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September 25, 2017

Taxing the Friendly Skies

The following article, featured in Cascade magazine, features UO Economics graduate students Haiming Kuang and Kathryn Sternberger.
Can the UO cut air travel—and polluting jet emissions?

The ubiquity of flying for business and pleasure has made the airline industry a major contributor to climate change, according to organizations such as the Environmental Protection Agency.

With an eye toward becoming more eco-friendly, some businesses and universities have responded by taxing air travel in an effort to curb the number of flights taken by employees, thereby cutting polluting jet engine emissions.

Can it work at the University of Oregon? Probably not.

That’s the conclusion of Haiming Kuang and Kathryn Sternberger, economics students who analyzed this question for a project that earned them honors distinctions when they graduated in June.

Read more on the Cascade website.

September 6, 2017

Oregon’s Legalization and Washington’s Border Sales

Oregon’s legalization quickly cut Washington border pot sales – featuring UO Economics faculty Benjamin Hansen, Keaton Miller and Caroline Weber

When Oregon’s recreational sales of marijuana took effect, retail sales in Washington counties across the Columbia River dropped 41 percent in just three days, UO researchers report.

Also taking a dip was the amount of legally sold marijuana leaving Washington, UO economists Benjamin Hansen, Keaton Miller and Caroline Weber noted in their findings, which were published online this week in the working paper series of the National Bureau of Economic Research.

“We found that the majority of marijuana sold in Washington is actually staying there,” said Hansen, the UO’s W.E. Miner Professor of Economics. “We found that prior to Oregon’s legalization 11.9 percent was potentially being diverted out of Washington overall, and it dropped to 7.5 percent after Oregon’s legalization.”

Read more about this study by Economics faculty at Around the O.

June 2, 2017

Trump and the Issues

CASCADE article featuring EC faculty members Anca Cristea, Mark Thoma, & Tim Duy

The president himself may have said it best: “History is watching us now.”

Those were Donald J. Trump’s words in July, when he became the Republican nominee for president at the party’s national convention in Cleveland. Now the Trump presidency is well under way, with an ambitious lineup of policies and proposals that trigger broad questions about the future of America.

Social scientists in the College of Arts and Sciences—three from political science, three from economics—were asked to dissect issues in play under the new administration: immigration, trade, the economy, health care and political movements. They explored the key elements underpinning these topics and what’s at stake.

Anca Cristea—Trade

Associate professor, Department of Economics

Interests: international trade, industrial organization, applied econometrics

Which is the better path: making international trade as open and fluid as possible? Or protecting US industries by raising the cost of imports? What happens to the average worker under either scenario?

Cristea is an empirical trade economist who assesses trends through statistical analysis. She studies the global benefits of easy movement of goods, services and people and the impact of trade on the environment and workers.

Trade generally lowers the cost to make goods and services, but it creates winners and losers when production is moved to locales with lower labor costs.

It’s better for business to have easy access to the global playing field, Cristea said—but that can come at the expense of workers whose jobs are outsourced to non-US competitors.

RECENT HISTORY: For decades, the US has generally not taxed imports or taxed them minimally—say, 2 percent on manufactured goods. Manufacturers who ship a $20,000 car from Japan pay about $400 in import taxes, for example.

The theory, Cristea said, is that making trade free or inexpensive encourages countries to play to their strengths. Businesses stick to producing what they do best, export the surplus, make a profit and grow; they save money by importing what would be expensive to produce or procure domestically.

But the US has shed about five million manufacturing jobs since 2000, which critics blame on free trade.

CHANGING THE JOB POOL: The new administration is trying to reverse this trend; proponents of trade protectionism believe it will restore a substantial number of manufacturing jobs. But research indicates that advances in technology are more important than trade in explaining the decline in manufacturing employment.

“Protecting trade is not going to preserve jobs lost to increased automation and technological development, both of which tend to be cheaper than human labor,” Cristea said. “These jobs are not going to come back.”

As US employers have moved all or part of their operations abroad, manufacturing jobs have dropped. But some firms relocate only part of their business and the savings allow them to retain and expand higher-paying jobs in the US, Cristea said—jobs in research and development, marketing and sales, for example.

In fact, at the same time that the US was losing manufacturing jobs, it was adding 53 million jobs in services, Forbes magazine reported—in sales, housekeeping, nursing and teaching, for example. Of these new jobs, about 60 percent were in higher-paying occupations than the jobs lost.

