Our two biggest cities—the economic engines of the state—have failed to grow as well. The City of St. Louis is emptying out, dropping from 622,236 in 1970 to 301,578 in 2020, though the larger metropolitan area has absorbed much of that loss. Kansas City saw dramatic population drops in the 80s and 90s, though recent growth has brought us up to over 500,000 around where we were in 1970. (Even still, the Kansas suburbs have been growing at a much higher rate than the city proper for decades.)

U-Haul publishes a migration index each year. For 2024, Missouri ranked 28th for growth.

Where is everyone fleeing to? The largest beneficiary of Missourian departures is Kansas—which is not a surprise to those of us here in the eastern part of the state. Kansas’s suburbs offer better schools, seemingly better-maintained infrastructure, and lower crime. Second is Illinois, with Texas, Arkansas and Florida rounding out the top 5 destinations.

(Aside: Yes, Florida and Texas have better climates than Missouri, but so do plenty of other states. Florida and Texas also have no state income tax. The Tax Foundation reports that low-tax states saw greater population growth than high-tax states.)

Missouri’s portion of the national GDP is shrinking as well. We produced 2% of the nation’s GDP in 1997. Today we produce only 1.5%.

Missouri’s leaders, at the state and local level, must decide if they are satisfied with our slow and steady decline. If they aren’t, what are their plans to reverse it? It can’t be more of the same, where we have driven up housing costs through foolish energy policies, or failed to deliver basic public safety. It certainly cannot be a continuation of former Governor Mike Parson’s profligate spending.

The Show-Me Institute has some ideas, thank you for asking, and most of them are about helping Missourians by getting government out of the way of families, businesses and entrepreneurs.

Not everyone will agree with our proposals. That is fine. But every leader should be asked: if not these policies, then what is your plan for reversing Missouri’s glide path to oblivion?

The post Missouri is Shrinking appeared first on Show-Me Institute.

Think of some of the top GDP growth states in the nation: Florida, Texas, Tennessee. None of these states have a state income tax. Free markets really do matter, and it has been demonstrated time and time again around the world and in the United States.

The Fraser Institute issues a periodic ranking of states according to “economic freedom.” According to its most recent ranking, Tennessee came in third—right ahead of number four Texas, but behind number one New Hampshire and number two Florida. Missouri came in at a respectable, but distant, number 15 ranking. Almost all of the “least economically free” states in Fraser’s report (New York, California, Illinois, West Virginia, and New Mexico), saw population loss.

Not coincidentally, Texas, Florida, and Tennessee have also dominated the U-Haul Growth Index, which measures the ratio of one-way, inbound U-Hauls versus one-way, outbound U-Hauls.

Granted, it is hard for Missouri to be Texas or Florida when we do not have the geographical gifts that those states enjoy.

But Tennessee is right on Missouri’s border and has much in common with the Show-Me State. Tennessee eliminated taxes that hamper growth (such as the Hall Tax, which taxed stocks and bonds), prioritized education reform to increase school choice and accountability, and its leaders are embracing its identity as a pro-growth, freedom-loving state.

Missouri has made recent progress in lowering the income tax burden. Since 2017, the top income tax rate has decreased from 6 percent to 4.7 percent for 2024.

Bringing the number down to zero should not just be a talking point—it ought to be a serious goal. If we want to be a top growth state, a nationwide destination for families, and attract more businesses, lowering the income tax is a great place to start.

I can speak from experience: having no state income tax is a luxury and a draw. Don’t we want that in our state too?

The post Slashing the Income Tax to Zero appeared first on Show-Me Institute.

This same ambiguous outlook applies to the U.S. economy as a whole. On the one hand, data released by the Department of Commerce last week reveals that real gross domestic product (GDP)—the value of all goods and services produced by the US economy, adjusted for inflation—increased at a 2.4% pace in the second quarter, following 2% growth in the first quarter. If this pace continues—a big if—then the economy will have safely avoided recession territory, having rebounded modestly from the two quarters of negative GDP growth at the beginning of 2022.

But past is not prologue. The economy still faces multiple headwinds that leave the risk of recession—or at least a significant weakening of growth—very much on the table. For one thing, the effects of monetary policy (i.e., rate hikes) on the economy operate with a time lag. The primary mechanism through which rate hikes fight inflation is by making borrowing costlier, thereby discouraging the demand for spending and, with it, the pressure on prices. The medicine from earlier doses of rate hikes is already having an effect on the economy; headline CPI inflation fell to 3% year-over-year last month, down from a peak of over 9%. However, rate hikes from late spring have not yet fully reverberated throughout the U.S. economy. Even so, the recent GDP data indicate that consumer spending only grew by 1.6% in the second quarter, with durable goods spending only growing by 0.4%. This particular subset of spending is useful as a gauge because durable goods like washing machines and other expensive household items are often purchased using credit, which now commands higher interest rates because of the Fed’s actions.

