Category: Political economy

Federal Government Employees

tomkapostasy2 Comments
YearExecPostalEx+PostActMilTotalSubDefSubCivilianU.S. Pop
19551.9.42.32.95.24.11.1166
19601.8.42.22.54.73.51.2181
19651.9.42.42.75.03.71.3194
19702.2.52.83.15.94.31.6206
19752.1.62.82.14.93.21.7216
19802.2.52.82.14.83.01.8227
19852.3.73.02.25.23.31.9238
19902.3.83.12.15.13.12.0250
19952.0.82.81.54.32.32.0265
20001.8.82.61.44.02.02.0282
20051.9.72.61.44.02.02.0295
20102.1.62.81.44.22.22.0309
20152.1.52.61.34.02.11.9321
20202.2.52.81.44.12.12.1331
YearExecPostalEx+PostActMilTotalSubDefSubCivilian
19551.1%.22%1.4%1.8%3.1%2.5%.64%
19601.0%.23%1.2%1.4%2.6%2.0%.66%
19651.0%.23%1.2%1.4%2.6%1.9%.69%
19701.1%.27%1.4%1.5%2.8%2.1%.76%
19751.0%.26%1.3%1.0%2.3%1.5%.79%
19801.0%.24%1.2%0.9%2.1%1.3%.79%
19851.0%.30%1.3%0.9%2.2%1.4%.80%
19900.9%.30%1.2%0.8%2.1%1.2%.82%
19950.8%.28%1.1%0.6%1.6%0.9%.76%
20000.6%.28%0.9%0.5%1.4%0.7%.70%
20050.6%.24%0.9%0.5%1.4%0.7%.68%
20100.7%.19%0.9%0.5%1.4%0.7%.65%
20150.7%.15%0.8%0.4%1.2%0.6%.59%
20200.7%.15%0.8%0.4%1.3%0.6%.62%

All Employees, Federal (CES9091000001) | FRED | St. Louis Fed (stlouisfed.org)

All Employees, Federal, Except U.S. Postal Service (CES9091100001) | FRED | St. Louis Fed (stlouisfed.org)

All Employees, U.S. Postal Service (CES9091912001) | FRED | St. Louis Fed (stlouisfed.org)

1970 (usps.com)

US Population by Year (multpl.com)

DCAS Reports – Active Duty Deaths by Year and Manner (osd.mil)

U.S. Military Personnel 1954-2014: The Numbers (historyinpieces.com)

How Many People Does the U.S. Federal Government Employ? (historyinpieces.com)

Federal Workforce Statistics Sources: OPM and OMB (fas.org)

Executive Branch Civilian Employment Since 1940 (opm.gov)

Total Federal Government employment has ranged from 4-5 million across the last 65 years, from 1955, when post WW II changes were in effect until today, 2020.

While Federal Government jobs have been flat to down 20%, the U.S. population has doubled, from 166 million to 331 million people.

Hence, the ratio of federal jobs to population has dropped from 3.1% in 1955, or 2.6% in 1960-1965 to just 1.25% in 2020. The much maligned and mistrusted federal government is less than half as large, in relative terms, as it was from 1955-1965.

The detailed components are somewhat complex. The judicial and legislative branches have employed a relatively immaterial 30,000 to 66,000 during this time, doubling with the population.

The Executive Branch includes both the Department of Defense and other civilian agencies. It does not include active military employees. It typically does not include the postal service (USPS), which is seen as a truly independent agency. The Executive Branch started with 1.860 M employees and ended with 2.206 M in 2020. The low was 1.778 M in 2000 and the high was 2.252 M in 1990. In rough terms, flat employment for 65 years. As a percentage of the population, it has ranged from 1.12% to 0.65%, declining throughout the period.

The postal service started with 367,000 in 1955, grew to 761,000 in 1990, flattened out for 1995-2000, before declining to 492,000 in 2015 and 496,000 in 2020. So, we have a doubling in the first 45 years, adding 400,000 staff, followed by a reduction of one-quarter million in the last 20 years. As a percentage of the population, it grew from 0.22% to 0.30%, before declining to 0.15% in 2015-2020.

Combining the executive, legislative, judicial and postal branches, we get a subtotal that excludes the active military category. This is what most people think of as “federal” employees. This started at 2.3 M in 1955, grew to 3.1 M in 1990 before settling down a bit to 2.8 M in 2020. As a percentage of the population, it began at 1.36% and ended at 0.84%. This is a 38% reduction, removing more than 0.5% of the population from government employment.

The active military population has declined from 2.9M in 1955 and 3.1M in 1970 (Vietnam winding down) to 1.4M in 2000 (peace dividend), where it has remained. As a percentage of the population, this function declined from 1.77% in 1955 to 0.99% in 1975 to 0.49% in 2000 to 0.42% today. This is a 3/4ths reduction. moving 1.25% of the population out of military service.

The “Total” column shows the 5.2M start and 4.2M end. The percent of population falls from 3.13% down to 1.25%. The Federal Government is a much smaller employer today than in the “post-war” era.

