Saturday, August 27, 2011

Texas, Job Growth and Recommendations from the Dallas Fed

As Governor Perry emerges as a serious contender for the Republican nomination, attention has been focussed on job creation in Texas, which the Governor is expected to make a centerpiece of his campaign.

 While analysis of Texas' job creation record, and the Governor's role in it, assigns a number of causes to Texas' success, only some of which might be credited to the Governor, I thought it would be interesting to look into the views of the President and CEO of the Dallas Federal Reserve Bank, including the issue of whether the jobs created are mostly low paying, and his recommendations for action in Washington.  I've slightly re-arranged the order of his presentation, to flow a bit better for our readers.

 His full presentation will be found at and relevant excerpts are set out below, along with the usual charts.  (Data matters!)

"Here is a chart that displays nonagricultural employment growth by Federal Reserve Districts over the past 21½ years, using the employment levels of 1990 as a base of 100 and tracing job creation through June.

Total nonagriculural employment growth by district 

 Nonagricultural employment growth in Texas has compounded at an annual rate of 1.95 percent over 21½ years; that of California at 0.57 percent; and New York’s at 0.19 percent. If you are interested in the output of their workers over this same period, the compound annual growth rate of Texas GDP is 3.6 percent; California’s is 2.59 percent; and New York’s 2.06 percent.

There are several ways to calculate Texas’ contribution to national job creation from June 2009 through the end of June 2011. One is to look at the number of jobs created by all 50 states, including those that have lost jobs since the nation’s anemic recovery began. Using this metric, through June of this year Texas has accounted for 49.9% of net new jobs created in the United States.

Another way to calculate Texas’ contribution to job creation is to lop off those states that have continued losing jobs and consider only those that have positive growth in employment these past two years. Using this metric, Texas has accounted for 29.2% of job creation since the recession ended.

This raises the obvious question―what kind of jobs are being created in Texas? Here are two charts that might help you form an opinion.

Texas nonfarm jobs in the recovery 

 Jobs and wages

[DEH note: Seasonally adjusted national median weekly earnings were $756 in the 2011 Q2, lower than that in Texas - Dept. of Labor, Bureau of Labor Statistics -] 

The most jobs in Texas have been created in the educational and health services sector, which accounts for 13.5% of Texas’ employment. The second-most jobs have been created in the professional and business services sector, which accounts for 12.5% of the Texas workforce. The mining sector, which includes support activities for both mining and oil and gas, employs 2.1% (yes, two-point-one percent) of Texas’ workers. 

In the second chart, you will see that these jobs are not low-paying jobs. The average weekly wage in the education and health services sector is $790; in the professional and business services sector it is $1,117; and in the mining sector, the average weekly wage is $2,271. Together these three sectors account for 68% of the jobs that have been created in Texas in the past two years.

I should point out that in 2010, 9.5% of hourly workers in Texas earned at or below the federal minimum wage, a share that exceeds the national average of 6%.

 Despite the fact that Texas has severely limited social services and an education system that faces great challenges, people and businesses have been picking up stakes and moving to Texas in significant numbers over a prolonged period.  It should be noted that in the last census, Texas gained population and congressional seats, while California’s population growth and congressional representation was static and New York’s was diminished. 

 Jobs have been created for American workers in Texas in several different sectors, not just in the oil and gas and mining sectors. People have taken those jobs of their own free will, even though the jobs may not measure up to the compensation levels everyone would like. 

 And yet Texas, like all states, is subject to the same monetary policy as all the rest: We have the same interest rates and access to capital as the residents of any of the other 49 states, for the Federal Reserve conducts monetary policy and regulates financial institutions under its purview for the nation at large. From this, I draw the conclusion that private sector capital and jobs will go to where taxes and spending and regulatory policy are most conducive to growth.

 In a cyberized, globalized world, those with the means to create jobs will gravitate to those places that provide the best prospect for a return on the investment of the abundant capital on business’ balance sheets or available to them in the marketplace or from eager bankers. Just as many people and firms within the United States have relocated to Texas from other states, investment will flow to countries anywhere in the world where it is most welcome.

Our fiscal authorities must not only figure out the way to contain the nation’s runaway deficits and public debt accumulation, but they must do so in a manner that is competitive with others who seek access to our money, and do so in a manner that does not pull the rug out from under the meager recovery we are experiencing. 

The Committee of 12 and the president have an awesome task. Essentially, they must reboot our entire system of economic incentives and come forward with an updated tax and spending and regulatory regime that incentivizes businesses to invest in the United States and create jobs for American workers rather than gravitate to foreign shores. And they must do so in a manner that avoids engaging in a race to the bottom, but rather, puts us back on the path to ever higher achievement of prosperity.

. . . [T]he ugly truth is that the problem lies not with monetary policy but in the need to construct a modern, appropriate set of fiscal and regulatory levers and pulleys to better incentivize the private sector to channel money into productive use in expanding our economy and enriching our people. 

Those with the capacity to hire American workers―small businesses as well as large, publicly traded or private―are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. 

 Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy. In an environment where they are already uncertain of potential growth in demand for their goods and services and have yet to see a significant pickup in top-line revenue, there is palpable angst surrounding the cost of doing business. According to my business contacts, the opera buffa of the debt ceiling negotiations compounded this uncertainty, leaving business decision makers frozen in their tracks.

I would suggest that unless you were on another planet, no consumer with access to a television, radio or the Internet could have escaped hearing their president, senators and their congressperson telling them the sky was falling. With the leadership of the nation―Republicans and Democrats alike―and every talking head in the media making clear hour after hour, day after day in the run-up to Aug. 2 that a financial disaster was lurking around the corner, it does not take much imagination to envision consumers deciding to forego or delay some discretionary expenditure they had planned.

Importantly, from a business operator’s perspective, nothing was clarified, except that there will be undefined change in taxes, spending and subsidies and other fiscal incentives or disincentives. The message was simply that some combination of revenue enhancement and spending growth cutbacks will take place. The particulars are left to one’s imagination and the outcome of deliberations among 12 members of the Legislature.
Now, put yourself in the shoes of a business operator. On the revenue side, you have yet to see a robust recovery in demand; growing your top-line revenue is vexing. You have been driving profits or just maintaining your margins through cost reduction and achieving maximum operating efficiency. You have money in your pocket or a banker increasingly willing to give you credit if and when you decide to expand. 

But you have no idea where the government will be cutting back on spending, what measures will be taken on the taxation front and how all this will affect your cost structure or customer base. 

Your most likely reaction is to cross your arms, plant your feet and say: “Show me. I am not going to hire new workers or build a new plant until I have been shown what will come out of this agreement.” 

Moreover, you might now say to yourself, “I understand from the Federal Reserve that I don’t have to worry about the cost of borrowing for another two years. Given that I don’t know how I am going to be hit by whatever new initiatives the Congress will come up with, but I do know that credit will remain cheap through the next election, what incentive do I have to invest and expand now? Why shouldn’t I wait until the sky is clear?”

It will be devilishly difficult for businesses to commit to adding significantly to their head count or to meaningful capital expansion in the United States until clarity is achieved on the particulars of how Congress will bend the curve of deficit and debt expansion.

Only Congress, working together with the president, has the power to write the rules and provide the incentives to correct the course of the great ship we know and love as America. I hope you, as the voters who put them in office, will demand no less of them."

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