Low taxes, low unemployment? Sounds good, but no truism

Newt Gingrich
MinnPost/Terry Gydesen
Newt Gingrich

This started out to be a fact-check of something Newt Gingrich said (which turns out to be something between an untruth and a colossal oversimplification), but I’m afraid it’s morphed into a more philosophical inquiry into that strange, twisted relationship between politics, facts and truthiness.

First, the Gingrich piece. When the former speaker was in town last week to star in a Tom Emmer fund-raiser, he was asked about Tim Pawlenty’s record as governor. As reported by MinnPost teammate Doug Grow, Gingrich replied:

“Your unemployment rate is lower than the national average because [Pawlenty] cut taxes, cut regulations and encouraged business,” Gingrich said. “The states with the lowest unemployment rates have the lowest taxes.”

The whole statement is highly suspect at best. Minnesota has had a lower than national average unemployment rate consistently, with only a few brief exceptions, since before Tim Pawlenty was born. Attributing this to Pawlenty’s no-new-taxism is just kinda silly, but we won’t take it too seriously or too literally. Presumably, since Gingrich and Pawlenty are both exploring presidential runs, Gingrich was viewing the topic of Pawlentyism through that prism and went for the speak-no-ill-of-a-fellow-Republican formula.

The last sentence, the one in bold face above wherein Gingrich suggests a high correlation between state tax levels and unemployment levels, is where Gingrich makes an assertion that is (a) easily checkable; (b) untrue or (c) at best, a colossal oversimplification.

The federal Bureau of Labor Statistics compiles state-by-state unemployment rates. There are various ways to calculate tax burdens but the best is to lump together all state and local taxes and express them as a percentage of per capita income within each state.  Below are the 10 states with the best (that is, lowest) unemployment rates (in ascending order by unemployment rate. The number in parentheses after each state is that state’s ranking according to state and local tax burden (with 1 being the highest taxing state and 51 being the lowest – p.s. there are 51 because the District of Columbia is treated as a state). The unemployment data, from BLS, are seasonally adjusted as of August. The tax burden comparisons are 2008 data from a July 2010 publication of the Minnesota Taxpayers Association (if you click through, go to page 15):

North Dakota (5)
South Dakota (51)
Nebraska (20)
New Hampshire (50)
Vermont (9)
Hawaii (6)
Kansas (18)
Iowa (27)
Wyoming (3)
Minnesota (21)

(Minnesota, with an unemployment rate of 7.0 percent, is actually tied for 10th best with Oklahoma and Virginia.)

You can see at a glance that the list of the 10 most employed states actually draws almost equally and almost randomly from the ranks of the highest tax states, lowest tax states and middling tax states.

The same is true at the other end, by the way. The list of the 10 states with the highest unemployment rates is topped by Nevada (14.4 percent unemployment!!!), which has the 40th highest state and local taxes as a percentage of average income (and therefore, according to Gingrich’s rule, should have low unemployment), followed by Michigan (smack dab in the middle of the states by tax burden) and California, which ranks 11th in tax burden and fits the Gingrich theory nicely if you choose to believe that what’s happening in the California economy is fundamentally about taxes.

An economist’s view
I asked economist Tim Taylor of Macalester College (and editor of the Journal of Economic Perspectives) about whether he saw any problems or possibilities in Gingrich’s statement about taxes and unemployment. Taylor laughed at the idea that someone would “come here and tell an audience of Minnesotans that ‘wow,’ it’s obvious you’ve benefitted from being a low tax state.” The joke, to Taylor, is that Minnesotans would know that ours is both a relatively high tax state (but only the 21st highest), and has long enjoyed a well-above-national-average economy.

In fact, although I wasn’t present, I would bet that the Gingrich remark was well-received because he was at an Emmer event. Many contemporary Republicans are so comfortable with the good-things-flow-from-tax-cuts religion that they would likely have nodded along. This is how selective perception and confirmation bias work. Liberals have political beliefs that likewise border on articles of faith and are fairly impervious to critical examination.

That’s the philosophical part I alluded to at the top. Most of us are not by nature inclined to be skeptical of something we hear that is consistent with what we already believe. And, in the context of a vital gubernatorial race, we want to believe what our party and our candidate believe.