The next column combines the Department of Defense in the Executive Branch with the active military to give a total military. This does not include the Veterans Affairs or Department of Homeland Security which serve quasi-military functions. We start with 4.1M in 1955, touch 4.3M in 1970, fall to 3.2M in 1975 and 2.0M in 2000, ending at 2.1M in 2020. The percentage of populations falls from 2.5% down to 0.6%.

The remaining federal employees began with 1.1 M in 1955 and grew fairly constantly to 2.0M in 1990, remaining flat for the next 30 years, ending at 2.05M in 2020. As a percentage of the population, this measure started at 0.64%, peaked at 0.82% in 1990 and has since declined to 0.62%, just below where it started.

After the Clinton/congress budget compromises in the mid-1990’s, criticism of the size and growth of Federal employment quieted down for the next 2 decades. Some criticism has restarted, as Federal agencies have increased the amount and variety of outsourcing employed through contracting and grants. The main summary shows that “contract” employees, those who work directly on Federal contracts, have been in the 3-5 million range since 1985. It reports that grant funded employees have been 1-2 million per year. The total is 4-7 million, the same order of magnitude as “regular” federal employment. I was unable to find comparable numbers for the 1955-1980 timeframe, so cannot be sure that this category has grown faster than the U.S. population. My guess is that there is some degree of “employee shifting” from regular to contracted employment. A subset of this is probably politically motivated, to please congressional oversight committees. On the other hand, corporate America discovered outsourcing to foreign factories and specialized firms in the 1980’s and probably moved 15-25% of jobs out of the Fortune 500. At one point, firms like GM and AT&T had 1 million employees.

Public service and the federal government (brookings.edu)

How big is the federal workforce? Much bigger than you think. – The Washington Post

The True Size of Government | The Volcker Alliance

The true size of government is nearing a record high (brookings.edu)

The sheer size of our government workforce is an alarming problem | TheHill

Indiana: Red State

tomkapostasy1 Comment

In presidential elections since 1960, Republicans have won 14/16 races. LBJ won 56% of the vote in 1964. Obama won 50% of the vote in 2012. Democrats earned just 33-38% of the vote in 6 of those elections, including 2016. Democrats earned only 40-42% of the vote in 4 elections, including in 2020. The median Democratic result is 41%.

United States presidential elections in Indiana – Wikipedia

Indiana leans Republican in surveys of party affiliation. Voters do not permanently register for a party. They declare a party only when they vote in each election. According to one survey, Indiana voters are tied for 18th most Republican leaning. Indiana has just 42% of voters reporting as strong or “leaning” Democratic.

Party affiliation by state – Religion in America: U.S. Religious Data, Demographics and Statistics | Pew Research Center (pewforum.org)

In the last 6 presidential elections, 15 states have always voted for Democrats and 20 states have always voted for Republicans. Indiana is part of the 15 in the mixed middle due to the Obama result. Indiana has not been highlighted as a “swing state” in recent years.

Blue and Red States (270towin.com)

Indiana has elected 10 different governors since 1960, with Republicans serving 10 of the 16 terms (63%), including each of the last 5.

List of governors of Indiana – Wikipedia

Since 1984, the results have been similarly divided, with 6 Republican and 4 Democratic terms. From 1988-2000, Evan Bayh and Joe Kernan won 71/92 counties (77%), on average. In 2002, Mitch Daniels won his first term with 53% of the vote, but carried 73 (79%) of the counties. This broad geographical Republican dominance has continued, with Democrats winning just 13, 19, 13 and 3 counties in the last 4 elections. When Mike Pence won with 50% of the vote in 2012, he carried 73 counties. When Eric Holcomb won with 51% in 2016, he carried 80 counties.

1984 Indiana gubernatorial election – Wikipedia

At the U.S. Senate level, Indiana has elected 10 different senators, with Republicans serving 13 of the 22 terms (59%). Democrat Joe Donnelly was replaced by Republican Mike Braun in 2019.

List of United States senators from Indiana – Wikipedia

Since 1960, Republicans have won 42 of the 68 congressional races (62%). Since 2000, the median party split has been 7 Republicans and 2 Democrats. This balance has been consistent in each of the last 5 terms. Democrats did hold a small 5-4 advantage in 2006 and 2008.

List of United States representatives from Indiana – Wikipedia

2020 United States House of Representatives elections in Indiana – Wikipedia

The Indiana Senate has been controlled by Republicans since 2009, with Democrats holding an average of only 22% of the seats.

Indiana Senate – Wikipedia

The Indiana House is closer to the overall 40% +/- Democratic population, with Dems holding an average of 31% of the seats in recent years. The concentration of Democrats in a relatively small number of counties drives some of this situation.

Indiana House of Representatives – Wikipedia

Since 1970, Marion County and Indianapolis have been combined into a common City-County Council and Mayor system, usually termed unigov. Since Mayor Lugar’s first term in 1968, Republicans have held the mayor’s office for 16 of 26 terms (62%). Democrats have held office for 10 of the last 14 terms (71%).