TRADE DEFICITS: The new administration wants to correct trade imbalances with countries such as China and Mexico, Cristea said, but it’s important to understand the nuances of this issue.

A trade deficit means that the value of a country’s exports is lower than the value of imports. There are two kinds of trade deficits: bilateral and global. The former refers to trade between two countries; the latter, to the total value of a country’s exports minus the total value of imports.

It’s misguided to focus on bilateral trade deficits as a measure of economic health because those figures don’t factor in trade with third parties. Consider Mexico: In 2015, the US used almost 70 percent of that country’s imports for its own exports, although that’s not reflected in the $50 billion US trade deficit with Mexico.

It’s better to focus on global trade deficits and to keep them from growing in the US. The current figure—$500 billion—is about 2.5 percent of the value of all US goods and services. This is the important deficit to watch, Cristea said—countries continue to invest in the US economy but the global trade deficit could eventually raise concerns that they won’t get a return on that investment.

Mark Thoma—Health Care

Professor, Department of Economics

Interests: debt, unemployment, interest rates, economic policy, health care

The difficulties Republicans have had replacing former President Obama’s Affordable Care Act leave the country with the same question that has persisted for years: How to control health care costs while ensuring or expanding coverage?

Millions of Americans get coverage under Obama’s signature health law—a record 6.4 million signed up in 2017, for example. But premiums for users and costs to government are rising significantly—the Congressional Budget Office warns that at the current pace, spending on federal health care programs will drive budget deficits and debt to record levels over the next 30 years.

Thoma is a macroeconomist who studies both monetary and fiscal policy, with a focus on the US economy. One of the most important issues for the economy is health care—and Thoma has followed it closely.

Thoma is well-known for his column in The Fiscal Times and his blog Economist’s View, which Nobel Prize winner and New York Times columnist Paul Krugman called “the best place by far to keep up with the latest in economic discourse.” Science Magazine listed Thoma as one of the 100 most-followed scientists on Twitter and he is a regular source for the national press.

The health care debate will ultimately hinge on a philosophical question rather than an economic one, Thoma said: Is health care a commodity or a right?

If the country decides that health care is no different from any other good, Congress could choose to give the health insurance industry more latitude in determining who receives coverage. However, if health care is seen as a right, that could impose a moral obligation on lawmakers to ensure that those who can afford it help pay for those who cannot.

In such a system, Thoma said, the government—not private insurers—would be a logical authority to oversee coverage.

THE ACA AND BEYOND: Regardless of whether the Affordable Care Act continues or is eventually replaced by a Republican alternative, Thoma said the underlying principle is the same. For government-run health insurance markets to work, people must be required to participate. If healthier people don’t have to buy insurance, Thoma said, everyone is in trouble.

Health care isn’t like other goods and services. The costs to individuals can be astronomical, arising without warning—costs to treat a serious illness or an injury. Most people can’t save enough to prepare for these expenses or afford them when they happen.

The solution is to pool money in an insurance fund—everyone pays and that money covers major expenses for the unfortunate. The snag, Thoma said, is the cost, or premium, to join. It’s an average of the expected costs for both healthy and unhealthy members, so it’s automatically a bad deal for the healthy—it’s more than their expected costs, so why not skip the expense and gamble on not getting sick or injured?

To avoid this scenario, the ACA forces people to buy health insurance by charging those who would otherwise go without. But it doesn’t charge enough, Thoma said—too many healthy people still leave the pool.

Without a mandate that everyone buy health insurance, or a steep penalty for going without, the downward spiral begins: As those in good health leave the pool, premiums rise among those remaining, more people leave and eventually only those with high health-care costs remain, facing premiums that they can’t pay.

That’s bad for everybody, Thoma said, because we’ll all end up paying more for health care. Those who can’t pay for insurance will get care in emergency rooms or through other costly means, and insurers will cover those costs by raising everyone’s premiums.

SWITCH TO SINGLE-PAYER? An alternative to people buying (or not buying) health care is the “single payer” approach—residents pay taxes to the state and it becomes the single payer, providing health care or contracting for it with private organizations. This approach could become popular, Thoma said, as more people join Medicare, a single-payer program that provides health insurance for older Americans who have paid for it through a payroll tax.