Rather than reflecting tax policy, Taylor said the list of best and worst states by unemployment is much more likely influenced by factors that should be fairly obvious given the causes and consequences of the Great Recession. States that were hardest hit by the collapse in the housing market (California), the housing construction business (Nevada), tourism (Nevada again) and those that were most involved in the financial industry (New York was actually middle of the pack) would be suffering the most.

When I told Taylor that Michigan is the second highest state by unemployment, he said that may have less to do with tax policy than with the collapse of the auto industry.

Duh.

As for Minnesota, Taylor said, “we didn’t participate as much in the boom on the upside and we’re not getting socked as hard on the downside.”

State economies are complex things, he added, and “it’s a fools’ game when a [state] does well or does badly to credit it or blame it on any one thing,” Taylor said. He doesn’t doubt that tax climates play a role but “if low taxes were everything, Minnesota would have lost all its business to the Dakotas and Arkansas a long, long time ago.”

By the way, if you’re wondering how North Dakota shows up on the ranking as a high-tax state, I suspect it is mostly about the money our neighbor is reaping from the oil boom. Energy producing states in general turn up in the high-tax, low-unhemployment end of the rankings.

Response from Gingrich’s camp
I did ask Gingrich’s spokester, Joe DeSantis, if he had any backup for Gingrich’s assertion of a high correlation between tax climate and employment. He encouraged me to take a broader look at the total package of small government impulses:

“The tax rate is one of several factors that contribute to the health of a state’s economy,” DeSantis wrote me. “There’s also regulation, right to work, spending, the tort system, clean government, land use laws, the education system and more.”

He urged me to look at Gingrich’s full record, not just one off-the-cuff, out-of-context quote, and to recognize that low taxes are part of a broader set of what he calls “economic freedom policies” that lead to the good stuff.

He referred me to a ranking by the Pacific Research Institute of what it calls an “economic freedom” index, (pdf) which takes several of those factors into account. He says that nine of 10 states ranked as the most economically free have unemployment levels lower than the national average.

That’s true. But the data is full of noise. The states to which he refers are all small — not a major metro area in the batch — and several of them are energy-rich. And there are still plenty of the “unfree” states mixed in among the unemployment winners. Nevada, the highest unemployment state, is rated one of the 10 most “free.” (DeSantis acknowledges that outlier, attributing it, quite reasonably, to recession-specific factors other than Nevada’s freeness.)

I ran the Gingrich stuff past my esteemed former Strib colleague Dane Smith, who is now president of the think tank/advocacy group Growth and Justice (full disclosure: Growth and Justice was founded by MinnPost founder/editor Joel Kramer). Smith studies this stuff hard.

He emphasized that all through the ‘70s, ‘80s and ‘90s, when it was closer to the top of state tax list and ranked high in various other measures of Gingrichian unfreedom, Minnesota’s economic growth was highest in the Midwest.

Curiously (and inconveniently for the taxophobes), he noted that Minnesota’s unemployment rate briefly rose to the national average for the first time a couple years ago not  long  after Minnesota cut income taxes by a record amount in 1999 and 2000. 

But finally, Smith suggested that we keep the differences between state tax levels in perspective. “The differences are pretty small,” Smith emailed me, “a matter of no more than 3 cents on the dollar between top and bottom. (Most states have effective overall state-local tax rates of between 10 and 13 percent).

“Finally, conservative economic policy has held sway over the last 30 years, and it’s been terrific for those in the top 10 percent, 5 percent and especially top 1 percent of incomes. It’s been a dreary 30 years for everybody else, but especially those at the bottom and in the very middle.   They got very little trickle, as Paul Krugman says.

 “Finally, finally, the United States a century ago put only about a tenth of its income and wealth to public use. Now the public sector accounts for about a third of the economy and during and after World War II, our public ‘take’ was even higher. According to conservative theory, this tripling of the effective tax rate in our nation should have reduced us to a howling wasteland.   But instead, we became the most powerful and richest nation on earth and built the strongest middle class in our history, with high home ownership and two cars in many garages.

“We’re still among the lowest taxed of the wealthy democratic advanced nations.  And all those other nations with better socioeconomic indicators – longevity, high incomes, low violence, better health — have much higher taxes and more equal economic outcomes.”

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Comments (19)

  1. Submitted by John Spry on 10/14/2010 - 11:15 am.

    Economists have spent more time researching the effects of taxes on the level of economic activity and economic growth than st unemployment rates.