List of mayors of Indianapolis – Wikipedia

The City-County Council has been a competitive body. Democrats held a 15-14 majority in 2003. Republicans lead 16-12 in 2007. Democrats resumed the majority by 16-12 in 2011, and more narrowly by 13-12 in 2015 when the “at large” districts were removed. Democrats won a large victory in 2019 of 20-5. It is unclear if this lopsided result will continue in the future.

Since Obama’s surprising presidential win in 2012, metropolitan Indianapolis area Democrats have become more active, with more candidates running for suburban offices, more financial and volunteer support and a few of them winning. This has been newsworthy, because many suburban counties and cities had zero or only nominal Democratic candidates historically. Joe Biden narrowly won some precincts in the 2020 presidential election, generating more news coverage.

2020 Election: How Trump, Biden performed in Hamilton County, Indiana (indystar.com)

However, Biden’s relative progress in the Indianapolis suburbs, like his results in other U.S. suburbs, did not translate into Democratic gains in the state and local races, where Republicans consistently outperformed Trump and won races by margins significantly higher than pollsters forecast.

Indiana elections: Dems see few wins as still sign for optimism (indystar.com)

Indiana election results: Democrats look for answers after losses (indystar.com)

The 19 counties that voted for John Gregg (D) against Mike Pence (R) in the close 2012 race account for 43% of the state’s 2019 population. That is consistent with 43% in 2010 and down a little from the 44% share in 2000. The Democratic leaning counties are not growing faster than the Republican leaning counties.

Indiana Democrats like Evan Bayh, Joe Kernan and Joe Donnelly appear to be unable to re-assemble a winning “blue dog” coalition of voters at the state level. Barrack Obama’s narrow 1% point victory over John McCain and Sarah Palin looks like an “outlier” result. Indianapolis seems to be an increasingly solid base for the party and its suburbs may fall from 70% to 55% Republican through time. However, for the foreseeable future, Indiana will be a solid Republican (Red) state.

Indiana: How Much Political Power?

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Indiana is the 17th largest U.S. state ranked by population, with 6.7 million residents.

Indiana’s GDP is the 18th largest. Its GDP per capita is only 32nd.

List of states and territories of the United States by GDP – Wikipedia

Indiana has 11 electoral college votes, tied for 13th most of all states. Indiana did not lose an electoral college vote in the latest census, although 3 neighboring states did. With 538 total votes, the average state has almost 11 votes, so Indiana is average by this measure. From 1872-1926, Indiana had 15 electoral votes. From 1932-40 it had 14. From 1944-88 it had 13. From 1984-2000 it had 12, so the trend is clearly downward.

Indiana Presidential Election Voting History (270towin.com)

Indiana has not been a “swing” state with disproportionate clout in our lifetime.

Party affiliation by state – Religion in America: U.S. Religious Data, Demographics and Statistics | Pew Research Center (pewforum.org)

Indiana can claim its fair share of U.S. presidents. 1 out of 46, with the 23rd president, Benjamin Harrison (1889-93). Indiana can partly claim Harrison’s grandfather William Henry Harrison who briefly served as the 9th president and who served as governor of the Indiana Territory from 1801-12, although he was not born there. Indiana also claims to be Lincoln’s boyhood home (1816-30).

Indiana also has its fair share of losing presidential candidates with Wendell Wilkie (1940) and Socialist Party stalwart Eugene Debs (1900-20).

Indiana Presidents: Learn About the 3 Hoosiers Who Became President (visitindiana.com)

Indiana truly stands out at the VP level, with 4 serving in this office: Charles Fairbanks (1905-9), Thomas Marshall (1913-21), Dan Quayle (1989-93) and Mike Pence (2017-21). It has provided 12 VP candidates.

Witnessing History: Hoosiers for President (indianahistory.org)

At the Supreme Court, Indiana claims more than its fair share of the 120 justices with 4: Willis Van Devanter (1911), Sherman Minter (1949), current Chief Justice John Roberts (2005) and recently appointed Amy Coney Barrett (2021).

A quick look at U.S. Supreme Court Justices from Indiana « Capitol & Washington (capitolandwashington.com)

Since WWII there have been 35 individuals serving in the top political appointment office, the White House Chief of Staff. Ron Klain currently holds that role, as the only Hoosier to do so.

White House Chief of Staff – Wikipedia

Historically and recently, Indiana has shown above average political influence at the national level in the U.S.

University Industry Specialization

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There has long been a divide between liberal arts colleges, research universities and institutes of technology.  The gap between traditional four-year colleges/universities and commercial or technical schools generally remains. 

In a fifty year period of growing enrolments, our major public universities have become larger and more complex.  They have added colleges and majors.  They have increasingly focused on winning research dollars.  They have learned to compete for students.  They have nearly all adopted the same brand strategy focused on “academic excellence”.   The college ratings game essentially focuses on the ranking of entering student SAT scores.   To succeed, universities have improved their facilities, increased financial aid packages and developed programs that attract high SAT students.