Another headwind facing the economy is the impending resumption of student loan repayments this fall. Make no mistake: student loan repayments ought to resume. Bailing out student debt by transferring it from the people who are reaping the financial gains from their education to taxpayers is regressive, fiscally irresponsible, and inflationary. However, this reality does not take away from the fact that people will feel the sting of being required to pay debts that they have been shielded from during the past few years. Consequently, consumer spending growth is likely to slow further or even turn negative. Considering that consumer spending contributed 1%age point (out of the 2.4) to GDP growth in the second quarter, a hypothetical scenario where consumer spending growth flatlines would by itself reduce GDP growth to just 1.4%. Moreover, another important component of GDP—investment—is sensitive both to rates themselves as well as business expectations about future consumer demand. It is entirely plausible—maybe even likely—that investment growth will decline from its most recent rate of 5.7%, and if that happens, GDP growth could easily fall below 1%.

Still another important headwind is the fact that, for all the progress the Fed—and the Fed alone—has made in combatting inflation, it has not yet succeeded in achieving its 2% target. As shown in the figure below, headline inflation is down to 3%, but core inflation—a better measure of fundamental pricing pressures—is still nearly 5%. Moreover, because the inflation readings are year-over-year measures, and because the monthly numbers from July and August 2022 were very low, it is quite possible that the headline year-over-year inflation numbers may rise modestly over the next few months.

Lastly, and arguably most importantly, the U.S. economy has been facing a productivity crisis over the past two years. Productivity—that is, economic output per hour of labor—has decreased by nearly 2.5% since the second quarter of 2021, which is unprecedented. By comparison, productivity rose by nearly 5% from the first quarter of 2017 to the fourth quarter of 2019. Not coincidentally, that earlier period corresponded with household income rising by over $5,000 after inflation—meaning higher purchasing power—as compared with the recent decline in purchasing power of over $2,000. The figure below gives a stark visual reminder that prices have grown consistently faster than wages since the passage of the American Rescue Plan Act “stimulus” bill in early 2021, with price growth decreasing only in response to the Federal Reserve’s interest-rate-hiking campaign.

As speculation continues over the near-term trajectory of the U.S. economy, it is worth mentioning again the essential need to raise productivity—not just to avoid recession, but to lift the economy out of the doldrums of 1% to 2% growth and return to or exceed its historical norm of 3% growth. While these numbers may seem difficult to relate to, a rule-of-thumb may prove useful. The amount of time (in years) that it takes for the U.S. economy to double in size is roughly 70 divided by the growth rate. Thus, if an economy grows at 3% per year, it will take approximately 70/3 = 23.3 years to double in size. By contrast, if the economy grows at 2% per year, it will take 70/2 = 35 years to double, and it will take 70/1 = 70 years to double if growth is persistently only 1%. That would be a disaster for the U.S.’s potential to remain the leading economy in the world.

So how do we achieve growth liftoff? Answering this question is much too large for a single blog post, but the key is productivity, and one important point to remember is that raising productivity is not about squeezing more out of workers and making life at work more of an unpleasant grind. Quite to the contrary. The most effective way to increase productivity is to ensure that workers are equipped with the skills to succeed, unencumbered by regulations to find the best occupation and employer to realize their potential, and where both workers and employers are able to keep more of the fruits of their productive activity. That phrase—productive activity—is key to keep in mind. While public debate often focuses on spending, spending, spending, it’s time to shift our attention to producing.

The post Recession: To Be or Not To Be, That Is the Question appeared first on Show-Me Institute.

What is the debt ceiling, and what would have happened had we not raised it?

The debt ceiling (or debt limit) is a legal limit on how much money the U.S. government is authorized to borrow. Once the country reaches this limit, the Treasury is not permitted to issue more debt.

Can we simply not raise the debt limit?

The Congressional Budget Office (CBO) projects that the federal government will run a deficit of more than $1.5 trillion in 2023 alone, with spending amounting to $6.4 trillion and revenue coming in at $4.8 trillion. Of the $6.4 trillion in spending, $4 trillion is for mandatory programs that operate without Congress needing to regularly reauthorize them (e.g., Social Security and Medicare), $1.7 trillion is discretionary spending, and $660 billion goes to interest payments. Balancing the budget and eliminating the deficit in one fell swoop would require essentially zeroing out discretionary spending or making instant, draconian cuts to mandatory programs. Given the deep fiscal hole that the federal government has put the country in, there was no real alternative to raising the debt ceiling.

If both sides agreed that the debt ceiling had to be raised, what were the negotiations about?

Historically, occasions when the government has reached the debt ceiling have produced negotiated agreements that both raise the ceiling and limit spending, as was the case with the Budget Control Act of 2011 during the Obama-Biden Administration. However, this time around, the White House insisted for months that it would not negotiate on any spending reforms as part of raising the debt ceiling.

Given the unsustainable fiscal path that the United States is on, the White House was essentially sending the message that the only way to avert a debt crisis now (by raising the debt ceiling) was to cement the current spending trajectory in place—and thereby increase the chance of a debt crisis down the road. The House of Representatives disagreed with this false choice between a debt crisis today and a debt crisis later and instead passed the Limit, Save, and Grow Act, which simultaneously raised the debt ceiling and slowed the trajectory of spending, among other reforms. Passage of this bill forced the White House to the table, abandoning its no-negotiations stance on spending reforms.