But regardless of the plan, Thoma said people need help making informed choices about treatment.

Say the issue is cancer—is surgery the answer? What about radiation or chemotherapy? Which hospital? Health insurers must provide guidance. With private insurance, insurers decide what procedures they will cover depending on how high a premium the client is willing to pay. Alternatively, government can regulate health care and determine which procedures are appropriate.

BENDING THE COST CURVE: Be wary of lawmakers arguing that a looming fiscal crisis makes urgent the need for a health care overhaul, Thoma said—rising costs must be slowed but we haven’t arrived at a budgetary crisis.

Rising health care costs drive increases in the national debt. But interest rates for loans remain relatively low and foreign stakeholders continue to buy up our debt—both suggest that the economy is sound and that there is no looming budgetary crisis.

Tim Duy—The Economy

Professor of practice, Department of Economics, and director, Oregon Economic Forum

Interests: macroeconomics, monetary policy, local and regional economics

The US economy grew 1.6 percent in 2016, down from 2.6 percent the year before. Forecasts are for around 2 percent growth for the next 10 years.

Is that too fast? Too slow? Or just right?

Economic growth is the increase in the amount of goods and services produced over time, and it relates directly to the number of jobs available. If growth is too slow, jobs vanish; if it’s too fast, there aren’t enough workers to keep up, and that causes rising prices and inflation.

What’s a president to do?

The Trump administration is acting on several fronts as it manages the economy—but that’s a delicate dance, economist Tim Duy said, and the wrong move can cause the nation to stumble.

Administration officials are weighing increased spending and tax cuts as they debate the proper rate of economic growth. Were Duy privy to that discussion, he’d be counseling caution regarding any major moves.

FIRST, DO NO HARM: Despite job losses in manufacturing, President Trump inherited, overall, a healthy economy, Duy said—low unemployment, solid wage and job growth, rising workforce participation, low inflation and low interest rates.

Stealing a page from the Hippocratic Oath, he said the best policy for the new administration would have been to “do nothing,” for fear of harming economic momentum.

Trump officials have other plans. The president has made tax reform a priority and has proposed broad-based personal tax cuts. Tax cuts that favor the wealthy might temporarily boost the economy, Duy said, but it would be more effective if those tax cuts went to the middle and lower classes.

Infrastructure spending—which Trump has also proposed—helps the economy if it raises productivity. Road projects, for example, can reduce shipping costs, which benefits producers and consumers, Duy said.

But other moves could slow growth, he added—restricting immigration, for example, hurts the labor supply in many sectors.

THE “D” WORDS:  Some people fear that a slowdown in economic growth could cause deficits and debt to grow.

Duy doesn’t share this worry. Annual deficits of $400 billion have pushed US debt to $20 trillion. But economists haven’t identified the amount of debt that is problematic for a country such as the United States, Duy said, which doesn’t truly face the prospect of bankruptcy. As a last resort, he noted, the country can pay off debt by printing more money—although that can trigger inflation.

Duy is more concerned that the administration will trigger excessive economic growth—that is, more than the workforce can accommodate. Because that can cause inflation, officials will likely try to avoid that scenario by raising interest rates, making it more difficult for businesses to borrow money and grow.

WHITHER THE FEDERAL RESERVE: Those officials are with the Federal Reserve—they set US monetary policy, and the makeup of their board is one of the most intriguing questions under the new administration, Duy said.

The Reserve’s job is to maximize employment and keep prices stable, and they do this by adjusting interest rates to keep the economy growing at a steady-but-sustainable rate. The current board would likely raise interest rates in response to a surge in the economy, to keep that growth in check, Duy said.

The operative term is “current”: Given upcoming departures from the Reserve board, Trump could appoint as many as seven members over the next two years, dramatically swinging fiscal policy from controlling growth with high interest rates to more likely freeing it with low ones.

“If you’re worried about the Federal Reserve offsetting your efforts to stimulate the economy,” Duy said, “you stack it with people who favor lower interest rates.”

He favors the appointment of “run-of-the-mill centrists” less likely to tip the economy into recession through extreme swings in interest rates.

Full Article: https://cascade.uoregon.edu/spring2017/features/history-is-watching-us-now-trump-and-the-issues/

June 1, 2017

“Are Acts of Kindness Random?”