State universities secure alumni and corporate funding so that they can compete with other highly rated schools.  State universities that were once positioned as teachers colleges, normal schools, agricultural and technical or urban universities all compete for the same academic rankings, investing in research labs, notable faculty and sports teams.  Some clever universities specialize in a few niche colleges like insurance, architecture, entrepreneurship or media.  They use brand excellence in a professional school or two as a substitute for higher rankings in the more prestigious arts and sciences.

Given the business world’s strong preference for industry specialization and experience, a more satisfying strategy for their students might be to specialize in a single broad industry.   Charter and magnet schools do this at the secondary school level.  Community/technical colleges often merge industry and professional skills into technical programs.  A few older colleges like agriculture still produce ag communications, ag business and ag engineering majors.

A university could adopt a broad industry like medicine, distribution, trade, communications, government/NFP, manufacturing, agriculture or financial services.  Professional and associate/technical degrees could be offered.   In addition, degrees in support fields like business, marketing, communications, finance, IT, engineering and science could be offered.  Courses could be developed to provide an industry overview, highlight industry firms, describe international opportunities and teach industry terminology. 

If state universities want to contribute to state level economic development, they could make an immediate and lasting impact by specializing by industry.

Framing Politics With a Ruler

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Peggy Noonan’s suggestion to use a 36 inch ruler to gauge right versus left in politics does help to explain the opposing views of tea partiers, Republicans and Democrats.  Noonan describes 0 inches as pure right and 36 inches as pure left (opposite of what you might expect).  She bemoans her perception that modern-day politicians negotiate between the 25 and 30 inch mark on the far left end of the ruler.  She asserts that tea partiers will try to move back to the 5 inch mark.

In politics, he who sets the framework usually wins the game.  Using American history since the agricultural 1770’s, urbanizing 1860’s, industrial 1920’s or depression 1930’s as a base, a case can be made that post-war politics and economics has been debated on the left end of the ruler, with a mixed economy government share of GDP at 20% and government spending/taxing share of GDP at 25-30%.  These shares of the economy double those of laissez-faire capitalism, the roaring twenties or the depression.  Noonan takes this long-run historical view of how the yardstick should be labeled.

Noonan is right in pointing out that politicians of both parties in a democratic system inherently seek to spend more money.  The rise in government spending in the Bush presidency after the unusual decline in government spending in the Clinton presidency (with Republican congress) is a modern reminder.  Tea partiers are right to have gut level concerns that government spending will continue to climb unchecked.  The trend in 2000-2008 was up.  Extraordinary banking and industry bail-out funds were piled on top of the stimulus spending for the Great Recession.  Health care and social security spending increases are expected in the next two decades.  Whether the various spending increases are justified or not, the trend is clearly up, without any clear countervailing force in Washington.

Those on the left might agree with the challenge to be faced, but they use a different scale to gauge left versus right, object to the accusation that they have driven up government spending, hold the Republicans responsible for inciting anger in the tea partiers and offer different long-run solutions.

If the scale is set between 100% individual, 0% government pure libertarianism versus 0% individual, 100% government pure socialism, the Democrats argue that the post-war game has all been played on the right (0-18 inch) side of the ruler.  Government share of GDP is 20%.  Government spending and taxes share of GDP is 30-35%, including all transfers.  This did not increase between 1960 and 2008.  The US tax burden at 27% of GDP is only 75% of the 36% average level for 30 developed countries.  Only Mexico, Turkey, Korea and Japan spend less than the US.  Total government spending in western European democracies is 40-55%.  Government spending did increase with the Vietnam War and Great Society policies, but was reduced by the Reagan revolution.  Government spending fell from 37.2% of GDP in 1992 to 32.6% in 2000. 

Democrats argue that their fiscal discipline was demonstrated in 1992 to 2000 when they balanced the federal budget and reduced the deficit, employing the “pay as you go” policy to force spending cuts to offset spending increases.  They point to Bush led Medicaid and defense spending increases as the cause of increased government by 2008.  They see the Bush tax cuts as redistribution to the wealthy and don’t see the overall tax-cut initiated economic growth claimed to increase net tax revenues.

Democrats argue that they have not purposely increased the long-run share of government in the economy.  They claim that the one-time investments/guarantees for the banking/auto industries were necessary for the whole economy, addressed issues that had grown for decades, will be partially recaptured and do not require continued funding.  Similarly, they pursued a moderate one-time Keynesian fiscal stimulus in response to a deep recession, just as was done by other governments of all parties in all countries for the last 60 years.  The stimulus spending lies between the 4.7% of GDP boost in 1982 and the 2.3% growth in 1992. Democrats argue that these actions are necessary and moderate and would have been undertaken by a responsible Republican successor to the Bush administration.

Democrats argue they are unfairly characterized as “big spenders” by the Republicans.  This simple accusation has stirred a populist response from “regular Americans”.  While Democrats have historically focused populist rage on big business and big banking, the Republicans and tea partiers have effectively used big government, Washington, elites, foreign countries and religions as targets, tying them to the Democratic Party.  Democrats argue that the monetarist, supply side, tax cut economic policies of the Republican Party since Reagan have been adopted for their populist simplicity and political effectiveness alone, further polarizing economic policy making.

