Tax Reform And The Blue State Model

It was not long before I started this blog in 2012 that Walter Russell Mead of the American Interest began writing about what he dubbed the "blue model" of government, and his prediction that that model was "on the way out."   When applied to the states, the term "blue model" referred to the combination of relatively high taxes, high state spending, and extensive regulation typical of Democrat-leaning states like California, Illinois, New York, New Jersey and Connecticut.  Mead's prediction was that the combination of the information revolution and competition from lower-tax and lower-regulation "red" states would put the blue model under increasing pressure and force reform.

Almost six years later, the "blue" states have only doubled down on their policy model.  None of those states have seen any significant cutbacks on state programs.  During this period California and Connecticut have actually raised their income tax rates on top earners.  In the competition against other states, California appears to be doing relatively well, although its population explosion has slowed substantially.  In New York, Connecticut and New Jersey the population has been almost completely flat in recent years.  Illinois has actually experienced a population decline since 2010, but only a slight one.   Meanwhile, the big "red" states, like Texas and Florida, have grown rapidly.  But the very slow and gradual relative decline of the big blue states so far has not created any significant motivation to do anything different. 

Could that be about to change?  As of January 1, the state and local income tax deduction will mostly be gone.  Suddenly there will be a significant shift in the competitiveness between the high-tax "blue states" and the lower-tax "red states."  Will this lead to any serious rethinking of the "blue state model"?

I'm betting against it.  The basic nature of the blue state model is to put in place various government handouts and favors to specified groups, who thereupon become dependent on the handouts and favors and will fight to the death to keep them as is.  Given the overall disinterest of most of the electorate, the recipients of the handouts and favors come to exercise effective control over the political process.  

Consider a couple of examples.  Generous pensions for state and local government workers are a hallmark of the blue state model.  Not that the red states are pure on this issue.  But if you look at lists of states ranked by amount of aggregate unfunded pension debt, or by amount of unfunded pension debt per capita, or by percentage of pension obligations that are unfunded, the big blue states consistently appear at or near the bottom of the list.  A December 2017 Report just out from the American Legislative Exchange Council contains rankings of the states on all of those measures.  In funding percentage at the risk-free rate, Connecticut ranks dead last among the states at 19.7%; Illinois 48th at 23.3%; and New Jersey 46th at 25.7%.  California and New York do better on that measure, but they are kingpins of aggregate unfunded pension debt:  50th place and $987 billion in the case of California (hey, it's less than a trillion!); and New York at 46th place and $345 billion.  (To its credit, New York has been relatively honest in funding the pension obligations it has taken on.  However, it has taken on ridiculously generous obligations, particularly as they concern early retirement ages for workers in many areas.  The result is that pension contributions constitute a high and ever-increasing percentage of government budgets at both state and local levels.)

Are the blue states going to do anything soon to right their pension ships?  New York and Illinois have provisions in their state constitutions that make revisions of pension accruals for existing employees difficult or impossible.  (See my discussion of that issue here.)  In California, there is no comparable constitutional provision, but the courts have imposed a rule of law that may amount to the same thing as a practical matter.  Former San Jose Mayor Chuck Reed has led an effort to enact a ballot initiative that would overrule the court-made restrictions; but after getting off to a slow start, that initiative was pulled in 2016, and its backers are talking about another try in 2018.  They will face major opposition from the public employee unions.

As a second example, consider obligations that blue states have taken on in union contracts.  Again, the red states are far from pure; but generosity to public employee unions is one of the hallmarks of the blue model.  Some insights into the nature of the problem can be found in a big New York Times spread today in the New York section, headline "What Would It Take To Fix New York Subway?"    The impetus for the article is that a recent series of things like derailments and fires has brought calls for an emergency program to "fix" the subways.  Mayor de Blasio, of course, has called for a new "millionaire's tax" to raise the funds.  (Funny how he seems to have the exact same idea for how to "fix" every problem we encounter.)  So, can we free up some money to "fix" things by bringing down the costs of operating the subway through automating the function of running the trains?  They are well on the way to doing that in London and Paris:

London is upgrading its fleet to become automated in the mid-2020s.  In Paris, driverless trains are in operation on two lines.

So how about in New York?