What is contained in the debt ceiling deal?

The debt ceiling deal contains a number of elements. First, it raises the debt ceiling through the end of 2024 and it establishes spending caps for fiscal years 2024 and 2025 that limit the growth of spending to 1% with tough enforcement provisions during the appropriations process, which is when Congress formally makes detailed, program-level spending decisions. In addition, the bill prescribes a 1% cap on spending growth through 2029. By way of comparison, the CBO projected an 8.1% jump in discretionary spending between 2024 and 2025, followed by average annual increases of 2.8% through 2033.

Besides affecting topline spending, the debt ceiling bill rescinds certain COVID-19 and IRS funds, expands work requirements for food stamps and welfare, and implements energy-permitting reforms to reduce delays from excessive and unresponsive bureaucracy.

What is the overall effect?

The CBO projects $1.5 trillion lower spending growth (or in Washington, DC parlance: cuts) because of the deal. Without the deal, discretionary spending would have risen from $1.7 trillion in 2023 to $2.4 trillion in 2033, whereas now the projection is for $2.2 trillion in discretionary spending in 2033.

To give further perspective, the figure below plots three different projections for the path of discretionary spending as a percentage of the country’s annual economic output. The blue dots are CBO projections made in fall 2019 under the previous administration and before COVID-19. The orange dots are CBO projections from this May, but before the debt ceiling deal. The red arrow showing the upward shift from the blue dots to the orange dots represents the persistent increase in discretionary spending under the current administration’s policy plans. The gray set of dots represent discretionary spending under the debt ceiling deal, with the green arrow showing the reduction relative to what was slated to occur before the deal.

As the figure makes clear, the debt ceiling deal essentially takes discretionary spending halfway back to the path it was set to follow before COVID-19 and the change in administration.

Figure 1: Discretionary spending as a percentage of GDP. Source: Congressional Budget Office, Show-Me Institute calculations.

How should Missourians view this deal?

The United States faces a profound and troubling fiscal situation with its unsustainable spending levels, not to mention slow economic growth, declining productivity, and inflation that remains much too high. It is important to recognize that the country has a spending problem, not a revenue problem. Federal revenues are currently above historical average, but the reason deficits are so large is that spending as a share of GDP is higher than it has ever been over the past century except during peak COVID-19 and World War II. The debt ceiling bill does not fully reverse the spending increases of the past two years, but it represents a step in the right direction, especially compared to the White House’s previous no-negotiations spending stance.

Taking a step back, whereas the debt ceiling debate focused on discretionary spending, the vast majority of federal spending goes to mandatory programs, chiefly entitlements. The CBO projects that, absent reforms, federal spending will rise from 23.7% of GDP in 2023 to over 30% by 2053, annual deficits will more than double to over 11% of GDP, and the national debt will balloon to almost 200% of GDP. In this scenario, interest payments on the debt would triple as a share of the economy and would represent the single largest spending item for the U.S. government. Even this scenario is rosy in that it assumes an infinite willingness among investors to buy U.S. debt regardless of how dire the fiscal picture becomes—a rather implausible assumption that America would be wise not to test.

Going forward, much work remains to be done to right-size government and revitalize economic growth so that Americans can enjoy a more prosperous future free from the risk of steep tax hikes, crippling inflation, debt crises, and adversarial foreign governments buying up large quantities of government debt. The debt ceiling deal is by no means a cure to the country’s current fiscal ills, but it’s one step in the right direction, and the starting point for a much-needed national conversation.

The post Debt Ceiling Deal Q&A appeared first on Show-Me Institute.

First of all, consumer spending is holding up. After only growing by 1.3% in the first quarter of 2022, it ended the year growing at a 2.1% clip—hardly robust, but clearly in positive territory. Consumers have been slammed by high inflation and eroding purchasing power for the better part of two years, but the steady job market and still-elevated checking account balances of households have managed to keep them afloat. Unfortunately, so too has rapid growth in credit card utilization, which may act as a source of financial vulnerability for consumers going forward as they grapple with continued interest rate hikes. Transitions into credit card delinquency are already on the rise, driven especially by households in the 18–29 and 30–39 year age ranges.

Switching gears, gross private domestic investment declined notably in the third quarter of 2022 (9.6% on an annualized basis) but increased by 1.4% in the fourth quarter. On the surface, this turnaround is good news. However, peeking beneath the hood reveals some reasons to be cautious. Most strikingly, residential investment fell by 26.7% as the housing market gets pummeled by the rapid rise of mortgage rates over 2022. In the first week of January 2022, the average rate for 30-year fixed-rate mortgages sat at 3.2%. In the last week of December, it was at 6.4%. Such a huge increase in rates translates to a jump in monthly payments of over $800 for someone buying a $400,000 house with a 20% down payment—making it more difficult to qualify for a loan.