Featuring Bill Harbaugh – Spring 2017 Issue of CASCADE


A hypothetical: You’re walking along when you spot a $20 bill on the sidewalk. Do you pocket it? Or give it to the charity on the corner?

Your answer should indicate whether you’re more concerned about others or yourself. But it doesn’t, necessarily. You might lie just to look good: “Charity, of course!” Even if you truly would donate the money, you might do it out of self-interest—say, to appear compassionate. In fact, you might not even know why you’d give up the $20 in that situation.

Given human nature, it’s hard for scientists to get at the truth of a seemingly straightforward question: Is it possible to care wholly and completely for the welfare of others—or is self-interest always involved?

Ulrich Mayr found an answer, by asking a source that doesn’t mislead: the human brain.

The head of the psychology department  (above right) teamed with economics professor Bill Harbaugh and psychology graduate student Jason Hubbard to test whether there is such a thing as “pure altruism”: acts of kindness done not for our own benefit but only for the benefit of others. The tests included MRI imaging that showed—at the neural level—whether subjects’ brain pathways were excited more by charity or self-interest.

The result was a resounding “yes”—some people give solely to help others. Even better, Mayr said, is the possibility that this kindness can be learned.

Q: You could study any number of human behaviors. Why altruism?

Ulrich Mayr: Well, it touches on a very basic question, doesn’t it? Mainly, whether people are good or bad. Scientists have historically tried to answer that question through a more specific one—the willingness of people to share their hard-earned resources with others in need. But that’s a tough nut to crack. People give away money for all sorts of reasons—to get their name on a building or get something in return or just to make people think that they have great character. You can’t get a good answer by simply asking people, “Why do you give?” You have to trust your subjects to tell you the truth, but they don’t always do so, so you’re in a bind there.

Q: Your tests involved real money. Walk us through them.

UM: First, we asked people repeated questions about how much money they wanted to give to charities and how much they wanted to keep. This was actual money paid to them for being in the study, so every dollar they didn’t give away they could take home. We kept a tally of how much money they were willing to give away over the course of the experiment.

Next, we ran them through personality questionnaires—how nice they are to others, how often they give to charity, how much they volunteer, that sort of thing. We wanted a broad understanding of their tendencies to be selfless or altruistic.

Q: Why would someone tell you if they’re actually selfish and greedy?

UM: That’s exactly the problem. Both the personality questionnaire and the giving-away-money exercise are subject to lying—you don’t really know what’s driving people’s responses, altruism or self-interest.

But the brain doesn’t lie. So for the third piece, we placed people in an MRI scanner and honed in on the “reward” areas of the brain that respond whenever something good happens to you—it could be money, good food or sex, for example. On a monitor, they watched transfers of $20 going to charities or to themselves. But they had no control over whether the money went to them or the charity. That’s important. In this situation, all of the non-altruistic motives fall away—you can’t influence anything, so you can’t engage in self-interest.

We observed that for some people, the reward areas respond when money comes to them—no big surprise there. But for some people, it responds more strongly when money goes to the charities. This is a measure of pure altruism—it cannot be easily faked.

Q: Why did you measure altruism three ways? Why not just rely on the brain imaging?

UM: The questionnaires and behavior tests are the traditional ways that we have tried to measure altruism, but we didn’t know whether they were actually getting at that behavior. By adding brain imaging, we found that all three are truly measuring altruism—there was consistency among the scores indicating a person’s level of altruism, across the three methods.

Q: Explain what happened with tests involving “the people in the white lab coats.”

UM: This was an interesting little tidbit. We asked people to make decisions whether to give to charity under two different conditions—one in which their setting was completely private and they knew no one was watching, and one where they were watched by people in a control room in white lab coats. People in the latter condition gave considerably more.

This shows that those self-interest motivations are also there, even in the people who are also very benevolent. But these reactions can be isolated and they don’t
affect the assessment of pure altruism.

Q: What did you find regarding older subjects?

UM: We found that a 60-year-old is about twice as likely to give money away to charity as a 25-year-old.

It’s always been known that older people give quite a bit more money, although psychologists are still trying to figure out why. Our study confirms that older people give more but it’s not because they have more money, or feel more pressure to give, or are more inclined to follow expected social norms. There is a “strengthening” of this general tendency to be benevolent.

Q: Why do you think older people are more charitable?

UM: One possibility is that it’s purely biological—something switches on in the brain that makes us more altruistic. I find that very implausible.