In New York, the L train [one of some 26 lines] is the only line where the new traffic control system has been fully implemented and where trains could, in theory, be automated.  But after a brief experiment using only one train operator in 2005, the M.T.A. had to bring back two-person crews to the L after losing a labor dispute.

Yes, we have at least some trains fully equipped for automated operation, but we use not one person, but two to run them.  The union insists!  Oh, and our costs of building new extensions of the subway system run five to ten times international norms.  So, sorry, no money is available for the emergency "fix."

Basically, what the "blue model" comes down to is spending far more money to get the same or worse results.  We spend far more than national norms on healthcare, for no better health outcomes; and far more (more than double) national norms per student on K-12 education for no better outcomes.  But the costs are all locked in place and nearly impossible to control or reduce.

So what will be the result of the tax reform?  My prediction:  the process of relative decline will be somewhat accelerated -- from very, very slow, to merely very slow.  Likely, new "millionaire's taxes," like the one de Blasio has been proposing, will go off the table.  But don't look for any immediate declines in the existing tax structure, unless there are a large number of departures of the wealthy suddenly announced.

UPDATE, December 27:  Turns out that the Daily Caller had a post yesterday on the amount of outmigration from the big blue states, headline "Nearly 450,000 People Fled These Three Deep Blue States In 2017."  The three states in question are California, Illinois and New York.  The post is sourced from Census data that came out on December 20.  Key quote:

Three Democratic-leaning states hemorrhaged hundreds of thousands of people in 2016 and 2017 as crime, high taxes and, in some cases, crummy weather had residents seeking greener pastures elsewhere.  The exodus of residents was most pronounced in New York, which saw about 190,000 people leave the state between July 1, 2016 and July 1, 2017, according to U.S. Census Bureau data released last week.

The outmigration from California was 138,000, and from Illinois 115,000.  In the case of California and New York, they were able to replace the departures with immigrants from abroad.     

"The Rich" Figure Out That The Tax Bill Is Not A Big Giveaway To Them

The famous Central Newsroom of Progressive Groupthink, located beneath Times Square, has been hard at work the past few months coming up with the official party line and talking point to deal with the tax bill making its way through the Republican-controlled Congress.  And, if you have been even close to awake during this time, you know what the officially-issued line and talking point is: This is a "massive giveaway to the rich."

You know that that is the officially-issued line and talking point because you can find it in literally every progressive or mainstream source that discusses the subject.  Examples:

• Washington Post, October 3: "The Trump tax cuts would be the most insane giveaway to the rich ever."  Yes, minor variations from the official talking points are allowed, such as the substitution of "insane giveaway to the rich" for "massive giveaway to the rich."
• Huffington Post, December 2:  "Senate Passes Massive Tax Cuts For The Rich In Middle Of The Night."
• New York Times, November 27:  "Senators Scramble to Advance Tax Bill That Increasingly Rewards Wealthy."
• The Hill, November 29:  "The current Republican tax bill would mostly benefit billionaires and millionaires like Trump, as well as wealthy corporations, all on the backs of middle-class and working-class Americans."     

But the question is, has anyone done any real analysis here?  Or is this just a line that sounds good to stoke up some resentment among the ignorant and thus help the progressives gain and hold onto political power?

It sure looks like the latter to me.  Consider the world of high-earning professionals from which I come.  These people are the archetypes of "the rich" in the usual caricature.  Suppose you are such a professional in Manhattan in the seriously "rich" category, earning $2 million per year.  You are currently paying around $700,000 per year in federal income tax.  Under the Senate bill, your marginal tax rate will go down from 39.6% to 38.5%.  Under the house bill, your marginal tax rate does not go down at all.  The marginal rate change will thus save you either about $20,000 per year, or nothing, depending on which version prevails.  You are currently paying in excess of $200,000 per year in New York State and City income tax.  Loss of that deduction will cost you about $80,000 per year.  If you own a house or apartment, it won't be a cheap one, and you likely pay around $50,000 or more in property tax.  Loss of that deduction (above a $10,000 cap) will cost you around another $15,000 or more per year.  Net, this is going to cost you $100,000 or more per year on your income tax bill.  The value of your home could also suffer some serious negative impact from the loss of the interest and income and property tax deductions.  

How again is this a "giveaway to the rich"?