Looking beyond the housing market, nonresidential fixed investment increased by an anemic 0.7% on an annualized basis in the fourth quarter after growing by 6.2% in the third quarter, a sizable deterioration. As a result, fixed investment overall fell by 6.7% on an annualized basis in the fourth quarter, which is even worse than the 3.5% decline in the third quarter. So how is it, exactly, that private investment still increased by 1.4% overall? The answer: inventories increased, which is far less important for economic growth in 2023 and beyond than businesses confidently investing in new factories and capital.

So what does all this mean for 2023? Unfortunately, not much. The good news is that the economy is not crumbling—at least not yet. And there are also reasons to be hopeful that the Federal Reserve’s interest rate hikes are finally breaking the back of inflation despite the federal government’s fiscal profligacy since the beginning of 2021. However, interest rates are still on their way up, consumers are borrowing more, gas prices are on the rise again, and the housing market is stalling out, with very real prospects of modest to moderate house price declines in at least certain pockets of the country. None of these trends bode well for consumer sentiment or small business optimism. But there’s still a chance that the Federal Reserve can manage to thread the needle, and divided government in Washington, D.C., means that more blowout inflationary spending packages are less likely. It’s certainly something worth crossing our fingers about.

The post The Latest GDP Report: What Does It Mean for 2023? appeared first on Show-Me Institute.

Missouri has eight metropolitan statistical areas (MSAs), a term used to describe a city with a population of at least 50,000 and the surrounding area. Below is a graphic from my latest publication, The 2020 Missouri Tax Landscape, which provides an overview of Missouri’s economy and taxes at the state and local levels. The compound annual growth rate (CAGR) of these MSAs is a calculated rate helpful for evaluating growth over time. While GDP growth is volatile, the CAGR provides a calculated rate as if the growth had occurred at a steady rate during the period.

Notes: Some MSAs cross state lines, indicated by the inclusion of the states in the label. Real GDP numbers are for the entire MSA. Real GDP numbers are in chained 2012 dollars, meaning they are adjusted for inflation over time with 2012 as the base year.

Source: Bureau of Economic Analysis. Real GDP by County and Metropolitan Area.  https://apps.bea.gov/itable/iTable. cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1

Columbia and Kansas City had the highest growth rates from 2009 to 2018, growing by 1.6 percent each year on average. St. Louis grew by less than half of that rate—a meager 0.7 percent. The CAGRs of Missouri’s largest MSAs are nowhere near those of large MSAs in surrounding states. In the same period, Oklahoma City, OK grew by a rate of 2.9 percent; Cincinnati, OH-KY-IN by 2.4 percent; and Omaha-Council Bluffs, NE-IA by 2.2 percent. Additionally, all of Missouri’s MSAs fell below the national growth rate of 2.3 percent during this period.

There are a lot of factors that contribute to a metro area’s growth, and the tax climate is certainly one of them. High tax rates take spending money away from citizens and make cities and states less attractive to people and businesses. There’s a plethora of research showing that taxation (and especially taxation on income) has a negative effect on economic growth. Given the low growth rates of Missouri’s MSAs, it may be time for some tax-related New Year’s resolutions.

The post MSA Growth in Missouri appeared first on Show-Me Institute.

Goldman Sachs predicts the United States gross domestic product (GDP) will shrink by a quarter. Thousands of people in the Kansas City region are losing their jobs, and the mayor just issued a shelter-in-place order. City revenue is about to plummet. We can safely say that revenues from the earnings tax and sales taxes will decline significantly.

Who knows what sort of bailout will be available to cities, if any. But this is not a time to be funding a film office whose function is to subsidize the likes of Netflix. Kansas City has been a high tax city for years. And not satisfied with spending those revenues, we have continued to increase our public debt. This may be a time of reckoning.

A city council that convenes online and votes virtually out of concern for a global pandemic must demonstrate that it truly understands the difference between basic, necessary services and those things that are merely nice to have. Is Visit KC, the city’s convention and visitors bureau, necessary in the next few months? Is the streetcar? Is the Economic Development Corporation (EDCKC) a vital need in the next quarter? The city council should act as they have asked Kansas City residents to act, supporting only “essential services.” Everything else, for now, needs to be set aside.

The post The Kansas City Budget Amid Coronavirus appeared first on Show-Me Institute.

But don’t take my word for it. Look at the research. An economic impact study was conducted by the Center for Economic Information at the Department of Economics at the University of Missouri-Kansas City that indicates between $15 and $17 million will be generated from the Zero Fare initiative. For those living paycheck to paycheck, as most Americans are, the cost of a monthly bus pass or cumulative single fares can make the difference in deciding which bills to pay. Tax revenue alone is expected to increase about $700,000 from the increased spending, and 100 jobs would be created.

UMKC’s Center for Economic Information (CEI) has no such study on its website. And the public information officer at KCATA responded that the CEI had not yet presented the final version of its paper. So I asked for a copy of whatever the KCATA CEO had used to make his claim. I was sent a four-page “draft mini report” dated December 5, 2019. (A PDF copy of this mini-report can be found at the bottom of this page.) The report does not list an author. But it didn’t require a degree in economics to see serious flaws in the analysis.

