Monthly Archives: October 2012

Voting with Your Wallet II: Education, Liberalism, and Unemployment

Last time I talked about an apparent positive relationship between state unemployment rates and state support for President Obama in political polls. This despite the conventional wisdom that Americans vote with their wallets. That would suggest that states with higher unemployment rates should be less likely to support an incumbent President.

I have to be honest. I started this thinking that the positive relationship was just a fluke. That it was really just a sort of anomaly that would go away if I included the right other variables. So I did what any good data analyst would do in the situation. I played with my data. That is to say, I added other variables, tried this and that, checked correlations here, ran regressions there.

And it didn’t turn out the way I expected.

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Again, my Economical Oath requires me to point out in advance that there are assorted technical issues with approaching this problem this way. But that doesn’t mean we can’t learn some interesting things from it. Virtually every economic analysis has technical problems with it; it’s mostly a matter of degree.

“Regression” is an intimidating term to many people. It sounds all complicated and statistical. All it really means is trying to find out how a some numbers affect other numbers. Practically speaking, it’s just using a computer to do calculations – you can even do it in Excel.

In addition to correlations, I used simple regression analysis to look at the relationships here. In the end, you come out with an equation that represents the relationships, along with numbers that tell you how good the relationships are, statistically-speaking.

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Bbefore I tell you about the relationships that I found, let me first tell you about the variables that didn’t work.

First, the percentage of the states’ populations that are black. Virtually no relationship to speak of – a correlation of -0.002. Likewise percentage Latino had a correlation of 0.18, but this went away after taking account of other factors.

Percentage urban versus rural, percentage with a Bachelor’s degree, population, population density, even acres of farmland – all of these have some correlation with support for Obama, but all of these apparent relationships proved small or insignificant when other variables were included.

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Including the state median family income looked really good at first. And in fact it made the state unemployment rate look even more important, statistically. A $1000 increase in a state’s median family income  was associated with a 0.5 percent increase in support for Obama.

But it turns out that family income was just capturing something else: the effects of advanced college degrees. States with a larger percentage of people with masters and doctor’s degrees have higher family incomes. And it’s those advanced degrees that really are associated with more support for Obama.

Education really does make you liberal. Or, properly speaking, appears to make you more likely to support the more liberal candidate. In this case, anyhow.

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So shut up and cut to the chase. What’s the bottom line?

After looking at more than a dozen different variables, here’s the equation that turned out to explain the most differences in state support for Obama in the best statistical way:

By “religiosity”, I mean the percentage of the state population who say that religion is very important in their lives. I used state data from 2007 Pew Research survey for this. My thinking was that many people base their political views on their religious faith, and that this might explain some of the differences in support for Obama.

And it does. For every 5 percent increase in state religiosity, support for Obama decreases by 1 percent, and that relationship is statistically significant. In other words it isn’t just be caused by random factors.

For the curious, the R-squared for this equation was 0.54, meaning these variables explain 54 percent of the differences in state support for Obama — not too shabby for a back-of-the-cocktail-napkin analysis. All three variables were significant at the 0.05 level.

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In the end, including percentage with advanced degrees and religiosity in the equation made the relationship between state unemployment rate and support for Obama look even better than it did without them. In fact, no matter what variables I included, there still was a positive relationship between unemployment and Obama support.

So the relationship that I didn’t think existed, the one that I thought would go away if I included the right variables, turns out to be pretty solid. Higher unemployment rates do seem to be associated with more support for President Obama.

Maybe Americans do vote with the wallets, only not the way you might think.

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Do Americans Vote With Their Wallets? State Unemployment Rates and Support for the Incumbent

Americans vote with their wallets, or at least that’s the conventional wisdom. Economic issues are supposed to be of primary concern to American voters. Or, as Bill Clinton’s presidential campaign famously put it in 1992, “It’s the Economy, Stupid.”

I avoid politics here – it’s not that kind of blog – but sometimes it’s impossible to separate economy from political economy, particularly in an election year. So I decided to take a look at this piece of conventional wisdom. In a non-partisan sort of way.

If the economy really is key to American voters, then one might expect that – all else being equal – states with high unemployment rates should be less likely to support the incumbent (Obama), and states with low unemployment rates should be more like to support him.

Put another way, there should be a negative correlation between support for the incumbent and state unemployment rate. A graph of states with support for Obama on one axis and state unemployment rate on the other should tend to slope downward.

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The economists’ union requires that I preface this with caveats: There are various technical issues with analyzing aggregate data this way, and this is not intended to be a scientific study. That said, back-of-the-cocktail-napkin analyses can still be interesting and enlightening.

