A new paper released today by EARN (the Economic Analysis and Research Network) looks at what states can do to create strong state economies that support high wage jobs for their people. Is it low taxes, well educated workers, or something else?

When we look at data from across the country, two clear conclusions emerge:

• There is no correlation between the overall level of taxation in a state and the ability of the economy to support high wage jobs (see figure A in this post);
• There is a very strong correlation between how well educated a state workforce is and the ability of the economy to support high wage jobs (see figure B).

Looking at this graph of overall tax levels and median earnings (a measure of wages that includes both hourly and salaried employees) one might suspect that there are just too many differences between states to see a clear correlation on any one variable.

Figure A

There is no significant correlation between overall tax levels and high-wage economies: Median hourly wage, and state and local taxes as a share of state personal income, by state, 2010

State	State and local tax revenue as a share of state personal income	Median Hourly Wage (2012 dollars)
WY	0.13590238	$16.97
AR	0.10037558	$14.42
NV	0.10475355	$15.76
MS	0.097939908	$14.16
LA	0.09574187	$15.38
WV	0.10971793	$16.17
IN	0.10564875	$15.70
KY	0.097442473	$15.19
OH	0.10470439	$15.97
SD	0.079988074	$14.96
ID	0.087547352	$15.10
OK	0.08531404	$15.51
UT	0.093340332	$16.17
AK	0.1974031	$18.69
SC	0.088154942	$15.65
AL	0.082354177	$15.19
TX	0.089617786	$15.14
TN	0.081749962	$14.53
IA	0.10341089	$15.82
AZ	0.09064911	$16.31
NC	0.098868851	$15.71
MT	0.094412722	$14.69
WI	0.11274396	$17.19
MI	0.1053127	$16.75
NE	0.10207951	$15.59
MO	0.086906169	$15.95
FL	0.091142418	$16.65
ME	0.12008039	$16.04
PA	0.10247088	$17.23
NM	0.096224878	$15.98
HI	0.11820127	$16.81
ND	0.12142884	$15.75
GA	0.089791357	$16.82
US	0.1031523	$16.85
DE	0.10092502	$18.31
OR	0.095232536	$16.61
RI	0.10883045	$17.88
CA	0.11036228	$17.83
WA	0.094482239	$19.30
MN	0.10786811	$18.48
KS	0.10357631	$15.77
VT	0.11876957	$17.09
IL	0.099506408	$17.07
NH	0.086699291	$18.96
NY	0.1430054	$18.39
VA	0.088036271	$18.78
CO	0.096436107	$18.73
NJ	0.11515426	$20.26
MD	0.099771245	$19.93
CT	0.1080529	$21.03
MA	0.099847735	$20.88

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The data underlying the figure.

Source: Authors' analysis of Current Population Survey Outgoing Rotation Group microdata and Tax Policy Center's Tax Facts data

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Gov. Rick Snyder is corrupting Detroit’s recovery even before it begins. By ignoring the state’s constitution and its protection for accrued public employee pensions, Snyder is undermining the rule of law and adopting the kind of “ends justify the means” reasoning that usually precedes violations of public trust. Snyder has violated his oath to uphold and defend the state’s constitution by asking a federal court to reduce the pensions of Detroit’s public employees, including many who risked their lives for years in service of the city.

The Michigan constitution is unambiguous. Section 24 states:

“The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.”

Yet, Gov. Snyder has set in motion a bankruptcy process whose aim is to do exactly what the constitution forbids – to diminish that contractual obligation and pay Detroit’s pensioners and retirees less than the full financial benefits they earned.

One can only hope that U.S. Bankruptcy Court Judge Steven Rhodes will rule, instead, that Emergency Manager Kevyn Orr and Gov. Snyder did not have the authority to file a bankruptcy petition that would unconstitutionally impair the city’s pension obligations.

