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Oregon’s economy growing while losing jobs?

August 1, 2012

Broad-based recovery eludes Ore.
By Oregon Economics
California Lutheran University

Report highlights
– The big economic story for Oregon is the recent revisions to gross domestic product history. These revisions were massive, particularly in 2010. As a result, it appears that Oregon’s output has been much higher than previously thought. Indeed, the estimated 8.1 percent growth for 2010 is phenomenal for any state. It’s in the range we normally associate with China.
– Oregon’s strong economic growth has not been accompanied by strong job growth. In 2010, the year with the phenomenal 8.1 percent GDP growth, Oregon actually lost jobs.
– People don’t feel as if this is a recovery, and I think they are correct. For one thing, job growth has been anemic. Unemployment has fallen only because millions have left the workforce.
– Oregon GDP growth will be very rapid in the next few quarters. However, less rapid growth rates for jobs and wage and salary income are forecast because the type of economic expansion is not one that generates a lot of jobs.
– We’re likely to see huge investment in relatively small sectors, and sectors with relatively few jobs. What’s missing in Oregon is a broad-based recovery.

Oregon Economic Forecast 2012 Q3
CLU Center for Economic Research & Forecasting 1
Bill Watkins
July 21, 2012

We’ve talked of a vigorous recovery since the recovery started, mostly as a contrast to what we’ve been experiencing. It is appropriate to ask what does a vigorous recovery look like?
Before we get there, though, let’s think about what we have been going through. We’ve seen aggregated economic growth. That is, output, GDP, has been growing, and that is the definition of a recovery. In fact, real GDP now exceeds its pre-recession high.

People don’t feel as if this is a recovery, and I think they are correct. For one thing, job growth has been anemic. Unemployment has only fallen because millions have left the workforce.
Then, there is the aggregation problem. GDP has recovered to its pre-recession high only because of population growth. Per-capita real GDP is still below its pre-recession high.

Wealth is another problem for most Americans. The collapse of real estate values has decimated many Americans’ balance sheets, leading to bankruptcies, postponed retirements, and more.

By contrast, a vigorous recovery would be characterized by rapid job creation, strong increases in per-capita GDP, increasing wealth, and people entering the labor force, not leaving it. At the state level, we would expect to see strong domestic migration.

In many ways, Oregon is well positioned for a vigorous recovery. It has had recent strong output1 growth. The state has the weather and energy to be an attractive location for internet infrastructure. Housing is as affordable as it has been in decades.

That’s not our Oregon forecast however. We do expect to see strong GDP growth, and on a per-capita basis too. However, much of that growth will be returns to capital not owned by Oregonians. Job growth is likely to be weak. Wealth gains, like job growth, will come slowly to Oregon.

The reason is that much of Oregon’s growth will come from high-capital-intensive and high-human-capital-intensive jobs. Oregonians in general will not directly benefit, because they do not own the physical or human capital.

Please see the Economic Activity essay for antecedents. To briefly summarize: Oregon has seen rapid economic growth, even as jobs declined in the state. Server farms, which employ few but create lots of economic value, and Intel, which creates very high-productivity jobs, are the primary explanations.

Typical Oregonians will see indirect benefits. These investments and the jobs associated with them will have multiplier effects. That is, they will create at least some other jobs throughout the economy. The companies will make other contributions to the communities where they are located, often with profound impact. Intel, for example, donates millions of dollars to schools and non-profits.

What’s missing in Oregon is a broad-based recovery. We’re likely to see huge investment in relatively small sectors, and those with relatively few jobs. You have to ask if it is possible for Oregon to actively expand the base of its economic growth.

I think the answer in the short run, is only with great difficulty. That doesn’t mean the steps are worth taking. I think they are, and they will help in the long run.

There is one easy step that could be taken: Stop screwing up. The fiascos associated with Facebook’s taxes and with the auto advertisement did huge damage. They were seen throughout the nation, and some investors saw all they needed to see to take Oregon off their potentials lists. There are lots of states vying for every new facility. Potential investors need to get to a short list, and well-publicized mistakes help them get to that short list.

Propositions 66 and 67 were also unnecessary mistakes. Oregon matched the nation’s highest top marginal income tax rates. The predictable result was that income was moved from Oregon to other, lower tax, states.

Two important possible initiatives, education and tax reform, are related.

Oregon needs to vastly increase the educational opportunities available to its citizens, but this can’t be done in a knee-jerk or willy-nilly fashion. Oregon probably has enough courses that end in “studies.” What is needed is training for STEM (Science, Technology, Engineering, and Mathematics) jobs. It may also be the case that this training is most efficiently provided by non-traditional methods, in non-traditional facilities.

Oregon can’t afford to do what needs to be done in education. That’s because of its inefficient, and sometimes counter-productive, tax structure.

Oregon’s tax structure is biased to income taxes, and those are excessively progressive. As stated above, the twin measures 66 and 67 were blunders. By raising the top tax rates, Oregon lost high-income taxpayers, taxpayers who are now no longer taxable by Oregon at any tax rate.

The need for educational funds could drive a restructure of Oregon’s taxes, with the goal of minimizing tax distortions and maximizing tax revenues. This would be done by limiting the progressivity of income taxes and by reducing income tax as a share of Oregon’s revenue. A tax on retail sales is an obvious step in doing this.

There are other issues. From a perspective of maximizing economic growth and hence opportunity for Oregon’s citizens, land use decisions are excessively centralized. Of course, this has been fought out in the polls before, as has Oregon’s tax system. Fighting them again would be divisive, but if Oregon really wants a vibrant economy, it may be a necessary fight.

  
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