I acknowledge that there are many other moving pieces in these tax bills, and there are certainly a good number of affluent people who will benefit, particularly in the category of business owners.  But people who just earn high amounts of ordinary income -- which includes not just professionals, but also most corporate executives -- look to be almost entirely big losers.  There could be a handful of such who live in no-income-tax states and rent their homes who could show a small gain.

So over at the New York Times, after parroting the official talking point for several weeks, they suddenly decided yesterday to take a look at how the House and Senate bills would affect the affluent people living in their own locality, and now they discover that it's the opposite of what they have been saying.  The headline is "How New Yorkers Would Lose Under the Republican Tax Bill."  By the way, it's not just any New Yorkers who would lose; it's predominantly the high income New Yorkers.

The article leads off with this picture of a row of townhouses on the Upper West Side of Manhattan:

Their caption is "Brownstones on the Upper West Side of Manhattan. New York’s homeowners could suffer disproportionately from changes in deductions for state and local taxes."  Does it bring a tear to your eye?  For those unfamiliar with our Manhattan real estate market, the houses pictured have market values in the range of $5 - 10 million (and in some cases even more), depending on condition and whether they are burdened with rent-regulated tenants.  You really have to feel for their owners' "suffering."

So what is the real impact here?

The tax plan would probably cut taxes for most New Yorkers, at least in the short term. But it has several provisions that local leaders said could pose long-term problems for New York and other urban areas. Mayor Bill de Blasio, in an interview on Monday, estimated that 700,000 New Yorkers would pay more in taxes in the near term.

De Blasio doesn't say who those 700,000 are, but the obvious inference is that they are the higher-income part of the population, who are losing the deductions for state and local income and property taxes and mortgage interest.  Could this be a backhanded acknowledgement that the lower and middle income mostly gain and the upper income mostly lose?  

And wait!  I thought that higher taxes on "the rich" were a good thing!  Actually, we now find out that higher taxes on "the rich" are only a good thing if we get the money, and they are a terrible thing if you get the money:

“The human impact is huge,” Mr. de Blasio said, referring both to the higher taxes some residents would pay and to the services that could be cut as a result of the tax plan. He said his administration had tried for four years to make one of the world’s most expensive cities more affordable by providing public prekindergarten and paid sick leave. “And then along comes the federal government and makes the situation worse,” he said.

All I can say is, it's time for the people in the Central Newsroom beneath Times Square to work some overtime to come up with the new official party line and talking points.

Connecticut In The Grip Of The School Funding Fallacy

In the realm of the thoroughly disproved fallacies of progressivism, perhaps the very most thoroughly disproved of all is the idea that throwing more taxpayer money at failing unionized schools will improve the education of the students in those schools.  Just a couple of weeks ago, in a post titled "How Do You Measure 'Success' In K-12 Education?" I covered the latest of umpteen such failed efforts in the federal government (the $7 billion School Improvement Grants program), and here in New York City, (Mayor de Blasio's "Renewal Schools" program).   After multiple years and vast amounts of money, neither of those programs could demonstrate any positive impact of any kind in any metric selected, from test performance to graduation rates to college enrollment.

This is just one of those things where no amount of actual evidence can ever convince people that it's not working. Today, the state of Connecticut is about to head down the same path yet again.  The chance that Connecticut's new initiative will work is exactly zero.

Recall first the big news in Connecticut last September: In long-running (commenced in 2005) school finance litigation instituted by Yale Law School faculty, a judge in Hartford issued a 90 page decision declaring Connecticut's school finance system to be "irrational" and "defaulting on [the state's] constitutional duty" to provide all students with an adequate education.  I covered that decision here.  The court's decision did not set any specific remedies, and seems to contemplate a lifetime job for the judge in overseeing and meddling in the state's school finance system.  The court's decision is currently on appeal and temporarily stayed.

However, on Wednesday Connecticut Governor Dannel Malloy made a budget presentation in Hartford.  According to coverage in the New York Times yesterday, Malloy said that he "broadly . . . agreed with the [court's] decision," and that "it would be better for the state to 'design and take our own medicine' rather than leave it to the courts."  OK, Gov, what's the big concept for fixing things?  You guessed it!  Throw more taxpayer money at failing unionized schools.