    Here are some of the most recent papers on this subject. As you will see, state-o-the-art economists are using the best possible currently available statistical methods, not simple correlations.

    Please don’t just look at the results, but the methodology and discussion of how these results fit in with the previous studies.

    The Robust Relationship Between Taxes and U.S. State Income Growth. W. Robert Reed National Tax Journal. 2008. (follow this link)

    http://ntj.tax.org/wwtax%5Cntjrec.nsf/222FB7C6B72DC53C8525742E006D8EDE/$FILE/Article%2003-Reed.pdf

    W. Robert Reed, 2009. “The Determinants Of U.S. State Economic Growth: A Less Extreme Bounds Analysis,” Economic Inquiry, Western Economic Association International, vol. 47(4), pages 685-700, October.

    http://ideas.repec.org/a/bla/ecinqu/v47y2009i4p685-700.html

    Ghosh Roy, Atrayee. 2009. “Evidence on Economic Growth and Government Size,” Applied Economics, 41, 607-614

    http://www.informaworld.com/smpp/content~db=all~content=a791812194~frm=abslink

  2. Submitted by Arito Moerair on 10/14/2010 - 11:24 am.

    “…Gingrich makes an assertion that is (a) easily checkable; (b) untrue or (c) at best, a colossal oversimplification.”

    or (d) a LIE. Gingrich LIED. Please, call out a lie as A LIE.

    It is this type of “tread lightly” tactic that has hampered Democratic electoral success for the last 30 years. When a wingnut zealot like Gingrich lies, we need to quickly and very forcefully call him a LIAR. Gingrich LIED. See how easy that is?

    Newt Gingrich is not stupid. He knows very well the complexities involved in this issue — it is flat-out wrong to say that low taxes equal low unemployment. It is not that simple. Ergo, he LIED.

    Have you seen the latest TV ad attacking Mark Dayton? It says that he’ll raise “job-killing taxes” in Minnesota to the tune of $5B. First off, the Democrats have very stupidly allowed this “job-killing taxes” meme to take firm hold. It’s being used in ads across the nation and people are eating it up. Our economic problem is one of low demand, not high taxes, but instead of even attempting to explain that, the Democrats have acquiesced into letting the Republicans beat the electorate over the head with a bald-faced lie. Second, Dayton plans to raise taxes on upper class Minnesotans, and nowhere in the ad does it say that. So they’re LYING. But does Dayton respond to that lie? Of course not.

    We need to stop being so kind in responding to these lies and start calling them what they are: LIES told by LIARS.

  3. Submitted by Ray Schoch on 10/14/2010 - 12:17 pm.

    I don’t think I can improve on David’s comment (#2). Intolerance has become a trait eagerly claimed by the current version of the Republican Party, while the Democrats have, as David suggests, allowed both right-wing ideology and outright lies to pass unchallenged.

    I personally dislike governmental paralysis as much as anyone, so shouting at each other across the aisle isn’t any sort of real solution to the multiple problems we face, but the people in the middle (and somewhat to the left of the middle) are far too polite. When liars promulgate a lie, they ought to be called on it, and publicly.

    Those who really ARE on the far left end of the spectrum have no qualms about nailing folks like Gingrich to the wall in figurative terms, and I continue to be puzzled why anyone who’s serious about effective government would take seriously the words of a serial adulterer who’s already proved many times that “truth” is a very flexible term.

    He’s smart, clever, and absolutely despicable. Gingrich and candidates like him ought to be labeled for what they are: neofascist demagogues who have no solutions – none – for our current problems.

  4. Submitted by Eric Larson on 10/14/2010 - 03:27 pm.

    Good work Eric- I hope the paycut wasn’t too bad. In the strib we saw you….what weekly? Now we get your good work more often. I like that you went back to Gingrich Inc and followed up and checked their broader “freedom” definition. But lets try this on for a moment.

    With the exception of Hawaii, none of the”top 10″ states is a plum place to spend winters. 2nd the “top 10” barely add up to half of California, population wise (I added up non Senate Electoral votes for a quick estimate). CA having twice the population of our “top 10” has an extraordinary tax burden. And their un-employment is up-up-up. Maybe a measure of total population in high tax states vs low tax states would be a better measure. New York has more people then the “top 10”. How are they doing? I’m willing to bet their tax burden is off the chart. Texas is a low tax state? What’s their unemployment rate.