So much is wrong in Stephen Richter’s NYT op-ed today, called “What Really Ails Detroit,” starting with his grossly inaccurate timeline. Richter says Detroit’s (and the United States’) “day of reckoning” came in the 1970s when American car manufacturers began facing competition on their home soil for the first time. That’s 20 years after the Big 3 started to abandon Detroit for the suburbs and Detroit began to hemorrhage its white population. As I said in an earlier blog post, “Between 1947 and 1958, the Big Three built twenty-five new plants in the Detroit metropolitan area, all of them in suburban communities, most more than fifteen miles from the center city. As the jobs moved away, so did the city’s residents. From 1.85 million in 1950, the city’s population declined to 1.62 million in 1960 and 1.51 million in 1970.” That’s a loss of more than 300,000 residents in two decades. The exodus of white residents (the entire decline was accounted for by whites, since the number of black residents increased), of jobs, and of wealth has never stopped. Detroit now has a population under 700,000, but the white population has declined by more than 1.4 million since 1950.

What ails Detroit is not the skills gap that Richter posits, but abandonment by its white population and by the owners of capital, starting with the auto industry, but including retail corporations, insurance companies and almost everyone else who had previously invested in the city. Detroit’s unemployment rate is the highest of any of the 50 largest cities because almost no one is investing there. When corporations do invest, as Chrysler did with its new Jefferson North assembly plant, they will find plenty of employees with the skills to make manufacturing a success again.

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In a NYT column today titled “What Really Ails Detroit,” Stephen Richter repeats a common story much beloved by serious-sounding pundits who don’t know much economics: that the thirty year run of broadly-shared growth after World War II was only possible because of “the absence…of any real competition from other nations,” and that American workers’ troubles since then are their own fault for not getting smart enough to compete on the global stage. He asserts that even as this international competition increased, “companies like General Motors continued to shower blue-collar workers with handsome pay and benefits,” hobbling their ability to compete, even as they refused to upskill sufficiently to compete in the global economy.

This narrative is really common—common enough to see if it holds up to any serious data scrutiny.

Start with claims that excessive blue-collar pay destroyed manufacturing.  For a paper examining those claims, check this out (pdf). Spoiler alert: it’s not. Inflation-adjusted hourly wages for production workers in U.S. manufacturing peaked in 1978 and were about 8 percent lower in 2007, while manufacturing productivity rose by well over 100 percent in that period.

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Here are a few articles we read recently. What did you read today?

• Walmart’s big lie: No, it doesn’t create jobs! (Salon)
• What to Expect on October 1 (Huffington Post)
• Immigration debate ensnares foreign workers (USA Today)
• Inequality is hindering economic growth (Baltimore Sun)
• Walmart’s ‘Worst Nightmare’ Competition Has Cashiers And Produce Clerks With $1 Million Pensions (Daily Kos)
• Civil Forfeiture: A Fiction the Offends Due Process (pdf, Regent University)

This piece originally ran in the Huffington Post.

Within the next few years, China will surpass the United States as the world’s largest economy.

Anticipating the impact of this milestone on our national psyche, the US policy class has been assuring Americans that there is nothing to worry about. Hardly a week goes by without a major media story suggesting China is an economic paper tiger: its economy is imbalanced, its leaders are corrupt, its banks are over extended, etc. Anyway, the stories routinely note, it will be decades before China catches up to us in per capita income.

Yet in the balance of global power, size matters. Many countries have higher per capita incomes than the United States (e.g., Norway, Qatar, Singapore). It is the large scale of the American economy that has made us the dominant political power in the world. Our big economy supports a big military, foreign aid, and allows policymakers to use access to our huge consumer and financial markets to buy allies and votes in the UN.

Unfortunately, it has also allowed us to borrow from the rest of the world to finance a chronic trade deficit. China, with whom we have the largest deficit, is as a consequence our largest creditor, holding over $1.2 trillion in US IOUs.