In the Times, their headline tells you all you need to know about their take on the story, which will not surprise you:  "Malloy Moves to Narrow gap Between Connecticut's Rich and Poor School Districts."   What exactly is the "gap" they are talking about?  Nothing in this article will tell you.  Do you get the impression that the state of Connecticut is granting more money to rich school districts than to the poor ones.  Undoubtedly, it is the intent of the headline writer, and of the article's author, to give you that impression.  But of course, that impression would be completely false; indeed, it would be the complete opposite of the truth.

Fortunately for us, Connecticut puts out some pretty thorough data on its public school funding.  Here is a chart with per student funding by district for each of Connecticut's districts for the 2015-16 year; and here is a chart of source of revenue by category (state, local, federal) for each of Connecticut's districts for the 2014-15 school year.  Put the two together, and you can get a pretty good idea of what if any "gap" might exist between the "rich" and "poor" districts.

For example, with a little arithmetic, we learn that, as of the most recent year available (2014-15), among Connecticut's "poor" urban districts, Hartford got about $14,900 per student from the state; New Haven about $12,500; and Waterbury about $9700.  Among its "rich" suburban districts, Greenwich got just over $1000 per student; Darien got about $950; New Canaan got under $600; and Fairfield got a big $535.  Gap?  Now, you may think that it is perfectly appropriate for Connecticut to give most to all of its state funding to its poorer districts, while leaving the richer districts mostly on their own.  But really, to call this a "gap" in favor of the richer districts couldn't be more ridiculous.

But maybe, you think, the "gap" they are talking about must be the gap that exists between the rich and poor districts after the rich districts top up their school spending with the vast local resources.  If so, you will be surprised to learn that total school spending per student in Connecticut does not not vary much as between the richest and poorest districts, and there is no obvious pattern that richer districts always spend more.  Some of the poorest districts spend at or near the top, and some of the richest districts spend less than some of the poorer ones.  Using the same six towns as before, total per student spending, this time for the 2015-16 year, was: Hartford $19,313; New Haven $18,248; Waterbury $15,219; Greenwich $21,331; Darien $19,318 (about the same as Hartford); New Canaan $19,576; and Fairfield $16,561 (well less than Hartford or New Haven). 

But as always, the only solution they seem to be able to come up with to fix the failing city schools is more taxpayer money.  From the Times:

Increases of around $10 million or more would go to 11 municipalities. Hartford would get the largest increase, more than $47 million, followed by Waterbury, which would receive a $43 million increase. Both cities have a substantial number of poor families. 

That $47 million increase for Hartford will (if it goes through) represent about a 14% increase in its annual state school funding.  For Waterbury, a smaller city currently receiving substantially less, the $43 million would represent almost a 25% increase.

But if more money translated into better and more successful schools, then why is it that Hartford, already spending $19,313 per student, isn't achieving about the same results as Darien and New Canaan, and well better than Fairfield?  Don't expect the Times to enlighten you on such questions.

Meanwhile, classic "blue" jurisdiction Connecticut is facing approximately its 30th annual budget "crisis."  The additional money for these poor urban school districts will have to come from somewhere -- either from the (already meager) grants to the richer districts, or from other state spending, or from increased taxes.  Any of these options will make Connecticut even less competitive in attracting new businesses and entrepreneurs, and in keeping its wealthy citizens from leaving for more attractive states.  Given that it is absolutely certain that the additional money will not improve the schools, would Connecticut's poor be better off instead with a better business climate that might attract more businesses and jobs?  Nobody in Connecticut thinks to ask such questions. 

How Does The High Income Tax Strategy Play Out?

At Forbes Magazine a guy named Rex Sinquefield writes from time to time about the counterproductive tax strategies followed in recent years by the state of Connecticut.  A friend in that state sent me a link to Mr. Sinquefield's latest contribution, from May 23.  The article is titled "25 Years, $13 Billion Lost: Connecticut Income Tax Continues To Fail."  

I previously linked here to a post about a year ago by Mr. Sinquefield that focused on the big round of individual and corporate tax increases enacted by Connecticut in 2015.  Those increases included a permanent extension of a 20% corporate income tax surcharge, which led several large corporations with headquarters in Connecticut to threaten to leave.  Subsequently, in January 2016, the very largest Connecticut-headquartered company, General Electric, followed through and announced it will move its headquarters to Boston.  (Wow!  You really know that you've reached the top of the tax pyramid when companies leave your state to save taxes by going to Massachusetts!)  The 2015 increases also got Connecticut's top personal income tax rate up to 6.9% (on income above $250,000), which puts the top Connecticut rate above New York (outside NYC) for incomes under $1,070,350, and above New Jersey for incomes between $200,000 and $500,000.