If you assume that’s unlikely, it has to be something that people experience—something about the way that older people construe the world that is different in younger adults. If that is the case then it’s something, in principle, that can be learned.

It’s important to note that the purpose of the reward areas in the brain is not to make us happy—that’s not their evolutionary purpose. Their purpose is to signal to the brain an action that is worth repeating. It’s a learning mechanism—it drives what the brain needs to encode, to memorize, so it can repeat it in the future to get that root sense of reward again.

Q: Do you think it’s possible to teach altruism?

UM: Well, we have shown here that by engaging in altruistic behavior, you get a reward in part of the brain. That should actually strengthen future altruistic behavior. I think it provides a key toward thinking about educational measures that could really drive this reward-related mechanism and strengthen altruistic behavior.

It suggests that it should be possible, maybe through a mild coercion, to get people to actually do good deeds. You could ask your kids to spend a portion of their allowance for a good cause of their choosing, for example. They may experience something they wouldn’t have experienced if you didn’t coerce them, and that’s a way to get that sense of reward. Then, if you’re somewhat lucky, it becomes a self-driving force and you don’t have to coerce them anymore. It becomes a habit.

April 5, 2017

Meet the New Faculty: Mark Colas, Grant McDermott, & Woan Foong Wong

Mark Colas originally hails from San Francisco, California, and is excited to be returning to the West Coast and joining the faculty at the University of Oregon. Mark received his B.A. from UC Davis in 2009 and will be receiving his PhD in Economics from the University of Wisconsin this Spring. Before starting graduate school, Mark spent two and half years living in mainland China, where he studied Mandarin Chinese and conducted research on internal migration in China. Mark is a Labor and Urban Economist whose research interests include migration, sector and occupation choice, and the determinants of inequality.

 

 

Grant McDermott originally hails from the Cape Winelands of South Africa. He attended the University of Cape Town for his Bachelor studies, and graduated with double honours degrees in economics and business science in 2005. He specializes in environmental and natural resource economics. His applied skill set emphasizes econometrics, Bayesian analysis and data science tools. He’s presently employed at the Bren School of Environmental Science and Management, University of California Santa Barbara, and will be joining the Department of Economics at the University of Oregon as an assistant professor later this year.

Woan Foong Wong is an international trade economist who is receiving her graduate degree from the University of Wisconsin-Madison. Her research focuses on trade costs, specifically factors that impede and facilitate trade flow. These include transport costs, trade agreements, and resource misallocation. A Malaysian native, she attended high school in India and subsequently completed dual degrees in Economics and Music Composition at Oberlin College and Conservatory of Music. Prior to graduate school, she worked at the Peterson Institute for International Economics which cemented her interest in trade policy.

 

March 7, 2017

Rise of the Machines

Check out this new article by UO’s Cascade Magazine, highlighting UO Economics graduate Jeremy Garbellano and his analysis of the tools available to experts for predicting recessions.

Rise of the Machines: Using Artificial Intelligence to Predict Recessions- Is is Better than the Classic Methods?

July 5, 2016

States with the Best Economies

Two thousand fifteen was a banner year for the U.S. economy, thanks to a strong dollar, job gains, lower oil prices, increased consumer spending, and general improvements in the housing and business sectors. And the International Labour Organization expects steady growth ahead despite a slowing global economy.But within the U.S., state economies could still be either boom or bust. Illinois, for instance, is currently in a fiscal free fall, with no budget for the second year in a row — putting its schools and social programs in peril — and the highest unemployment rate in the Midwest. Meanwhile, California has blossomed into the seventh largest economy in the world, boasting a GDP of $2.3 trillion, which was comparable to Brazil’s $2.2 trillion, in 2014.

With such wide disparities in growth, WalletHub’s analysts compared the economic performance of the 50 states and the District of Columbia across three key dimensions: Economic Activity, Economic Health and Innovation Potential. Continue reading below for our findings, expert commentary and a full description of our methodology.