Finally, Democrats have adopted part of the Republican play book in fundamentally looking to the private sector to drive the future economic growth required to support even the historic level of government spending.  The stimulus spending was partially focused on future industrial growth and infrastructure.  The banks and auto firms are returning to pure private ownership.  Small business lending and investment tax credits have become a focus.  Health care reform maintained private providers and insurers as the core of the system.  The costs of the war in Iran have been reduced.  A bipartisan group has been appointed to work on the Medicare/social security future.  Steps are being taken to promote exports.  A reduced public sector role for the mortgage industry has been proposed.  Obama and many Democrats have continued the pro-business approach used by Clinton.

On the other hand, Republicans can fairly point to steps taken by the Democrats that indicate a continued desire to “tax and spend”.  The stimulus bill benefited state government, construction and other Democratic interests disproportionately.  Health care reform achieved growth in government commitments without structural cost solutions.  Labor unions were given special treatment in the auto bail-out.  Fannie Mae and Freddie Mac’s roles were not touched in the banking reform.  The financial consumer protection agency smacks of unlimited and uninformed regulation.  The proposed increase in taxes for high earners is significant and is not coupled with structural spending reforms.  A second mini-stimulus has been approved and unemployment benefits have been extended to record lengths.

The current economic situation has raised the stakes for politics.  We should expect to see ongoing attempts to define the ruler and place the participants at marks that favor one group or another in the public eye.

Book Reviews

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I’m very busy in my new role with Tripp-Lite in Chicago.  I have published many book reviews on Amazon.com in the last 2 months, including:

Pontoon, Garrison Keillor

Pere Goriot, Balzac

The Limits to Power, Bacevich

The City, Kotkin

Hitchhikers Guide to Universe, Adams

Ragtime, Doctorow

Siddhartha, Hesse

What’s the Matter with Kansas?, Frank

The American, James

No Ordinary Time, Goodwin

Prize Winner of Defiance, Ohio, Ryan

Enjoy!

Better Management, Less Demand for Labor

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The Bush administration experienced a weak jobs recovery from 2002-2007 and the Obama administration is facing even stronger headwinds in 2009-2010.  Are there structural factors that are more important than the widely discussed business cycle and macroeconomic policy factors?

On the labor supply side, the growth of internet based job applications processes has greatly improved the effective supply of high quality candidates for all positions.  This increases the expectation of firms of finding great fit candidates.  On the other hand, until recently workers had inflexible wage expectations due to worker experience, pride, assets and family income alternatives.  The decline in family housing and investment assets together with the greater experience of long-term unemployment has recently increased the willingness of potential employees to be flexible in seeking work.  Human resources departments remain reluctant to greatly reduce hiring wages in fear of turnover, legal and internal equity challenges. 

Extended unemployment benefits reduce the incentive to find work for some individuals, but this has a relatively minor labor supply impact.

Much greater structural changes have been experienced on the demand side of the equation.   Perhaps most important has been the ongoing growth in labor productivity, which has reduced the effective demand for incremental employment.   Increased staff flexibility in working long hours has also reduced the demand for peak-time or just in case workers

Firms have become more aggressive and experienced in downsizing employee groups as dictated by business conditions, thereby reducing the demand for labor.  This could eventually result in greater future employment demand, since the expected future cost of maintaining partially productive staff is reduced.  It appears that this cost reduction has been offset by a greater awareness that hiring an employee is a long-term investment decision.  Firms that have been trying to rework the employment bargain from one of life-time loyalty to one of “fair dealing” remain very reluctant to plan for future downsizing, so they have set higher new staff addition thresholds, subject to the sensitivity analysis once reserved for major capital investments.

Firms have also become more aware of the all-in cost of hiring.  Health care benefits costs per employee have increased significantly, especially as a percent to wages for hourly and entry-level jobs.   Internet application processes have increased hiring costs for many firms.  The level of firm-specific training required for break-even in many jobs has increased.  With better models of hiring, firms are less willing to hire “good enough” candidates who do not fully meet all functional, industry, character and culture needs, resulting in positions which remain open for longer periods.   Overextended managers have less incentive to add permanent positions.  Firms are also less likely to invest in entry-level professional staff positions due to the higher turnover and lack of investment returns.

Labor force reductions have escalated in the last decade.  Downsizings are conducted when indicated, even in times of plenty.  Marginally productive or engaged staff members are moved up or out sooner.  Employees in obsolete functions see their jobs eliminated.  Protected functions or industries are quite rare today.   In a labor intensive business world, firms are more aggressive in pairing staff.

Productivity improvement projects have become less labor investment intensive.  Much improvement comes from getting more value out of the existing resources.  The declining role of physical capital creates fewer tag along positions.   Firms have learned to manage peak seasons and major projects with less incremental staffing.    Information technology investments had stimulated some new forms of project and analytical staff needs in the last 30 years, but that demand is flat today.  Firms have adopted standard process and project management templates that reduce the demand for new positions to accompany IT investments.