Somehow the people of Connecticut failed to notice that they got rich precisely by being a haven of low taxes.  Prior to 1992 Connecticut had no income tax at all.  High income people flooded into the state, but not into the whole state.  Overwhelmingly the wealth was concentrated in that tiny panhandle that sticks out in the southwest corner of the state, toward New York City.  The panhandle contains four towns -- Greenwich, Stamford, Darien and New Canaan -- sometimes known as Connecticut's "gold coast."   To anyone who looked, it was obvious that the business model of those towns in their heyday was for their citizens to be able to deal with the New York business community without having to pay New York taxes.  Anyway, that was then.  Today, Connecticut has frittered away essentially all of its former tax advantage over New York and New Jersey, and is well above Massachusetts in overall tax burden.  The office building boom in downtown Stamford gradually came to a halt.

And what has happened to the location decisions of wealthy individuals?  That brings us to Mr. Sinquefield's latest article, where he focuses on data available from the IRS, and compiled by the Yankee Institute in Hartford, that reveal net migration of income earners between any two paired states.  The results should not surprise anyone:

Between 1992 and 2014 (the most recent year for which Internal Revenue Service taxpayer data is available), Connecticut lost $12.36 billion in net adjusted gross income (AGI). Perhaps not surprisingly, the bulk of this outwardly migrating AGI went to states that do not punish work by levying an income tax. The state of Florida won the lion’s share of Connecticut’s fleeing AGI, with $7.96 billion leaving the Nutmeg State for the Sunshine State.  

Florida, of course, has no income tax at all.  The $12.36 billion, by the way, is an annual amount, meaning that, on net, individuals who have migrated out of Connecticut since 1992 have annual income $12.36 billion higher than the annual incomes of those who have migrated in.  Moreover, the number has grown every year, and has accelerated in recent years.  For example, from 2006 to 2011 the figure crept up from about $6 billion to $7 billion; but then there was a prior big round of tax increases in 2011, and the figure shot up to about $9 billion in 2012 and $11 billion in 2013.  In a process that has now continued over 25 years, the income tax has transformed Connecticut's economy from tax-haven boom to high-tax stasis.

The funny thing is, somehow the income tax and its big gusher of state revenue has not solved Connecticut's problem of persistent annual budget crises.  The income tax -- initially a flat 1.5% -- was sold as the ultimate one-time fix that would end Connecticut's budget problems for all time.  Today, with the rate more than four times higher, the budget problems are the same.  All the money just disappeared down the maw of endemic overspending and seemingly far-off pension promises for public employees.  

Are there any lessons to be learned here for other states?  You might think so, but consider this article from James Nash of Bloomberg News on Monday, titled "States Eye Wallets Of Richest Residents With Income Tax Measures."   Nash discusses potential measures for the November ballot seeking to raise income taxes on high earners (or retain special high-earner tax rates otherwise scheduled to expire) in states including California, Colorado, Maine, Massachusetts and Minnesota.  Several of these are being sold as supposedly a special revenue stream to pay for a particular need.  For example, the Minnesota ballot initiative will supposedly provide money to "care for senior citizens and people with disabilities"; a Los Angeles County initiative will supposedly raise money to provide for "homeless services."

Nash quotes a guy named Morris Pearl, of something called Patriotic Millionaires, who believes that higher taxes on the wealthy few should be enacted because they are broadly popular:

"There is more action in the states because the federal government, particularly the Republicans in the House of Representatives, don’t really care what the people think," said Morris Pearl, a 56-year-old former managing director at Wall Street investment firm BlackRock Inc. who now heads the Patriotic Millionaires, a coalition of wealthy Americans advocating higher taxes on the rich. "In a lot of states, people are realizing that the wealthy are taking advantage of the system."   

Well, I can't say I'm surprised that a lot of people are in favor of higher taxes as long as they are to be paid by someone else.  But be careful what you wish for.  Remember that here in highest-in-the-nation tax-and-spend Manhattan we supposedly pay our highest-in-the-nation taxes to provide for a progressive utopia, but what we seem to have instead is highest-in-the-nation income inequality, well-above-average poverty rate, and schools that cost about double per student the national average for bottom-of-the-barrel results.  For that we put this huge drag on our economic performance?

