Taxation: July 2009 Archives

A few months back I posted on a disturbing trend showing Mainers were dropping out of the labor force which makes Maine's unemployment rate look smaller than it actually is.  Unfortunately, that trend has worsened.

Between January 2009 and June 2009, Maine's labor force has shrunk in each month for a total loss of 9,258 people.  A few more months of this and Maine will likely break a few records.  First, the 5-month consecutive decline ties the record set between June-October 2000 (data goes back to 1976); however, the labor force only declined by 3,527.  This record is in sight.

Second, in absolute losses, the current record was set between April and July 1991 with a decline in the labor force of 11,280 (the labor force was smaller then so this was a more significant decline than the same absolute decline would be today).  This record will be harder to top.

Adjusting for the declining labor force, Maine's "shadow unemployment rate" is 14 percent higher than the reported rate--9.7 percent versus 8.5 percent (click "continue reading" to view chart).  More distressing, the shadow rate is higher than the national unemployment rate of 9.5 percent.  Since January, 2009, Maine's shadow rate has tracked the national unemployment rate.  The lower reported rate is an illusion.

This leads to the inevitable question: "where are these people going?"  In the best case scenario, these folks are waiting on the sidelines waiting for the job market to improve before jumping back in.  In the medium case, these folks are taking early retirement but, hopefully, are still living in the state.  In the worst case, these folks are fleeing the state to greener pastures.  As I reported here, Maine is already a net out-migrant state for two years running.  My gut says its likely a mixture of the last two.

Last Thursday the U.S. Department of Commerce's Census Bureau released their 2008 Consolidated Federal Funds Report which details federal spending by state.  Surprisingly, in Maine federal spending only grew 1 percent from Federal Fiscal Year (FFY) 2007 to FFY 2008 and, since FY 2000, spending is up 52.5 percent.  This is below the growth rate nationally at 9.3 percent and 71.3 percent, respectively. (click "continue reading" to view chart).  Why is federal spending slower in Maine than the rest of the country?

There are five categories of federal spending to examine.  First, "retirement and disablity," which is mostly Social Security, increased 4.8 percent between FFY 2007 and FFY 2008--higher than the national average of 4.6 percent.

Second, "other direct payments," which is mostly Medicare and other welfare, increased 15 percent between FFY 2007 and FFY 2008--significantly higher than the national average of 7.9 percent.

Third, "grants to state and local government," which is mostly Medicaid but also transportation spending, increased 4.4 percent between FFY 207 and FFY 2008--below the national average of 16.2 percent.

Fourth, "salaries and wages," which is both military and civilian federal employment, increased 0.4 percent between FFY 207 and FFY 2008--below the national average of 0.6 percent.

So far we have gone through 4 of the 5 categories and all of them collectively are growing far faster than the 1 percent growth in overall federal spending.  I think you know where I'm going with the last category.

The last category is "procurement."  Mainers will not be surprised to note that most federal procurement is done through the Department of Defense.  Not only has Maine historically been home to numerous military bases, but also to significant defense contractors such as Bath Iron Works in Bath or the Portsmouth Naval Shipyard in Kittery.  However, the Brunswick Naval Air Station is slated for closure.

Given the importance of federal defense spending to Maine's economy, it is rather distressing to see that declined by a whopping 31.7 percent from FFY 2007 and FFY 2008.  In dollar terms, procurement spending fell by $525 million to $1.13 billion in FFY 2008 from $1.655 billion. 

However, as shown in the chart, federal procurement has been on a roller-coaster ride as far back as the chart goes.  Yet, this volatility has worsened in the last few years.  Some of this could be attributed to the closure of several bases both in Maine and New Hampshire as well as the pending closure of Brunswick.  Another source of volatility has been the uncertain future of ship production at BIW.  For a brief synopsis behind this saga, see this post at Behind Blue Lines.

Overall, federal spending in Maine is clearly shifting away from real production, such as naval ships, and toward a growing reliance on transfer payment--most notably other direct payments which grew at a blistering 15 percent rate.  Since this is mostly Medicare spending, this reflects both the rapid aging in Maine as well as inflation in the price in healthcare (ironically caused in part by excessive Medicare spending).  These are disturbing signs for the future viability of Maine's economy.

Will Maine's broader sales tax to new goods and services drive more Mainers to shop in New Hampshire?  Good question.  This news article may provide a clue.  Apparently Massachusetts is not only raising their sales tax to 6.25 percent (a whopping 25 percent increase) but they are also expanding the sales tax base to alcohol.  Now Massachusetts merchants are hanging on for the inevitable rush to the New Hampshire border.  Who else understands the negative effects of cross-border shopping than the very folks who are negatively impacted?  Are policymakers listening?  As I reported previously, Maine businesses feel the negative impact as well.

According to recently released data from the U.S. Department of Commerce's Bureau of Economic Analysis, Maine's private sector share of personal income set an new all-time low of 64.76 percent in the 1st quarter of 2009. (click "continue reading" to view chart)

The primary culprit was the huge jump in personal current transfer receipts (Social Security, Medicare, Medicaid, etc.) of 10.6 percent between the 1st quarter of 2008 and the 1st quarter of 2009.  The total now tops a whopping $10 billion.  State and local government compensation also contributed to the crowding out of the private sector by growing 4.2 percent over the same time-period.

The private sector, by contrast, shrank by 0.9 percent.

While Maine's predicament closely follows the national trajectory, Maine's private sector share is still 7.87 percent lower than the national average (64.76 percent versus 70.3 percent).  Policymakers should be frantically searching for ways to get Maine's private sector share to at least the national average by reforming Medicaid and reducing state worker employment and compensation.