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Correlations are measures of how much two sets of numbers tend to move in the same or opposite directions. A correlation of 0 means there’s no relationship, close to -1 means the two move in opposite directions, and close to 1 means there’s a strong positive relationship. In this case, we’re expecting a negative number.

The correlation between state support for Obama and state unemployment rate actually turns out to be positive 0.27. This means that – all else being equal – the higher the unemployment rate in a given state, the higher the support for President Obama. The opposite of what we’d expect, if economic issues are driving voter preferences.

(Note: I used FiveThirtyEight’s unadjusted average poll numbers by state, simply because they were available in an easy-to-use format. The numbers were as of 3:00 pm on 28 October. The unemployment rates are those for September 2012, from the Bureau of Labor Statistics, bls.gov.)

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Correlations are rather unexciting to many people. After all, they’re just numbers. A mentor of mine used to recommend an alternative technique that he called, “Look at your data”. So here’s a – yes, I am an economist – graph of state preference for Obama versus state unemployment rate.

As suggested by the positive correlation, the data points do tend to slope upward. The best fitting line is shown, and it has a positive slope too.

States such as Rhode Island, California, New Jersey, and Nevada have relatively high unemployment rates and yet have relatively large percentages supporting Obama. States such as North Dakota, Nebraska, and Oklahoma have low unemployment rate yet have smaller percentages supporting Obama.

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What gives? Is the conventional wisdom about Americans voting with their wallets wrong? Is it not the economy, stupid? Does high unemployment actually cause people to prefer the incumbent?

That’s hard to say. Political preferences are complex, and many factors combine and interact to determine an individual’s political views. It gets even more complicated when you consider things at the state level.

It’s possible that higher unemployment rates really do cause people to support this incumbant. Perhaps people who are unemployed are more likely to prefer Obama because they believe, for whatever reason, that they personally will be better off if he is re-elected. On the other hand, it’s also possible that other factors are affecting both unemployment rates and political preferences, making it appear that higher unemployment rates are causing people to support Obama.

Whatever the details, it’s clear that saying money is all that matters to American voters vote is too simplistic. Maybe Americans do vote with their wallets, but that could mean voting for the candidate they believe is most likely to fill them.

More on this Topic: Voting With Your Wallet II: Education, Liberalism, and Unemployment

Little-Known Fact: Corporate Tax Rates Have Been Decreasing for Decades

How much tax should corporations pay?

That’s a more complicated question than it sounds. To a large degree, how a government how one raises the raises revenue is a matter of values and priorities.

And practicality. Willie Sutton is said to have robbed banks because that’s where the money is. Jean Baptiste Colbert, finance minister to King Louis XIV in the 1600s, said “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”

Like it or not, there’s truth to that. Governments get the money where they can. Corporations spend heavily on public relations and campaign contributions. Corporate feather-plucking tends to be accompanied by considerable hissing.

There also are economic arguments to be made against corporate taxation. Corporate profits are taxed twice – once when the corporation earns them, and again when shareholders receive the profits as dividends or as capital gains. This double taxation is economically inefficient and distorts capital markets, at least to some degree.

In addition, corporations that feel over-burdened by taxes have the option of taking their ball and playing in a different field, i.e. moving to a country with lower taxes. According to the Wall Street Journal, “10 companies in the last three years” have moved from the U.S. to other countries such as Ireland, Switzerland, the U.K., and the Netherlands. The Journal repeats the mantra that U.S. corporate tax rates are the “highest in the developed world”.

How rampant this trend is, whether it really is increasing, and how much of an impact this has had on the U.S. economy is unclear. Regardless, companies moving to other countries is hardly something that we’d want to encourage, particularly when the U.S. unemployment rate is at 7.8  percent.

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At the same time, there are reports of companies “re-shoring” jobs back to the U.S. after having previously off-shored jobs to other countries. The specific reasons vary, but companies have been finding that there are advantages to the U.S. and disadvantages to other countries that they hadn’t realized before.

But at the end of the day, of course corporations are going to say corporate taxes are too high. No company wants to pay more taxes, any more than individuals do. Everyone wants someone else to pay. But the implicit threat is always there: if corporate tax rates are too high, companies can and will move, as the Journal puts it, to “friendlier climes”.

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But individuals hear about corporations making billions of dollars in profits, and numbers like that tend to set off alarms. “They’re making that kind of money? They should be paying lots of taxes.” And who’s to say they’re wrong? The word is that corporations are “people”, and people pay taxes.

While the U.S. corporate tax rate is often listed as 35 percent, or even an “effective tax rate” of 39.2 percent, this is misleading at best and a lie at worst. The U.S. tax code is so riddled with exceptions and exemptions and loopholes that corporations usually don’t pay anything close to this.