Crony Capitalism Not Working Out Too Well For Upstate New York

On Saturday the New York Times, deep in its interior (page A21), had a report on the economy of upstate New York titled "Governor Struggles to Preserve Jobs and Economic Momentum Upstate."  I like the term "economic momentum" in relation to upstate New York.  As far as I know, all the economic momentum there is negative, and preserving that kind of momentum is the last thing anyone would want to do -- I think.  Another theory is that upstate New York leans Republican in its politics, and Governor Cuomo and his Democratic allies are intentionally shrinking it because they would like nothing more than to have it disappear.  You be the judge!

Upstate New York is a world center of crony capitalism, by which I mean every sort of government grant, tax break, incentive, and handout to big employers to induce them to come and bring "jobs."  The Times article goes through a litany of various of these giveaways.  Examples:

Mr. Cuomo has been aggressive about promoting business in the state, cutting or capping a variety of taxes and doling out state money, including $1.5 billion in stimulus through a regional development competition promised this year. He says such plans are necessary to reverse what he calls the “negative synergy” of job and population losses.  To that end, the state has awarded nearly $3 billion through its Regional Economic Development Councils over the past four years, nearly $2.4 billion of it upstate, to create or retain some 150,000 jobs, according to the Empire State Development Corporation, the state’s economic development agency. New York has also offered billions in other incentives dating back to previous governors’ terms.        

They hand out billions and billions, and all they have to show for it are ongoing "job and population losses."  Somehow, nobody ever realizes that in the world of handouts and tax giveaways, the politically disfavored who don't get the handouts and breaks end up bearing disproportionately high taxes, and over time they give up and close down.  Overall, the results of the game are negative.  Lots of that is reported in the Times article:

On Monday morning, the Entergy Corporation said that it would close a nuclear plant on Lake Ontario, eliminating more than 600 jobs north of Syracuse. Hours later, Alcoa said it would soon idle or close two smelting plants in Massena, on the St. Lawrence River, leaving nearly 500 people out of work. The same day, the state posted a formal notice that Sentry Safe, a safe-building company in Rochester, would close a factory with some 300 jobs next summer.      

And there are plenty of more examples.  Then there are the brilliant efforts of our political saviors to swoop in at the last minute with big government handouts to "save" some jobs:

[O]n Wednesday, . . . Mr. Cuomo and Senator Chuck Schumer, a Democrat, announced a deal with Kraft Heinz, committing up to $25 million in state funds for upgrading several of the company’s upstate plants, which make products such as mozzarella and Cool Whip, in exchange for the company’s maintaining nearly 1,000 jobs for five years.     

Without a doubt, Kraft Heinz will shortly be back for another handout, and then another, to "save" the jobs again and then yet again.

There is nothing new about this.  In upstate New York they've been trying to lift themselves up by the magic of crony capitalism for as long as I've been alive.  Check out this article from Forbes in 2000 titled "Willis Carrier's Ghost."  Willis Carrier is the Carrier of Carrier Air Conditioning, a large employer originally attracted to the Syracuse area by government handouts.  According to Wikipedia here, at its peak Carrier employed over 7000 in the Syracuse area, but now the total is more like 1000.  "Over the course of 2011 the majority of [Carrier's] manufacturing buildings of the Syracuse campus were demolished at a cost of nearly 14 million dollars."

But Carrier is only the tip of the iceberg in Syracuse's dabblings in crony capitalism.  From Forbes:

By the estimate [in 2000] of Vito Sciscioli, the city’s longtime development director, some $2 billion has been shelled out in Syracuse over the past five years in government grants, tax abatements, benefits from tax-exempt financing, infrastructure improvements and utility breaks. This is a staggering sum for a city that now has only 152,000 people in it.      

The population of 152,000 was in 2000.  By 2014 it was more like 144,000.  I guess the $2 billion didn't work out too well.  Too bad for the suckers who stuck around but didn't get the handouts!

But Cuomo and his allies have no ideas for upstate other than more of the same crony capitalism that has driven the place into the ground for decades.  Another billion dollars for Buffalo!  Four new casinos!  And of course, the one business that was ready to come in and start work right away without government handouts or help of any kind -- "fracking" for natural gas -- has been banned.  With gas prices now way down, it's probably too late for that, now, at least for several years. 