Firms are now fully aware of the use of contractors, part-time staff, consultants, outsourcing and imports to fill most functions.  The need to hold partially employed staff is greatly reduced.  Many processes have been re-engineered specifically to allow outsourced resources to be used to accommodate peak demands.  

Finally, overall business investment has been weak in the post Y2K period.  Firms have learned to manage inventories much better.  They have installed significantly higher project hurdle rates based upon their experience with project failures.   The lower market cost of capital has been a very minor factor outside of industries like real estate and banking.   Through productivity improvements, the effective capital stock has increased without as much new investment.  Sensitivity to the risks of change has caused firms to reduce the number of minor investment projects.

Business investment has been especially weak in the last 3 years, with firms freezing capital expenditures until the overall economic climate is resolved.  This includes fiscal, monetary, trade, tax and regulation policies.  The credit crunch has reduced hiring by small firms.

In general, firms have become much more effective in managing their capital, inventory, technology, brand and labor resources.  Many of these changes in the last decade have reduced the demand for labor.  Some of these changes may have a long-term impact on the minimum or natural unemployment rate, while others will cycle through business profits to business investment to increased labor force demand in the long-run.

High ROI Suburbs

tomkapostasy2 Comments

Many of America’s highest income, politically conservative suburbs have successful pursued high amenity public service strategies.  How is this high spending approach economically and politically justified?

http://en.wikipedia.org/wiki/Tiebout_model

In 1956, economist Charles Tiebout developed a model of competing suburban governments providing different levels and combinations of services to match the varied preferences of groups.  Subsequent research on suburbs and private real estate communities has confirmed that individuals prefer to choose amenity/payment bundles which match their values.

http://www.springerlink.com/content/r1v378785j2588j8/

Why would members of this usually tax and government-averse high income group willingly choose to live in a high amenity suburb?

The sociological observation that individuals prefer to belong to groups of like individuals is a partial explanation.  Exclusive communities are more homogeneous.

Brand name communities also provide some luxury goods type value from their exclusive status as high income, wealth and service communities.

High income, wealth, tax and service communities screen out criminal elements and benefit from low service costs to security services, delivering a safe environment.

High service communities provide signaling benefits in a world of imperfect information.  Transferred corporate executives rely upon education and amenity cues in choosing a residence.  Universities rely upon the reputation of school districts in selecting among applicants. 

Most importantly, a high service strategy delivers a great financial return on investment – especially for the initial group of residents.  High service communities proactively pursue strategies to minimize the cost to existing residents.

They invest in all service dimensions to ensure that the community is recognized as “a” or “the” leader in the metropolitan area and region.  Schools, roads, utilities, zoning, parks, transportation, libraries and cultural institutions achieve recognition.

They increase the tax base through annexation, selective density increases and attracting commercial firms.

They pursue “good government” initiatives, outsourcing services, consolidating services, utilizing volunteers and boards, leveraging regional, state and federal funds, employing specialized consulting firms and retaining highly qualified staff that benefit from the community’s growth and financial stability.

They invest in economic development, using Tax Increment Financing districts, user fees, economic development incentives, balanced zoning and negotiation to take advantage of the economic value of their attractive locations.  Retail, office, distribution, services, logistics and light manufacturing firms are welcome in the right zoned areas.

High service communities make capital investments to provide future economic returns.  Schools, parks, roads, libraries, utilities, cultural services, transportation and recreation assets are created through donations, local and regional government actions.

Suburbs compete with other metropolitan suburbs for residents and with other regional centers for commercial investments.  The right investments provide an atmosphere with low taxes, high services and a high quality of life. 

A Midwestern suburb of 75,000 has invested almost $1 billion in the last 20 years in its schools, roads, utilities, library, parks, infrastructure, cultural institutions and economic development incentives.  In essence, each of the existing 25,000 households has made a $40,000 bet on the future.  There has been some political and journalistic opposition.  A typical residence is valued at $250,000.  There are another 3,000 commercial firms with $250,000 property investments, making the total property value $7 billion. 

The community has annexed the unincorporated areas, increased density, attracted new businesses and continued its build-out towards a 120,000 population.  The number and value of commercial enterprises is expected to grow from .75B to $4B in 20 years.  Through zoning measures, growth and increased demand for a singular resource, the average residence will be valued at $400,000, with the existing residences appreciating from $250,000 to $325,000.  The built out residential market value will be $16B, for a total property value of $20B.

The original 25,000 households will gain a real $75,000 on their housing values.  Because of the community’s economic and population growth, their capital investment will be reduced to less than $20,000.  The early residents will clearly benefit from this high service and investment strategy.  The new residents will benefit from the investments and have the opportunity to “vote with their feet” in determining if the services delivered are worth the property values and taxes required.

High income families demand high quality services and are willing to pay for them.  They also require their municipal governments to take all possible steps to increase the cost effectiveness of these services.

Indiana 2050

tomkapostasy4 Comments

It will take some time for the official 2010 Indiana census to be complete.  The 2009 estimates and 1950-2000 census data can be used today to create a reasonably accurate picture of Indiana in 2050, 40 years from now.