  5. Submitted by Ray Schoch on 10/14/2010 - 04:33 pm.

    Eric has raised some interesting issues that would be worth checking out. I’d also like – as long as I’m wishing here – to see an additional item factored in that probably wouldn’t require a lot of extra leg work. What’s the median household income in the state(s) in question?

    Working a minimum-wage job, or nearly so, takes you off the unemployment rolls, but doesn’t allow you to be self-sufficient or contribute some reasonable portion in taxes toward the services being consumed. No one pays for himself/herself completely, but low-wage jobs make it pretty hard to make a contribution that an economist would call “significant,” even if you’re making enough money to have to pay income taxes in the first place.

    What I’m getting at is that it seems plausible – I’ve no idea if it correlates or not – that low-tax states might also be low-wage states for the median household, in which case “high employment” might not be quite as rosy a scenario as it might seem otherwise. There are areas of the country where $8.50/hour might allow you to survive in a kind of genteel poverty, but not many, and “high employment” doesn’t mean much if the jobs that are keeping the employment rate so high pay so poorly that they don’t allow individuals and families to keep their nostrils above the fiscal water line.

  6. Submitted by Tony George on 10/14/2010 - 05:39 pm.

    “No truism”. Isn’t that putting it a little mildly? Following Bush’s tax cuts, we had massive layoffs. I can’t see how Target can support Tom Emmer saying he’s good for the economy when we had the massive recession of 2008 because of the Bush tax cuts. Target must be supporting Emmer for his other Tea Party beliefs, because he certainly won’t do the economy any good.

  7. Submitted by David Willard on 10/14/2010 - 06:12 pm.

    Seriously David and Ray? Dems have been stuck at 10 when calling names and ranting for ten years toward anyone who dares disagree. Try changing your failed policies. Quit blaming the critics and look on the mirror. The Dems are in for a royal spanking and it isn’t because they are shy about screaming bloody murder over every policy disagreement.

  8. Submitted by James Hamilton on 10/14/2010 - 07:58 pm.

    Mr. Schloch makes a good point. How do the states rank when you deduct total taxes from median incomes? As I recall, Minnesotans come out better than South or North Dakotans.

  9. Submitted by Paul Udstrand on 10/14/2010 - 09:38 pm.

    Economic Freedom Index? Talk about creating a meaningless index. And New York scores the lowest. Yeah, pull up a chair sometime and listen to the boys from Wall Street tell ya how it is to make a buck in New York.

  10. Submitted by Alec Timmerman on 10/14/2010 - 09:40 pm.

    Heck,
    Look at corporate taxes as well! Supposedly low tax states will attract more business. Nevada has zero corporate tax so wouldn’t corporations also flock there? Michigan has 5.5% corporate tax. There is actually a slightly negative correlation between corporate taxes and unemployment. In other words, a state with higher than average corporate taxes is more likely to have lower than average unemployment.

    Republicans want to forget that investment in infrastructure and human capital made our state great. they want to emulate Nevada and Mississippi. No thanks.

  11. Submitted by Ray Schoch on 10/14/2010 - 10:52 pm.

    Ah, Mr. Willard, I’d be happy to look at “failed policies” if you’d only be so kind as to point some out to me.

    Economic policy has been Republican/corporate/conservative-driven for the past generation, so there’s no need to look there for failed Democratic policies – Democrats have hardly had an opportunity to make policy, and when they did – under the very corporate-friendly Clinton administration – they managed to end deficit spending and even have a surplus, which the succeeding Republican administration promptly turned into a trillion-dollar debt. The failures, to be polite, have mostly been on the Republican side.

    Unless, of course, you’re among the top 2 or 3 percent in terms of income. If that’s the case, the Republican/corporate/conservative policies have been quite wonderful for you. Congratulations, and I hope you tip generously. Most restaurant servers are not making the $100,000 that Tom Emmer claims is common.