The fact is that the federal tax rate the corporations actually pay has been decreasing for decades and is now close to 20 percent. This isn’t some biased analysis coming from a left-wing think-tank. This is coming straight from the Bureau of Economic Analysis’ data. A simple calculation – divide corporate federal income taxes paid by before-tax corporate profits. There’s not much room for biases to creep in there.

An ironic point that this graph shows is that the last big increase in corporate tax rates occurred in 1986, under President Reagan’s administration. People forget that Reagan had to raise corporate taxes in order to offset some of the deficit increases caused by cutting individual income taxes and increasing defense spending.

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What’s driving this decrease in effective corporate tax rates, at the same time corporate profits are increasing? That is much harder to determine. The byzantine complexity U.S. tax code is legendary, and Congress has a habit of tucking exemptions and credits into many bills. What’s clear, however, if that the rates that tax corporations are actually paying are decreasing substantially.

The question, however, is whether this decrease in corporate taxes is a good thing that we as a country want to embrace and encourage, or if this creeping de-taxation goes against our collective values and priorities.

With the U.S. public debt soaring to nearly unprecedented levels, we need to consider all revenue sources. Larger corporate profits mean there are lots feathers there, ripe for the plucking. Whether politicians be opt to avoid the hissing is yet to be seen.

Gross Domestic Product Grows at 2.0 Percent or 2.3 Percent

The Bureau of Economic Analysis (BEA) reported today that the U.S. real Gross Domestic Product (GDP) grew 2.0 percent last quarter over the previous quarter at an annual rate. But if you compare GDP in the most recent quarter with the same quarter in 2011, real GDP grew at a 2.3 percent annual rate.

Europe – indeed most other countries – report GDP growth on a percent-change-from-the-previous-year basis, comparing the most recent quarter with the same quarter last year. In other words, how big was the economy in July/August/September 2012 compared with July/August/September 2011, after adjusting for inflation?

But not here. In the U.S., the Bureau of Economic Analysis (BEA) reports real GDP growth on a percent-change-from-previous-quarter-at-an-annual-rate basis. In other words, how big was the economy in July/August/September 2012 compared with April/May/June 2012, adjusted to an annual growth rate instead of quarterly and adjusted for inflation?

Why the difference? Beats me. It could just be a case of, “We’ve always done it this way”, or even “We’re the U.S. and we’re different”. I know that the U.S. clung to Gross National Product (GNP) over Gross Domestic Product (GDP) for years even though the rest of the world was reporting GDP. So it’s possible that the BEA is just being conservative.

Regardless of the reason, I prefer the change from previous year to the change from previous quarter, and not just because it makes the U.S. number more comparable to the rest of the world.

First, looking at the annual changes gives a clearer picture of the longer term trends. It also is less susceptible to distortion due to one-time changes and thus doesn’t have as much random variation. That make it less noisy, as economic signals go.

Finally, the annual number eliminates the confusing “quarterly change at an annual rate” concept. Sure, I understand what that means, but do most people? Why make things so complicated and convoluted?

Of course, as is usually the case in economics, there’s a trade-off. While the change from previous year shows trends better, it doesn’t show immediate changes quite as clearly. Focusing on the annual change thus could make it hard to spot a turnaround right away.

On balance though, I prefer yearly to quarterly. When it comes to economic data, I’ll take smooth over noisy any day.

The Economy as a Confidence Game

It’s all about confidence.

The economy, that is. So much of what determines whether an economy grows or shrinks is a result of what people expect will happen in the future. If consumers feel good about the future – if they’re not worried about losing their jobs, or believe they’re going to find a job, or get a raise or get promoted – then they’re likely to spend more money.

And if consumers spend more money, companies make more money. And if companies expect consumers to spend more money, then companies will spend more money expanding and building more stores and offices and factories.

And if companies spend more expanding, it creates more jobs and give consumers more money to spend.

And so on, and so on, and so on. It’s all a virtuous circle that rebounds on itself to reinforce positive feelings and growth all around. Or a vicious cycle, when sentiment goes sour.

This is why there are surveys of consumers and purchasing managers and corporate executives, to find out how they’re feeling about the future. Feelings and perceptions matter.

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So what do you do to get the confidence game rolling? How do you take an economy that’s down on its luck and inject enthusiasm and warm economic fuzzies?

For starters, you talk a good game. You tell people things are going to get better, but it’s going to take time. You be honest, but reassuring. This is why policymakers since time immemorial have tried to talk things up with the economy was down. Confidence is important, and if leaders don’t have it, consumers and companies won’t either.

But words aren’t going to do much by themselves, of course. Herbert Hoover spent much of 1929, 1930, and 1931 telling people that good times were just around the corner, and we all know how much good that did. You’ve got to follow the words with action.