First, the study does not contemplate the net effect of a fare-free bus system—it simply adds up the costs saved by passengers and ignores any additional cost occurring elsewhere. It does not consider any additional tax, reduction on city spending in other programs or additional costs to the KCATA due to increased demand and wear and tear. Like a child arguing in favor of getting a family dog, the report counts all the benefits and none of the cost. For this reason alone this mini-report ought to be dismissed immediately.

I shared the draft report with some university economists for their comments. Each of them pointed out the failure to account for additional spending to cover the lost fare revenue.

Dr. Howard Wall at Lindenwood University in St. Louis pointed out that the authors misapplied the model they used to calculate the benefit. Understood correctly, the model, called IMPLAN, calculates the impact of additional money injected into an economy from outside—such as the local impact of a large federal grant. But this is not the case with fare-free buses in Kansas City. The policy would only move money already within the local economy by shifting the burden of bus fare. The UMKC mini-report argues, in effect, that one can fill a bathtub by moving water from one side of the tub to the other.

Dr. Byron Schlomach at Oklahoma State University was dismayed by the speciousness of the claims of growth in regional gross domestic product (GDP).  The only way regional GDP could rise by the amount claimed in the analysis is if free buses attracted huge numbers of people (or made workers more productive) and added money or physical capital such as buildings and machines. As you can guess, there is no evidence for this anywhere. It’s hard to imagine any scenario in which eliminating bus fare in Kansas City attracts significant residents, jobs, or capital.

Dr. Schlomach also offered another compelling point. He wrote by email, “Pricing plays an important role even in 90% subsidized, publicly-owned enterprises like bus transit. It can provide information for where and when the service is most highly valued and serve as an indicator for where resources should be allocated.” How would KCATA collect information on the popularity of routes if not through the farebox? Perhaps it could install people-counting sensors on every bus entrance, but then that too is an additional expense not considered in this analysis.

But the giveaway from UMKC is on the last page. The draft mini-report spends one-fifth of its total content discussing the ideas of Henri Lefebvre, a 20th-century French Marxist philosopher and sociologist. Why this is included in a memo claiming to be an “economic impact” analysis is a mystery. But it indicates that this was not an attempt to understand the impact of a significant change in public policy—it does none of that.

Rather, it seems that advocates of fare-free buses, aware that the research and experiences of others who have considered fare-free buses, sought out someone willing to make dubious claims of a positive economic impact. That UMKC lent its name to this is a shame.

The post About That “Economic Impact Study” Conducted on Free Bus Service in Kansas City . . . appeared first on Show-Me Institute.

That said, there are important lessons to be learned from Kansas’s experience. Jansen explores the consequences of the failure to reduce spending concurrently with the tax cuts, the inaccurate growth projections that led to overly optimistic forecasts, and the difficulty of weathering the tax cuts’ short-term impact on government revenue while waiting for the long-term benefits of a better tax climate to arrive.

Click on the link below to read the entire essay.

The post What Happened in Kansas: The 2012 Tax Reform, the Economy, and Lessons for Us All appeared first on Show-Me Institute.

In this essay, Rik Hafer and William Rogers provide insight into what has happened to cause such slow statewide growth. The authors go beyond the standard measure of economic growth, gross domestic product, and examine alternative measures of prosperity such as personal income and job growth. The picture that emerges is complex, but perhaps the most troubling finding—given the connection between an educated workforce and economic growth—is that Missouri consistently struggles to attract college graduates, particularly those with advanced degrees, to the state.

To read the complete essay, click on the link below.

The post The Missing Million: Missouri’s Economic Performance Since the Moon Landing appeared first on Show-Me Institute.

In fact, in terms of the research into such matters, the destructiveness of income taxes is among the few things where there is some general agreement in the economic literature. To once again quote researcher Jens Arnold of the Organisation for Economic Co-operation and Development and his review of the evidence:

A stronger reliance on income taxes seems to be associated with significantly lower levels of GDP per capita than the use of taxes on consumption and property. Within income taxes, those on corporate income seem to be associated with lower levels of GDP per capita than personal income taxes. In fact, corporate income taxes appear to be the least attractive choice from the perspective of raising GDP per capita. [emphasis mine]

Letting the government take people’s money before it can be saved or spent denies families and businesses the opportunity to invest that money in themselves, and those negative effects compound over time. That denial of investment impacts overall GDP. It’s that simple. Removing more and more money from the private economy and increasing government’s contribution to overall state GDP is a recipe for disaster that legislators shouldn’t be entertaining.

The goal should be to continue the work of reducing and eliminating income taxes in Missouri, and new taxes on, say, internet sales should not become play money for politicians rather than an offset for income tax relief.

The post Just the Facts: Income Taxes Are Destructive to Growth appeared first on Show-Me Institute.

The State of the Heartland Factbook 2018, a joint effort by the Walton Family Foundation and the Brookings Institution, uses 26 different socioeconomic measures to detail the performance of the 19 states that compose America’s Heartland. This data is compiled into the full report, and is accompanied by an interesting interactive database.