Main Findings

Overall Rank State Total Score ‘Economic Activity’ Rank ‘Economic Health’ Rank ‘Innovation Potential’ Rank
1 Utah 71.55 2 2 4
2 Washington 70.68 1 10 3
3 California 67.84 4 12 2
4 Massachusetts 65.58 8 15 1
5 Colorado 60.81 9 7 5
6 Delaware 59.85 5 18 14
7 District of Columbia 59.50 17 1 10
8 New York 58.82 6 27 11
9 Texas 58.74 3 34 20
10 Oregon 57.48 10 9 13
11 New Hampshire 57.30 20 3 6
12 Maryland 56.52 19 8 7
13 North Dakota 55.15 7 13 42
14 Connecticut 54.88 15 33 8
15 Virginia 53.13 18 4 21
16 Arizona 53.10 16 23 17
17 Georgia 52.41 11 29 26
18 North Carolina 51.50 22 22 16
19 Minnesota 51.34 33 6 18
20 Michigan 51.08 26 30 9
21 Vermont 51.00 25 16 19
22 New Jersey 49.20 24 38 12
23 Wyoming 48.92 12 28 48
24 Idaho 48.80 28 19 28
25 Alaska 48.76 27 25 23
26 Florida 48.33 14 37 34
27 South Carolina 47.58 13 41 36
28 Wisconsin 47.09 38 5 30
29 Illinois 46.41 21 40 25
30 Missouri 46.04 40 11 27
31 Pennsylvania 45.05 31 44 24
32 Montana 44.99 41 20 29
33 Tennessee 44.50 32 26 41
34 Iowa 44.19 37 24 38
35 Kansas 44.18 35 31 31
36 Nebraska 43.84 42 21 35
37 Indiana 43.82 36 32 32
38 Nevada 43.78 23 35 43
39 Ohio 42.12 34 43 33
40 South Dakota 41.13 46 14 40
41 Rhode Island 39.91 45 39 22
42 Hawaii 39.35 50 17 39
43 Oklahoma 38.50 39 42 46
44 Alabama 38.00 44 46 37
45 Kentucky 36.62 30 50 45
46 Louisiana 36.28 29 49 49
47 New Mexico 34.52 47 51 15
48 Maine 34.34 48 45 47
49 West Virginia 34.31 43 47 50
50 Arkansas 33.94 49 36 51
51 Mississippi 31.86 51 48 44

 

Artwork 2016 States with the Best Economies v2

Ask the Experts

Nearly a decade since the Great Recession, some states still struggle to rebound. We therefore consulted a panel of economic experts regarding growth strategies that state economies can adopt in order to improve or return to full capacity. Click on the experts’ profiles below to read their bios and responses to the following key questions:

  1. What are the most effective ways for state and local officials to boost their local economies?
  2. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?
  3. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?
  4. What makes a state attractive to potential entrepreneurs?

Back to All Experts

John J. McGlennon

Chair and Professor of Government at the College of William & Mary
John J. McGlennon

What are the most effective ways for state and local officials to boost their local economies?

A lot depends on the state or locality. It’s a good idea for local officials to understand their area’s competitive advantages: geographic location can’t be changed, so recognizing what kind of jobs or industries fit your community is important. For a lot of cities and counties, encouraging expansion and diversification of existing businesses may be a better investment than the elusive pursuit of the magical “clean, high tech industry” that every community seems to seek.

Local officials really need to be careful about understanding the costs and benefits to them: what local tax revenues will they collect directly or indirectly vs. how much will they have to pay in new or improved services? Will a tax break really pay for itself when businesses are much more mobile?

Often, businesses that may be considering relocation are less interested in tax breaks than quality of life and presence of a well-trained/educated workforce.

What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?

Invest in education. Promote entrepreneurship: you are more likely to have success keeping people with attachments to your state than to attract newcomers if you are already losing population. A turnaround has to start with your own folks. But be open to immigration from outside the US.

States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?

If tax breaks are your first weapon, they probably won’t work out so well. They can be an effective deal closer, but if you can’t compete on location, quality of life, educated workforce and other things that should matter, you might not get such a great deal out of companies that can pick up and move or shut down overnight. If you have the attention of a company because of the desirability of your location, you should structure tax breaks which require deeper investment in the state or locality by the business (e.g., tied to hiring of locally trained workers, escalate the break as the company expands its workforce or plant size).

What makes a state attractive to potential entrepreneurs?

Depends on the entrepreneur, but usually, things like quality of life, access to markets, well maintained infrastructure and openness to new ideas.

Back to All Experts

Timothy Duy

Professor of Practice in the Department of Economics and Senior Director of the Oregon Economic Forum at University of Oregon
Timothy Duy

What are the most effective ways for state and local officials to boost their local economies?

