance and banks, and some other taxes, but no corporate income tax. [NVDoTx] Taxation-wise we’re one of the most mining friendly places on the planet. [Gleaner]

In fact, what we have at the state and local level is a system which doesn’t reward consumption of goods and services, or good old fashioned Demand.  The more you buy the more  you pay, regardless of your annual income.  Local property taxes are based on the value of the property, not the income capacity of the homeowner.  The only forms of taxation we could reduce are already insufficient to sustain local government operations, witness the layoffs in the Clark County School District.

We appear to have spent so much time worrying about the supply side of the equation we’ve diminished our capacity to encourage or reward demand.

Can we assume further emphasis on the supply (investor) side of the classic market equation will eventually reward us with economic growth necessary to reduce unemployment?  Why would it?  An investor could back The Next Greatest New Product On Earth, but if there is no demand for it the investment and the innovation will both be in vain.

Well Gee, we say, if there’s no demand then the Market Has Spoken, and neither the innovator nor the investor can expect anything other than failure — you win some, you lose some, and a few get rained out.  If we extend the baseball analogy a step further — have we paid enough attention to the rain outs?

A rain out might look something like this:  A hypothetical suburban neighborhood has a higher percentage of public employees — teachers, firefighters, police officers, social workers, and so on — than some other residential areas in the region.  The neighborhood has the usual assortment of retail enterprises, a supermarket, a medium sized shopping mall, a couple of Big Box retailers for general merchandise and home supplies.   If there is a significant reduction in the wages, salaries, or the number of public employees what happens to the micro-domestic product?  No reduction in taxation rates are going to recoup the lost revenues in the neighborhood such that the retailers can maintain their previous profit levels.

There may be a point at which the reduction in demand tips, and the retailers cannot maintain their staffing levels, at this juncture public sector layoffs beget private sector layoffs; and, if we aren’t careful there’s a downward spiral effect on overall economic activity in the area.  Obviously, the larger the population the more such losses can be absorbed in the generalized figures, but just as obviously in places with smaller populations (Carson City for example) the impact is magnified.  Remember this home-made graph?

The 8.3% rebound looks good, but the dip between 2007 and 2010 was deep and hard.  There is yet another way to observe the connections between weak demand and the Nevada economy.

How many new businesses are being registered with the Secretary of State’s office?  As would be expected the drop off is fairly clear beginning in 2006 (Housing Bubble starts to waver) and plumbs the depths until starting back up in 2010.  Then we falter.   Should we test the hypothesis that the “plague of weak demand,” is at least partially responsible for the little bounce from a 0% increase to another 0% increase in 2012?

The hypothesis ought to be tested because there are some assumptions beneath it, including “no one starts a business expecting to fail,” or “no one starts a business without the expectation of having customers.”  If we are, indeed, “plagued by weak demand,” then might this show up in the numbers of businesses formed in a given region?

Perhaps it’s time to forgo the pleasant assurances of ethereal ideological assumptions about the functioning of our free market economy with a singular focus on the investors, and apply some moderation.  We ignore the demand side of the scales at our peril.

Moderation is commonly firm, and firmness is commonly successful

1 Comment

Filed under 2012 election, Economy, employment, Nevada economy, Nevada politics, nevada unemployment, public employees

One response to “Challenging Our Economic Assumptions In Supply Side Nevada

  1. Great report!
    Simply put; Reagan’s famous “trickle down” theory does not work.
    It’s a bunch of hooeyistic propaganda.. perpetrated by “them” and “their” cronies in the (BURP!) media.
    In actuality it is the “trickle UP” theory – take from the poor (and middle class) and give (more) to the rich.
    (please excuse a possible double reply)