Are "Trade Deals" Really The Problem In Galesburg, Illinois?

I don't mean to be overly bashing the New York Times lately -- there are plenty of other media outlets that are just as bad -- but sometimes it's unavoidable.  Yesterday they had a big front-page article titled "Town's Decline Illustrates Peril Of Trade Deals," by Binyamin Appelbaum.  The article is about Galesburg, Illinois, its long decline, and the causes of that decline.  Or I should say "cause" (singular), because exactly one cause is discussed, namely "increased foreign trade."  Does that really explain anything at all about what is going on here?

Now there is no doubt that Galesburg has declined.  Wikipedia here helpfully collects decennial census data, showing that Galesburg reached a peak population of 37,243 in the 1960 census, and was down to 32,195 by 2010.  Much discussion in the Times article concerns a large Maytag factory in Galesburg that closed in 2004, when a large part of its production moved to Mexico:

In 2004, Maytag shut down the refrigerator factory that for decades was Galesburg’s largest employer and moved much of the work to Mexico. Barack Obama, then running to represent Illinois in the Senate, described the workers as victims of globalization in his famous speech that year at the Democratic National Convention.  A decade later, many of those workers are still struggling. The city’s population is in decline, and the median household income fell 27 percent between 1999 and 2013, adjusting for inflation.

Permit me to point out a couple of problems with the thesis that Galesburg's woes have been caused by "trade deals" and "globalization."

• Which "trade deal" are you blaming for Maytag moving these jobs to Mexico?  NAFTA?  That was 10 years earlier in 1994.
• Even if the closing of this factory could be directly attributed to some "trade deal," or to "globalization" more generally, the problem is that lots and lots of places have lost lots of manufacturing jobs without declining overall.  Exhibit A of course is New York City.  Here in New York we had over 1 million manufacturing jobs in the 1950s.  Today there are about 75,000.  But the total number of jobs is up significantly, recently setting all-time records of around 3.6 million.    So all of the manufacturing jobs and then some have been replaced by other jobs, and in fact much better jobs, mostly much cleaner and cushier white collar and office jobs.  I'm certainly not meaning to hold up New York City as a model of a good business climate to attract jobs.  But New York City is definitely a complete disproof of the thesis that loss of manufacturing jobs to foreign competition dooms a city to economic decline.  Los Angeles would be another such example if any were needed.

Let's face it, trade deals or no, globalization or no, every factory sooner or later is going to close.  Even if the Chinese can't make the stuff cheaper, eventually someone will come up with a better product, or a cheaper way of making the same product, or the equipment in this factory will wear out, or this company will hire incompetent managers who run the place into the ground, or something else.  No town can maintain itself over the long pull by just hoping to hang on to the exact same set of factories forever.  To maintain yourself and grow, it is essential to attract new businesses.  And that requires one very simple thing, which is a good business climate.

Does Illinois have that?  No.  What are the problems?  There's nothing very complicated about this:

• Overall state/local tax burden.  The most recent (2011) Tax Foundation data put Illinois at #13 out of 50 states, which is bad but not disastrous.  (Numbers 1 through 4 are NY, NJ, CT and CA respectively).  But perhaps more relevant to Illinois's situation is that almost all the states around it are lower, including Ohio (#18), Michigan (#21), Indiana (#22), Kentucky (#23), Iowa (#29) and Missouri (#33).  The only neighboring state ranked higher is Wisconsin (#5), and there they have been cutting taxes aggressively under Republican leadership of recent vintage.
• Pension burden.  By this time almost everybody knows that Illinois has the worst unfunded pension problems of all 50 states.  And just last week the Illinois Supreme Court basically declared unconstitutional any effort to fix the problem short of massive tax increases or firing all state employees en masse.
• Illinois is not a right to work state.  Neighboring Michigan, Indiana, Iowa and Wisconsin are right to work states.

So if you have an idea for a new factory and money to build it, are you going to invest it in Galesburg, Illinois, where you will be a sitting duck for high current taxes, big coming tax increases and predatory unions?  When you could just as easily go to any of those neighboring states and avoid all those problems?

Sorry, New York Times, but "trade deals" and "increased international trade" have next to nothing to do with the woes of Galesburg, Illinois.