Build off of their existing set of assets. In other words, don’t try to build something like a new “cluster” from scratch. Everyone wants a “biotechnology” cluster, but few regions have one and difficulty of building one from scratch means officials will spend vast amounts of time and money on a project that is not likely to succeed.

Instead, identify the clusters of firms already in your region and ask why they are successful. It will likely be some mix of workforce, proximity to customers or raw materials, and area infrastructure. Once you understand your asset base, local officials can work to protect that base and ensure that local firms can grow. And then, officials can begin the process of promoting your region to firms that need that same set of resources you have already developed.

Note that this is never an easy process. Strengthening and expanding the local economy takes a lot of time and effort – and a broad coalition of private and public partners need to buy into the plan to make it effective. Achieving that buy is a critical part of that process.

What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?

Work to promote the amenities those workers desire – schools, housing, recreational opportunities, etc., while at the same time supporting the firms that employ those workers. You are most likely to retain workers if they are both attached to the community and have an opportunity to grow their careers.

States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?

I remain wary of tax breaks. The primary reason a firm moves into your region is because it fundamentally fits with the available resources. Tax incentives are just the icing on top of the cake – firms ask for them because they can, and local officials often oblige, but they are not the reason a firm comes to a region. Also, there are plenty of cases of firms receiving a hug tax credit only to leave a community a few years later, leaving behind a hole in the local economy. Such failures foster community resentment against economic development activity and may limit future opportunities.

That said, I also believe that tax incentives should remain in the developer’s tool kit. This may be particularly important for recruiting firms with high capital to labor ratios – firms that would pay multiples of taxes per worker over that paid by the average firm in the community. In such cases, there may be room to use incentives effectively. It still requires good judgment on the part of development officials to implement effectively.

My preference is to use incentives in such a way that they add to the stock of publicly available infrastructure. For instance, a firm may need access to better sewers or a new highway access to expand. Once these assets are created, other firms, both existing and new, can use them. They become public goods. Another example is that maybe an incoming firm needs a high speed internet cable to succeed. Once that cable is laid, other firms will be able to tap into it.

What makes a state attractive to potential entrepreneurs?

A presence of other entrepreneurs for networking, ease of doing business (permitting, etc.), access to capital (banks, venture capitalists), resources to grow (land, labor, infrastructure). And livability – that can be a driving factor in the decision making process. But even if they come for the lifestyle, they eventually will need those other factors if they want to grow.

Back to All Experts

Henry Sirgo

2016 McLeod Endowed Professor in the Department of Social Sciences at McNeese State University
Henry Sirgo

What are the most effective ways for state and local officials to boost their local economies?

State and local officials must commit resources to education and infrastructure. The Republic of Korea and Finland are about the size of the average U.S. state. These nations have high performing economies. Finland, which consistently ranks at or near the top in educational attainment of its elementary and secondary students, routinely requires that teachers have degrees in the disciplines which they teach. South Korea, which has surged in its economic ranking among the members of the Organization for Economic Co-Operation and Development, has among the world’s best rapid mass transit systems.

What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?

Place an emphasis on elements of the core curriculum when dedicating funds to elementary, secondary, and higher education. Examine detailed documents of the past including the National Defense Education Act of 1958 and the exemplary document produced by the National Commission for Excellence in Education during the tenure of U.S. Secretary of Education, Terrell Bell. Highly skilled workers, when deciding whether to remain in a community consider whether public schools offer Advanced Placement (AP) courses in biology, calculus, economics, foreign languages, political science, and physics.

States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?

Since predictability is paramount when choosing a business location, such efforts usually generate a negative impact on state economies and create a “race to the bottom”.

What makes a state attractive to potential entrepreneurs?

Entrepreneurship is inherently creative. Communities with cultural amenities and other elements which contribute to a high quality of life will attract and retain such individuals and foster civic engagement.

Methodology

In order to identify the best-performing state economies, WalletHub’s analysts compared the 50 states and the District of Columbia across three key areas: 1) Economic Activity, 2) Economic Health and 3) Innovation Potential.

We first identified 23 relevant metrics, which are listed below with their corresponding weights. Each metric was given a value between 0 and 100, wherein 100 represents the most favorable economic conditions for a state and 0 the least.

Finally, we calculated the overall score for each state using the weighted average across all metrics and ranked the states accordingly.