This new information makes it easy to compare Missouri to the other states in our region. However, the comparison is hardly flattering. The two best examples of Missouri’s stagnation are the change over time in Gross Domestic Product (GDP), which is the total value of everything produced by the people and companies of the state, and standard of living. Measuring the change in GDP from 2010 to 2016, Missouri only grew faster than two nearby states (Mississippi and Louisiana), averaging a 0.8 percent compound annual growth rate (CAGR). Most of the other states had a CAGR of over 1.0 percent.

Standard of living (which the authors measure as GDP per capita) showed practically identical results, with Missouri once again coming in third from the bottom (again ahead of only Mississippi and Louisiana). While Missouri showed a positive CAGR of 0.5 percent in standard of living, the majority of the states where data was reported averaged at least a 1.0 percent CAGR from 2010 to 2016.

The story was the same with regard to wage growth. Missouri held its popular position of third from the bottom, a CAGR of 0.4 percent from 2010 to 2016.

Clearly, there is work to be done in Missouri if we want to climb to a position where we are competitive with the states surrounding us. Policy initiatives that spur economic growth will be key in helping turn the Show-Me state into a better place to work and live.

The post Are Missouri’s Neighbors Passing It By? appeared first on Show-Me Institute.

Based on the Bureau of Labor Statistics’ June data for Missouri, there is good news for our state, too. Our unemployment rate ticked down to 3.5% from 3.6% in May, which was already down from 3.7% in January. Missouri is now half a percentage point below the national unemployment rate. Additionally, Missouri’s labor force saw an increase of 8,000 people in just the last month. These data might suggest that an increasing number of Missourians are interested in working, and they are successfully finding jobs.

These statistics do not tell the whole story, however. Historically, Missouri is one of the slowest growing states in the nation. Compared to Tennessee, a demographically similar state, Missouri is still underperforming despite having similar unemployment rates. When looking at the growth in employment, Tennessee trumps Missouri. The figure below displays total employment as a percentage of 1990 employment. Even with a good last few months, Missouri lags behind Tennessee.

With similar demographics and access to resources, it should be possible for Missouri to experience Tennessee’s level of growth. As we discussed before, Tennessee’s improved performance might be related to its education and workforce development initiatives or lower tax burdens. Missouri has been heading in the right direction in recent months—but should we be content, or should we examine whether Missouri could benefit from adopting the policies that have helped Tennessee’s growth outpace ours?

The post Missouri’s Making Improvements, but Still Trailing appeared first on Show-Me Institute.

Missouri’s low unemployment rate is welcome news, but it doesn’t tell the whole story. There are other important factors that predict economic well-being, such as labor force participation and statewide output, where Missouri’s economy is underperforming compared to other states. Tennessee, for example, is a demographically similar state but has shown significant growth compared to Missouri while also boasting a 3.5 percent unemployment rate.

As shown in the graphs below, Missouri’s labor force is stagnating. During an economic expansion, one would expect the number of interested laborers to increase. Missouri, however, defies these expectations. Our labor force shrunk by almost 30,000 people from 2016 to 2017. In this same period, our neighbor to the southeast, Tennessee, saw a spike in their labor force with 81,000 people joining.

People are entering the workforce in Tennessee to take advantage of the employment opportunities there. Some are Tennessee residents who have decided to look for work, and some are coming from outside the state. The state’s low unemployment rate suggests that Tennessee is capable of absorbing these additional potential workers and turning them into payroll employees. Compared to Missouri, Tennessee is attracting and employing people at a faster rate.

Additionally, Missouri’s production lags behind that of Tennessee as well. Missouri’s real gross domestic product, the measure of overall economic health, is growing slowly. Since 2012, Tennessee routinely experienced 2 to 4 percent annual growth in real GDP. Missouri struggles to hit 1 percent annual growth. The growing gap between Missouri’s and Tennessee’s GDPs, shown below, is stark.

Such slow growth is problematic for Missouri’s economy. The national economy is doing well, but Missouri is failing to take advantage of the rising levels of consumption, investment, and employment found throughout the country and is consequently losing out on major economic opportunities.

So what about Tennessee as compared to Missouri makes its economy grow faster and pull more people into the workforce? There are a few possibilities. First, Tennessee has no income tax, and two years ago Tennessee began to phase out the tax on investment income and will eliminate it entirely by 2022. Second, beginning in 2014 Governor Bill Haslam started reforming higher education by offering all high school graduates the opportunity to earn an associate’s degree or professional certification at no cost to them. Moreover, there has been greater coordination between colleges and businesses to ensure that the curriculum fits employers’ needs so that students learn skills that are in high demand. Third, Tennessee is a Right-to-Work state. Fourth, Tennessee is known as having a business-friendly environment.

It may be hard to pinpoint exactly what has led to Tennessee’s success, but tax-cutting policies combined with investment in workforce development and other pro-business policies like Right to Work stand out as reasons Tennessee is experiencing growth that Missourians can only envy. Continuing to push for elimination of the individual income tax and exploring potential workforce development policies could work just as well in Missouri.

The post Missouri’s Economy Struggles Despite a Low Unemployment Rate appeared first on Show-Me Institute.