The standard economic prescription is for the federal government to step in with fiscal and monetary stimulus to compensate for the lost spending by consumers and companies. Government money has a multiplied effect on an economy, as it circulates around. As people see things start to get better, confidence will gradually improve as well. Eventually that self-reinforcing virtuous circle can kick in, and the economy can start to grow steadily.

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But this takes time, and lots of things can derail a recovery from a severe economic downturn. Economic turbulence in other countries not only decreases demand for your country’s exports, but it also works against the confidence of companies and consumers. Political instability in other countries, oil price shocks, droughts in agricultural regions – all of these can complicate things further.

What don’t you do? What should you absolutely avoid, so you don’t wreck a fragile economic recovery? You don’t create gridlock in Washington, sending the message that the federal government is not going to do anything to help the economy. You don’t create a no-win fiscal cliff scenario with threatened spending cuts and tax increases that would devastate the economy. You don’t play games with the full faith and credit of the United States with a manufactured “debt ceiling”.

I’m not saying that economics is all an illusion, that downturns are all in our minds, that the Great Recession is just some giant psychosomatic economic illness. Recessions are real, and the most recent one was unusually severe.

But humans are emotional creatures, and perceptions matter to us.

We need for the federal government – and Congress in particular – to get its collective head on straight and start leading instead of obstructing. When Congress starts showing that it wants to be part of the solution rather than the problem, consumers and companies will start showing confidence. And when they do, we can get the economic confidence game rolling.

Related Posts: Why Deficit Spending During Recessions is Good

Why Deficit Spending During Recessions is Good

Why do most economists believe that governments should run deficits during recession? Isn’t borrowing money bad?

There’s some truth to the idea that borrowing money is often a bad idea for individuals and families. But we all know there are exceptions. For one, when there’s an emergency, you might not have any choice. And, contrary to popular analogies, government finances are very different from those of families.

Government revenues (aka “taxes”) are closely related to families’ and companies’ incomes, but that’s about where the similarity ends. When people lose their jobs in a recession, governments collect less in taxes. When corporate profits decrease, governments collect less in taxes. And we’re talking about governments at all levels here, from local to state to federal.

So what do governments do when they’re receiving less revenue? Local and state governments essentially have to run balanced budgets by law, so they cut spending. And this hurts the economy even more, causing more unemployment, and leading to even less tax revenue. What’s worse, the effects of decreased government spending get multiplied as the reduced money flows around the macroeconomy.

To be fair, there are natural forces that do eventually help economies recover. Real wages may fall to the point where companies finally start hiring again, for example. Eventually economies do tend to right themselves. The key word here is “eventually”. Unfortunately, it can take a country’s economy a decade or more to “fix itself”. Look at the Great Depression, or Japan’s Lost Decade.

To help the economy recover faster, we need to make up for the decreased investment spending by firms and decreased consumer spending. For better or for worse, the only entity in a position to do that is the federal government, since unlike state and local governments it is able to borrow money fairly easily.

As a result, the best minds in economics say that running a federal deficit during recessions is a good idea. Doing so will help to pull the economy out of the recession faster, and will reduce its severity.

There are some caveats, though.

Most importantly, governments should not be running deficits during expansions. If anything, the federal government should be running surpluses during expansions in order to pay down the public debt. This helps to clean up the government balance sheets in preparation for the next recession. Unfortunately, U.S. governments have shown an inability to do this. With the exception of the late 1990s, when politicians have seen surpluses, they’ve seen the opportunity to buy votes with tax cuts. This sounds good to many voters, but it’s bad news for the economy.

Second, borrowing money even for good reasons has implications. For one, you have to pay interest on it, and that costs money down the road. This is another good reason to pay down the debt during expansions.

Third, someone has to be willing to lend you the money. So far, the interest rates that the U.S. has to pay for the money it is borrowing are still low, partly because most other countries are even worse shape than the U.S. But as public debt as a percentage of GDP continues to increase, the interest rates the U.S. government will have to pay are bound to eventually start to increase, and that can cause serious problems. See Greece, Spain, and Italy for more of that. At the end of the day, no government can continue to borrow more and more money at an increasing rate indefinitely.

So the bottom line is that deficit spending during recessions is a necessary evil. Economists don’t like governments having to borrow money, but in downturns, it’s for a good cause. But there’s always a trade-off, and there are limits to how much any government can and should borrow. Eventually we’re going to hit those, and at that point we’ll have run out of options.

Home Starts Jump to Four-Year U.S. High as Demand Firms

From Bloomberg:

Housing starts in the U.S. surged 15 percent in September to the highest level in four years, adding to signs of a revival in the industry at the heart of the financial crisis.

Beginning home construction jumped last month to an 872,000 annual rate, the fastest since July 2008 and exceeding all forecasts in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. An increase in building permits may mean the gains will be sustained.