June U.S. Jobs Report Signals More Job Loss to Come for PA
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Commonwealth Must Maintain Spending to Forestall Additional Job Loss
The following analysis is provided to Pennsylvania reporters as part of the Keystone Research Center’s ongoing tracking of the health of the Pennsylvania economy. The Keystone Research Center is a nonprofit, nonpartisan research organization that promotes a more prosperous and equitable Pennsylvania economy.
The carnage in the national job market continued unrelenting in June, with the U.S. shedding 467,000 jobs and the national underemployment rate reaching 16.5% - roughly one of every six Americans in the labor force.
Today’s national job numbers place the debate about Pennsylvania’s state budget in a new context. It is well known to economists that the best way for state government to limit job loss in an economic recession is to maintain spending levels. Nobel Prize-winning economist Joseph Stiglitz and others have shown that direct spending reductions may generate more adverse economic consequences than tax increases, particularly tax increases on higher-income households. That means tax increases can be the least damaging way to close state fiscal deficits in the short run and provide for long-term economic growth. (www.fiscalpolicy.org/10-30-01sfp.pdf)
Basic economics underscores that Governor Ed Rendell’s proposal to balance the state’s budget in part through an increase in the state’s personal income tax is on target and that the alternative course of draconian cuts in state spending would reduce job creation and increase unemployment. So far Pennsylvania unemployment remains about a percentage point lower than the national rate - an advantage that translates into 60,000 jobs. The wrong budget agreement would jeopardize that Pennsylvania advantage.
The basic economic reasons that maintaining state spending ideally through revenue increases that fall on higher earners are straightforward:
1. Government injects every dollar it raises into the economy.
2. Taxpayers, by contrast, save some of their income and those savings do not stimulate the economy in the short run. The income of higher earners is most likely to be saved rather than used for consumption or investment in a deeply depressed economy.
3. State spending financed through bonds - in effect, through future state revenues - can be especially stimulating to the state economy in the short run, one reason that bond-financed water and sewer infrastructure and the state’s $650 million Alternative Energy Investment Fund are so well timed.
From the point of view of maximizing short-run job creation, an even better alternative to the Governor’s current proposal would be to collect needed state revenues more substantially from higher earners, through a differentially higher tax on investment income. This can be done in Pennsylvania without a constitutional change. (As a result of private sector pessimism about future demand, investment income is especially likely to stay on the sideline in today’s economy. This makes the stimulating impact of spending financed by higher tax rates on investment income especially great).
While Pennsylvania’s unemployment rate is lower than the national one, it continues to move higher as the U.S. labor market weakens further. Moreover, initial claims for unemployment insurance also released this morning were above 40,000 in Pennsylvania for the third week in a row, a figure which is 87% higher than during a comparable period prior to the start of the recession. Unemployment is higher in every part of Pennsylvania, although manufacturing-dependent rural areas have been especially hard hit. County-level unemployment rates are available now for May and can be seen in an online map at http://www.keystoneresearch.org/unemploymap.html.
Source: The Keystone Research Center