But one of the most attention-getting findings contained in a newly released report from the Brookings Institution titled “How Trump’s Steel and Aluminum Tariffs Could Affect State Economies“ might cause you to think otherwise.

As the Brookings report points out, Missouri’s imports of steel and aluminum amount to $1.4 billion, or 7.4 percent of our state’s total imports. By that measure, Missouri’s exposure to tariff-driven increases in the price of those two commodities is the highest of any state in the country. But how meaningful is that metric?

Joseph Haslag, chief economist for the Show-Me Institute, points out that the metric is misleading for a couple of reasons. One is the presence of a large automotive sector in our state, and the other is the simple fact that Missouri is just not a large importing state.

A better measure, therefore, is to look at Missouri’s exposure relative to our state’s total output of goods and service—its gross domestic product. By that measure, Missouri falls from the state that is “most exposed” to steel and aluminum purchases to the 8th most exposed state—still not anything to be happy about.

At both the state and national levels, agriculture is one sector of the economy that is likely to suffer. As Blake Hurst, president of the Missouri Farm Bureau, told me, “Farmers are going to be hit two ways—having to pay more for tractors, combines, and other equipment made from steel and aluminum, and also having to deal with the possible loss of foreign markets due to retaliatory tariffs on U.S. agricultural exports.”

 Watch this space for further information on how changes in tariffs and trade agreements are likely to affect Missourians.

The post How Would Missouri Fare in a Global Trade War? appeared first on Show-Me Institute.

THE SOLUTION: Reduction or elimination of the individual income tax.

Lowering or eliminating individual income taxes allows Missourians to increase their take- home pay, increase business investments, and encourage population growth through in-migration.

WHO ELSE DOES IT? Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) currently have no income tax. Two other states (New Hampshire and Tennessee) levy income tax only on dividends and income from investments.

THE OPPORTUNITY: Income tax reductions could be achieved in several ways. Reductions in tax incentives and spending can, for instance, provide the budgetary space to cut taxes. Whatever the pathway, reducing an obstacle to state and personal income growth should be a high priority if we want to jumpstart Missouri’s economy.

KEY POINTS

• Missourians work hard for their money and deserve to keep what they earn.
• Income taxes penalize and discourage work.
• If you include the 1 percent earnings tax in our two biggest cities, Missouri has a top income tax rate of 7 percent, which is more than all but 17 states. Our top income tax rate equals or exceeds those of all but one of eight neighboring states.
• A real reduction in individual income taxes raises take-home pay and encourages more consumption of Missouri goods and services, making Missouri more competitive with other states in the nation.

SHOW-ME INSTITUTE RESOURCES

Essay: The 49th State: Revisiting Missouri’s GDP Sector by Sector

Essay: Taxes Matter and They’re Too High for Missouri

For a printable version of this article, click on the link below. You can also view the entire 2018 Missouri Blueprint online.

The post 2018 Blueprint: Income Tax Reform appeared first on Show-Me Institute.

Over the years, we have marked the progress (or lack thereof) that Missouri has made by reporting new data on gross domestic product (GDP) released by the Bureau of Economic Analysis (BEA). If you pick out a single year’s data, Missouri seems to do okay. From 2015 to 2016, for instance, real GDP in Missouri increased at a 1.15 percent rate, ranking 31st out of the 50 states and the District of Columbia. Washington recorded the fastest growth rate, at 3.7 percent. It was a bad year for states that rely on natural resources: Louisiana, West Virginia, Oklahoma, Wyoming, Alaska, and North Dakota all reported declines in real GDP from 2015 to 2016. So, it looks like the recent decline in oil and coal prices helped push Missouri up into the middle of the pack. For reference, in the United States as a whole, reported real GDP increased at a 1.54 percent rate in 2016—much faster than in Missouri.

But year-over-year data doesn’t reveal larger, more important economic trends; any given year can be dominated by business cycle fluctuations. Growth is focused on long-term trends. When you look at the entire 1997–2016 period, the picture is quite different from 2015. Little wiggles in the year-over-year data get smoothed out and show the economic fundamentals operating within a state. Over the full two-decade period, we see that Missouri’s growth has been paltry.

During this period, Missouri has grown at half the pace of the United States as a whole (1.024% compared to 2.05%). Out of all 50 states and the District of Columbia, Missouri ranks 48th in economic growth; we trailed Mississippi by 0.001%—we were almost 47th. For an idea of the impact of Missouri’s poor performance, imagine you and a friend had started at the same job in 1997, each making $50,000 a year. If your friend’s salary grew at the rate of the country as a whole, and yours grew at Missouri’s rate, the friend would have made about $72,800 in 2016 while you’d have made roughly $60,400!

In a recent essay, Joe Haslag and Michael Austin identified some policies that could help explain why Missouri took a nosedive after 1997. There was the corporate income tax rate hike in 1993. There was a shift of spending from education and infrastructure to social services. There was the sharp increase in the state’s tax credit programs. And, though more difficult to measure, there was the regulatory burden that seems only to have increased over time. (Do you remember a time when the state government eliminated a regulation?)