Economic Activity – Total Points: 40

  • GDP Growth: Full Weight (~8.00 Points)
  • Exports per Capita: Full Weight (~8.00 Points)
  • Percentage of Fast-Growing Firms: Full Weight (~8.00 Points)
    Notes: This metric measures the number of firms in each state that are included on the “Technology Fast 500” list (Deloitte report) as a share of total firms in each state.
  • Business-Startup Activity: Full Weight (~8.00 Points)
  • Quality of State Legal System: Full Weight (~8.00 Points)

Economic Health – Total Points: 40

  • Unemployment Rate: Full Weight (~3.64 Points)
  • Nonfarm Payrolls Change: Full Weight (~3.64 Points)
  • Civilian Labor-Force Change: Full Weight (~3.64 Points)
  • Median Annual Household Income: Full Weight (~3.64 Points)
  • State-Government Surplus/Deficit per Capita: Full Weight (~3.64 Points)
  • Unfunded Liability (Public Pension Plans) per Capita: Full Weight (~3.64 Points)
  • Percentage of Population Lacking Health Insurance: Full Weight (~3.64 Points)
  • Percentage of Residents Living Below Poverty Level: Full Weight (~3.64 Points)
  • Foreclosure Rate: Full Weight (~3.64 Points)
  • Immigration of U.S. Knowledge Workers (Average Educational Attainment of Recent Migrants from Abroad): Full Weight (~3.64 Points)
    Notes: The educational attainment of recent immigrants aged 25 and older from abroad (“moved from a different country”) is classified as having either no high school diploma, a high school diploma (or equivalency), some college experience or an associate’s degree, a bachelor’s degree, or a graduate or professional degree. Each degree class was assigned a weight based on the equivalent average years of schooling the U.S. education system would require for the level of educational attainment:

    • 0 for no high school diploma,
    • 12 for high school diploma,
    • 14 for some college experience or an associate’s degree,
    • 16 for a bachelor’s degree, and
    • 18.95 for a graduate or professional degree (the average number of years of schooling of the U.S. population of graduate, professional, and doctorate degree holders)

    The number of recent immigrants in each education class was multiplied by its respective weight then divided by the total number of recent immigrants aged 25 and older for the final score.

  • Migration of U.S. Knowledge Workers (Average Educational Attainment of Recent Migrants from Other U.S. States): Full Weight (~3.64 Points)
    Notes: The educational attainment of recent migrants aged 25 and older from other states within the U.S. (“moved from a different state”) is classified as having either no high school diploma, a high school diploma (or equivalency), some college experience or an associate’s degree, a bachelor’s degree, or a graduate or professional degree. Each degree class was assigned a weight based on the equivalent average years of schooling the U.S. education system would require for the level of educational attainment:

    • 0 for no high school diploma,
    • 12 for high school diploma,
    • 14 for some college experience or an associate’s degree,
    • 16 for a bachelor’s degree, and
    • 18.95 for a graduate or professional degree (the average number of years of schooling of the U.S. population of graduate, professional, and doctorate degree holders)

    The number of recent immigrants in each education class was multiplied by its respective weight then divided by the total number of recent immigrants aged 25 and older for the final score.

Innovation Potential – Total Points: 20

  • Percentage of Jobs in High-Tech Industries: Full Weight (~2.86 Points)
  • Percentage of Jobs Held by Scientists and Engineers: Full Weight (~2.86 Points)
  • Number of Independent-Inventor Patents per 1,000 Working-Age Residents: Full Weight (~2.86 Points)
  • Industry R&D Investment Amount per Total Civilian Employed Population: Full Weight (~2.86 Points)
  • Nonindustry R&D Investment Amount as a Percentage of GDP): Full Weight (~2.86 Points)
  • Venture-Capital Funding per Capita: Full Weight (~2.86 Points)
  • Entrepreneurial Activity: Full Weight (~2.86 Points)

 

Sources: Data used to create these rankings were collected from the U.S. Census Bureau, Bureau of Labor Statistics, U.S. Department of Commerce Bureau of Economic Analysis, Deloitte, U.S. Chamber Institute for Legal Reform, State Budget Solutions, CoreLogic, U.S. Patent and Trademark Office, The National Science Foundation, National Venture Capital Association and Ewing Marion Kauffman Foundation.

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