Indiana grew by 24% from 1970 to 2009 and is likely to grow by 25% from 2009 to 2050.  The population will increase from 5.2 to 6.4 to 8.0 million residents.

In 1970, Indiana had only 4 counties with populations of 200,000 or more: Marion (Indy) at 794,000, Lake (Gary) with 546,000, Allen (Ft. Wayne) with 280,000 and St. Joseph (South Bend) with 245,000.  These four counties contained 1.9M people, or 36% of the 1970 population.  They grew to 2.0M in 2009 and an estimated 2.2M in 2050. 

By 2009, there were 6 counties above 200,000 populations, with Elkhart and Hamilton counties joining the list.  By 2050, it is likely that 10 counties will be above the 200,000 mark, adding Porter, Hendricks, Johnson and Tippecanoe counties to the list.

Between 2009 and 2050, Indiana is expected to grow by 1.6M people, or 25%.  Ten of the 92 counties will experience two-thirds of the growth across the next four decades.  Based on recent trends, Hamilton County will add 300,000 residents.  Suburban Hendricks and Johnson counties will grow by 100,000 residents (89%).  Marion and Allen counties will add 80,000 residents at 10-20% growth.  Tippecanoe, Hancock, Elkhart, Porter and Boone counties will each grow by 60-80,000 residents.

Five Indianapolis area counties will experience 70% or higher growth.  Hancock, Hamilton and Boone Counties will grow by 100%, with Johnson and Hendricks Counties close behind.  The nine counties in the Indianapolis area grew by 46%, from 1.25M to 1.8M people, in the last 40 years and are expected to grow by a further 43% in the next four decades, reaching a population of 2.6M.  This 790,000 person growth accounts for half of the state’s total growth from 2009 to 2050.  The Indianapolis area will grow from 28% to 33% of the total state population.

Eleven counties will change population ranks by three or more places.  Boone and Hancock Counties will climb 9-10 places.  Shelby, Clark and Hendricks Counties will rise 3-4 places.  Delaware, Wayne, Henry, Grant and Vanderburgh Counties will decline by 3-4 places.  Howard County may drop 7 places.

Indiana’s population will continue its 0.5% annual growth rate and reach 8 million by 2050.  Growth will be highly concentrated in a small number of urban counties.  The top ten counties, each with 200,000 or more people, will account for 50% of the state population.  The next 11 counties, each with 100,000 or more people, will account for another 19% of the state population.  These 21 counties will capture 80% of all growth,

averaging increases of 60,000 people.  The remaining 71 counties will experience growth of 4,000 people each on average.

       Pop   Pop   Est   2009-50     2009   2050   Chg 
SMSA County City  1970   2009   2050   Growth  Pct  Rank   Rank   Rank 
                     
Vincennes Knox Vincennes       42       38         38           –   0%       37 37       –  
Terre Haute Vigo Terre Haute      115     106       106           –   0%       17 19       (2)
South Bend Elkhart Goshen      127     201       273           72 36%        6 6       –  
South Bend Kosciusko Kosciusko       48       76       104           28 37%       19 20       (1)
South Bend LaPorte LaPorte      105     111       120             9 8%       15 16       (1)
South Bend Marshall Plymouth       35       47         59           12 26%       31 31       –  
South Bend St. Joseph South Bend      245     268       289           21 8%        5 5       –  
Richmond Henry Newcastle       53       48         48           –   0%       30 34       (4)
Richmond Wayne Richmond       79       68         68           –   0%       25 29       (4)
Muncie Delaware Muncie      129     115       115           –   0%       14 17       (3)
Louisville Clark Jeffersonville       76     108       148           40 37%       16 13        3
Louisville Floyd New Albany       56       74         94           20 27%       21 23       (2)
Lafayette Tippecanoe Lafayette      109     168       248           80 48%        8 8       –  
Kokomo Cass Logansport       40       39         39           –   0%       36 36       –  
Kokomo Grant Marion       84       69         69           –   0%       23 27       (4)
Kokomo Howard Kokomo       83       83         83           –   0%       18 25       (7)
Indianapolis Boone Lebanon       31       56       114           58 104%       27 18        9
Indianapolis Hamilton Noblesville       55     279       579         300 108%        4 2        2
Indianapolis Hancock Greenfield       35       68       144           76 112%       24 14      10
Indianapolis Hendricks Danville       54     141       261         120 85%       11 7        4
Indianapolis Johnson Franklin       61     142       242         100 70%       10 9        1
Indianapolis Madison Anderson      139     131       141           10 8%       13 15       (2)
Indianapolis Marion Indianapolis      794     891       971           80 9%        1 1       –  
Indianapolis Morgan Martinsville       44       71       101           30 42%       22 21        1
Indianapolis Shelby Shelbyville       38       45         61           16 36%       33 30        3
Ft. Wayne Allen Ft Wayne      280     354       434           80 23%        3 4       (1)
Ft. Wayne De Kalb Auburn       31       42         54           12 29%       34 32        2
Ft. Wayne Noble Albion       31       48         68           20 42%       29 28        1
Evansville Vanderburgh Evansville      169     175       189           14 8%        7 11       (4)
Evansville Warrick Booneville       28       59         84           25 42%       26 24        2
Columbus Bartholomew Columbus       57       76         96           20 26%       20 22       (2)
Columbus Jackson Brownstown       33       42         45             3 8%       35 35       –  
Cincinnati Dearborn Lawrenceburg       29       51         71           20 39%       28 26        2
Chicago Lake Gary      546     494       534           40 8%        2 3       (1)
Chicago Porter Valparaiso       87     164       232           68 41%        9 10       (1)
Bloomington Lawrence Bedford       38       46         50             4 8%       32 33       (1)
Bloomington Monroe Bloomington       85     131       171           40 31%       12 12       –  
  Subtotal 37 counties   4,091  5,125    6,543      1,418 12%      
                     