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In a recent blog on the Detroit bankruptcy, I noted that Detroit’s Emergency Manager, Kevyn Orr, may have inflated pension liabilities by lowering the assumed return on pension fund assets. Because most of the cost of pension benefits comes from investment earnings, this can double or even triple the cost of these benefits (Orr quintupled the cost, which suggests other factors are involved).

Public pension fund actuaries use an expected rate of return rooted in historical experience—in practice, usually slightly lower than realized returns over the long run. Some financial economists are critical of this practice, and argue that, although expected returns on risky assets take into account the possibility of losses due to default risk and the like, they don’t factor in risk aversion—the fact that most investors prefer guaranteed returns over volatile ones even if the average expected return is the same in both cases. In the critics’ view, this means contributions to fund future pension benefits should be based on yields on “risk-free” government bonds in order to avoid shifting risk from current to future generations of taxpayers. (A variation of this argument, which seems contradicted by present circumstances, is that pension benefits are guaranteed and should therefore be discounted using a guaranteed rate of return.)

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Last week, House Speaker John Boehner said, “sequestration is going to remain in effect until the president agrees to cuts and reforms that will allow us to remove it. The president insisted on the sequester none of us wanted, none of us like it, there are smarter ways to cut spending.” It’s true that sequestration takes a meat ax to discretionary spending in the federal budget, indiscriminately cutting spending across-the-board and slowing the economic recovery. Of course, there are smarter ways to alleviate longer-term budget problems, most of which would not kick-in until after the economy recovers from the Great Recession. But what are the “smarter” ways House Republicans have offered?

One proposal, championed by House Majority Leader Eric Cantor and Chairman of the Committee on Agriculture Frank Lucas, is to cut the Supplemental Nutrition Assistance Program (SNAP) by $40 billion over 10 years. Some in the conservative Republican Study Committee would go even further and reduce SNAP by that amount per year—a reduction of over 50 percent. Using the Census Bureau’s Supplemental Poverty Measure (SPM), which allows for the inclusion of both in-kind government benefits and taxes in poverty analysis, I estimate that this latter policy could increase the number of people in poverty by 2.2 million. Almost one million of these people would be children.

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Detroit’s current citizens and the public employees who serve them are not the cause of Detroit’s fiscal problems. They are the victims of forces beyond their control, including globalization, capital flight and racism. No one can, with any seriousness, blame Detroit’s librarians, social workers, garbage collection workers or street cleaners for the city’s catastrophic loss of population and tax base, the long decline and near-collapse of the Big 3 auto companies, or the 1967 riots, which launched a frantic exodus of businesses, white residents, and money from the City of Detroit to the suburbs.

As the suburbs grew and new highways encouraged sprawl in the 1950s and 1960s, Detroit’s manufacturing employment base and population—and especially its white population—began to decline. As Thomas Sugrue has pointed out, between 1947 and 1958, the Big Three built twenty-five new plants in the Detroit metropolitan area, all of them in suburban communities, most more than fifteen miles from the center city. As the jobs moved away, so did the city’s residents.

From 1.85 million in 1950, the city’s population declined to 1.62 million in 1960 and 1.51 million in 1970. By 1980, white flight was nearly complete: whites, who made up 83% of the population in 1950, were only 34% of the population, one million fewer than in 1950. The terrible riots in 1967 accelerated the movement of white families to the suburbs, but a combination of opportunity and racism had spurred hundreds of thousands to leave Detroit well before the U.S. Army occupied it. The hostility of whites toward blacks, their fear, and economic self-interest as they understood it led them to refuse to live in integrated neighborhoods, spurring them to sell their homes and abandon the city.

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Here’s what we read today. Share what you’re reading in the comments.

• How She Lives On Minimum Wage: One McDonald’s Worker’s Budget (Forbes)
• Super Size the Minimum Wage (Slate)
• GOP’s Long-Predicted Comeuppance Has Arrived (Talking Points Memo)
  
• WATCH: The Daily Show pits Fox News against fast-food workers (The Week)