The bottom line is that state government needs to take a thoughtful approach to policy if it is to boost economic growth. Lower tax rates, for example, result in higher returns on capital and labor. The state should look for high returns on its own investments as well, just like a private citizen or business would. Common-sense adjustments to emphasize education and infrastructure over policies that transfer wealth from one group of citizens or businesses to another are needed unless Missouri’s policymakers are satisfied with 47th place.

The post Almost 47th appeared first on Show-Me Institute.

When the BEA announces its real GDP growth rates for states, it uses an “all-industry” value.  This includes both private industries (all economic enterprises owned by individuals or groups) and also the government (which encompasses the purchases of goods and services at all levels/branches of government).  Because the private and public sectors both contribute to total (all-industry) output, this total measure can provide misleading signals on how well the private sector of the economy is doing.  After all, the private sector of the economy is the growth engine for future economic well-being. 

The table below illustrates how total measures don’t always paint the full picture. The table shows the growth rates for three categories: All Industry; Private Industry, and Government.  The data cover the most recent four quarters for which information is available. All growth rates are based on year-over-year comparisons to smooth short-term wiggles in the data. In other words, the growth rate for 2016Q3 is the growth rate from 2015Q3 to 2016Q3, etc.

The data show that government “output” grew in the third quarter but declined in the previous three. This resulted in an all-industry output growth that was lower than that of the private sector, which actually expanded in every quarter shown.  While the all-industry growth rate averaged 1.6 percent over these four quarters, private industry output—excluding government—increased at a faster average rate of 1.9 percent. 

You might be thinking, “But such small differences in growth rates are trivial.”  They are small, but they are not trivial:  Using the average all-industry growth rate, it would take 45 years for the state’s output to double.  The private industry values, in contrast, indicate that income would double in 38 years, a 16 percent reduction.  Surely most of us would prefer our income to grow faster. 

After separating out the effects of government, it appears that the private sector’s output of goods and services expanded at a faster pace than is suggested by the commonly used all-industry measure.  This example shows that including government’s activity can affect our perception of how well the economy is actually doing.

The post Missouri’s Private Sector Expanding appeared first on Show-Me Institute.

Cochrane’s growth-oriented policy program outlines the need for more efficient regulations and a simpler tax system that would encourage work instead of undermining it. He says the ideal tax system should be one that raises revenues without drastically distorting economic behaviors, and a pure tax on consumption is “close to that ideal.” The piece goes on to cover a myriad of policies where free-market reforms could boost growth and improve standards of living.

While I highly recommend reading the piece, the Show-Me Institute also had the pleasure of hosting the self-described “Grumpy Economist” last month at Saint Louis University, where he talked in more depth about how these reforms could affect Missouri and the nation. The full presentation is available online here. 

The post “But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure.” appeared first on Show-Me Institute.

GDP Growth during the Expansions of the Post-WWII Period

Source: CRS calculations based on data from the Bureau of Economic Analysis (BEA).

Note: Economic expansions as identified by the National Bureau of Economic Research.

This result is not just bad—it is catastrophic. The average American should not be wondering if his income is a bit above or below 2007 levels. Just by historical averages, the average American should be 20% better off than in 2007. And this slow growth is settling in as a permanent new-abnormal.

I believe the root cause of abysmal growth is the huge tax increases imposed by President Obama and Congress since 2008. The most harmful were the increase in the capital gains tax from 15 to 20 percent, the increase in top bracket income from 35 to 39.6 percent, and the new tax of 3.8 percent on investment income in the Affordable Care Act (ACA). The massive increase in regulatory burden through the ACA and Dodd-Frank bills are also crushing, but unfortunately are harder to measure.

The three tax increases mentioned above (plus higher state and local taxes) directly lower expected returns on all investments. Our government grabs the fruits of investment and then is puzzled when businesses do not invest. This causes billions of dollars of investment projects to come off the table.

Weak investment is the signature feature and cause of the abysmal "recovery" under President Obama. The aggregate of all investments in the United States is Net Private Domestic Investment (NPDI), computed by the Bureau of Economic Analysis. Relative to GDP, NPDI averaged 7% per year from1960 to 2008. The average was 7 to 8 percent from 1960 to 1990, and 6.5 percent in the Clinton and George W. Bush years. However, for the Obama years NPDI was an astoundingly low 2% of GDP!

In every year of Obama’s presidency but 2015, NPDI was worse than in any year from 1960 to his inauguration. This isn't bad luck. If nothing changed in the economy, the likelihood of having a period as bad as Obama’s just by chance would be 1 in 1000.

The numbers for GDP and NPDI are interesting, but they’re still just lifeless statistics. The human toll is terrible, taking the form of millions of Americans who can’t find jobs or can’t make ends meet in the jobs they do have.

Dismal investment levels are the predictable result of taxing investment and income at high rates. This terrible economic performance will continue until income and investment taxes are slashed. The government can still raise needed revenue with a broad-base approach, eliminating all the special deductions and credits and allowing very low rates.

On the other hand, maintaining the current high rates will entrench lackluster investment and stagnant incomes and trap far too many Americans in a bleak economic future.

The post The Dismal Recovery appeared first on Show-Me Institute.