  All Others 55 counties   1,104  1,298    1,459         161 12%      
  (Pct of State)   21.3% 20.2% 18.2% 10.2%        
                     
  Indiana     5,195  6,423    8,002      1,579 25%      
        24% 25%          
                     
Indianapolis       1,251  1,824    2,614         790 43%      
(Pct of State)     24.1% 28.4% 32.7% 50.0%        

Labor and Tax Law Changes to Create Jobs

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The U.S. labor market remains mired in a post WWII land of large employer paternalism that is unsuited to the needs of global competition.  Major changes to labor laws should be made to lower the full costs of hiring employees.  At the same time, major changes to unemployment insurance should be made to provide a meaningful safety net, without reducing the incentives for the unemployed to actively seek re-employment, even at lower wages when needed.

In return for a variety of actions to reduce the unit cost of labor by more than 20%, employers should be required to fund one-half of an unemployment insurance fund that provides meaningful benefits.  Employees would fund the other half through payroll deductions.  Unemployed workers would receive an initial payment of one-half of six months’ worth of wages.  Additional 50% payments would be made at the beginning of third and fourth quarters of unemployment.  This lump-sum approach maintains the incentive to actively seek new employment, while providing a true safety net in a world where 6 month bouts of unemployment are recurring career experiences at all levels.

The federal government could lower the transaction costs of employment by maintaining a national ID card system that qualifies individuals for employment and removes the hiring cost and risk to employers.  The federal government could certify 3-5 firms to operate a standardized resume/profile system that records and certifies the basic education and employment history for individuals in one place. 

Employees would be more attractive to employers if they invested more in their professional skills.  A continuing education tax credit would improve candidate skills and remove the need for employers to offer most internal training and educational benefits.

Employers would hire more individuals if the terms of employment were more flexible.  Labor laws could more clearly allow “paid time off” banks to be used in place of overtime compensation.  The trigger for required overtime premiums could be raised from 40 to 48 hours for the first 10 weeks of annual overtime.  Seasonal positions could be exempted from employer unemployment compensation responsibility.  A new employment category could be created to clearly allow 100% incentive based sales positions.  The IRS rules defining employees and contractors could be simplified to reduce administrative costs and risks.

Federal labor laws and regulations could be simplified to reduce administrative costs and limits could be placed on potential liabilities.  The equal employment opportunity, family medical leave, disability and other employee “rights” acts incentivize employers to take extreme defensive steps and avoid hiring in order to avoid potential liabilities.

The federal government could incentivize the creation of new positions directly by paying half of the first six-months of wages.  The rules for unpaid internships could be clarified, allowing students to work up to 700 hours per year within win-win educational programs which lead to employment.  The labor laws could be clarified to allow “no fault” dismissals within 180 days.

In a globally competitive environment, labor laws need to benefit employers and employees.  Steps can be taken to reduce the total cost of employment and protect employed and unemployed workers.  The cost to employers and society through taxes is modest.

In addition to macroeconomic steps to improve the economy and administrative steps to provide meaningful unemployment compensation benefits and lower employment costs and risks, the federal government could change tax policies to significantly reduce the incremental costs of employing workers.

The federal government could incentive continuing education through tax credits.  Unemployment compensation insurance could be shared by employers and employees.  Family medical leave benefits could be funded by the federal government as is done in other developed nations.

Tax changes could be made to incentivize individuals to invest in their own life and disability insurance plans.  Tax credits could be used to promote individual charitable contributions and reduce the need for corporate gifts and matching programs.  The dollar and percentage limits for tax –deferred retirement plan contributions could be raised, increasing the value of compensation.  The rules for qualified plans could be modified to allow a greater share of “highly compensated” employee pay to be made on a pre-tax basis.

Finally, the two biggest fringe benefits – social security and health benefits – could be migrated to government and employee funded programs over a decade, releasing employers from this responsibility.  Social security can be funded from federal income tax revenues or simply made employee deduction.  Health care insurance programs could lose their tax-deductible status.  If no better option is found, employer contributions to consumer choice (HAS/HRA) plans could retain their tax-deductible status.

Allowing American employers to focus on creating jobs, operating their firms and making money will unleash incentives to increase productivity, competitiveness and our standard of living.  Finding the political will to fund desired public services will not be easy, but the total benefits justify the short-term challenges.