    As for name-calling, I’ve not called anyone names – either here or anywhere else. “Conservative” failure is simply failure – intellectual, economic, ethical – there’s no need to glamorize it with pejoratives. What we’ve had is nearly 30 years of tax reduction for the wealthy, exporting of middle-class jobs overseas, stagnant wages for all but the very top income brackets, and financial manipulations by modern day Robber Barons that would have made the originals from the 1880s blush with envy. The argument that “taxes kill jobs” is laughable sophistry. We’ve had a generation to try “business-friendly” Republican tax-reduction policy, and as taxes have lowered, for both individuals and corporations, jobs have disappeared and the gap between the wealthy and the rest of the population has ballooned. Feel free to check figures if you like.

    Obama’s policy proposals have routinely been greeted with outright hostility by the Party of No, which is, to be polite and not call names, bought and paid for by large corporations and their lobbying groups. He hasn’t been in office 2 years yet, so whether the substantially weakened policies his administration has been able to put in place are failures or not remains to be seen, since some haven’t even begun to operate yet. Calling them “failures” when they haven’t started to operate yet seems… um… premature, don’t you think?

    Democrats may, in fact, get their collective nose bloodied on November 2nd, but if that’s what happens it will largely be because the radical right has more effective propaganda and more money, not because it has better ideas.

  12. Submitted by Bill Gleason on 10/14/2010 - 11:42 pm.

    It may be that for low wage manufacturing jobs, the low tax, low unemployment argument holds. And competing in that market is a race to the bottom. First the tax evaders move to Arkansas or Mississippi and then, once these states have been bled for tax breaks, they move to China.

    But that is certainly NOT the case for biotech jobs as Bill Hoffman and Thomas Lee have illustrated in MedCity News: http://bit.ly/c33edD

    They examined the top ten biotech states and their favorable business tax environments and came up with the following:

    1. CALIFORNIA (48)
    2. TEXAS (11)
    3. PENNSYLVANIA (27)
    4. MASSACHUSETTS (36)
    5. KANSAS (32)
    6. NEW JERSEY (50)
    7. NORTH CAROLINA (39)
    8. ILLINOIS (30)
    9. MARYLAND (45)
    10. OHIO (47)

    The only anomalous case is Texas. All the rest of the state in this list have what would pass for a bad business tax climate.

    As Hoffman and Lee put it:

    “In other words, contrary to fiscal conservatives’ zealous faith in private markets, building a viable biotech industry takes public money, a lot of it. And where do we get this money? You guessed it…TAXES!!!! Not just tax credits but actual state dough.”

    So let’s face up to the fact, folks, that The Grinch does not really understand the relationship between tax climate and the kind of jobs that we would like to have in Minnesota.

    If you are interested in turning the state into a giant motorcycle factory, then keep those taxes down!

  13. Submitted by Ron Gotzman on 10/15/2010 - 07:59 am.

    We ought to have higher taxes, greater regulation, more public workers, and increased stimulus spending. The M. Dayton, B Obama plan will work. Just give it more time and more of the people’s money!

  14. Submitted by Paul Udstrand on 10/15/2010 - 09:13 am.

    You know who’s Economic Freedom Index would be through the roof- Somalia!

    That’s the thing about Libertarians, they’re fantasy utopia looks like Montana, but in reality it ends up looking like Dhaka.

  15. Submitted by Greg Kapphahn on 10/15/2010 - 09:24 am.

    Some of us need to look up the standard psychological term “projection” if we think that it’s those on the left who are screaming.

    Or just watch a bit of the weasel or go through the C-span archives for hearings and congressional debates on important issues to see who it is that’s been bent out of shape for the last three decades, even while the Republicans were in ascendancy during the Bush regime. (Does “You lie!” or “Hell no!” ring a bell?)

    Perhaps the screaming so many on the right claim to be hearing from the left just reflects their own habit of internally screaming what they, themselves, believe as an attempt to drown out any information that might be attempting to enter their ears or their eyes – information that would help them see and hear and understand how misguided, how unfaithful, how UNChristian (or any other major religioun for that matter) their ideas, ideals, policies and perspectives really are.

    I can’t help but wonder how many of our rightwing friends, rather than just taking new and more accurate information in stride and altering their perspectives accordingly, have an internal reaction which looks like Munch’s famous painting “The Scream” every time they discover they have reason to fear they might previously have been wrong about something.

  16. Submitted by Paul Udstrand on 10/15/2010 - 10:00 am.

    Mr. Spry,

    I was unable to look at any of the references you provided, the all require special journal access. I don’t have time at the present to go down to the U and dig up the journals.

    I have to say this however, my academic experience (in the field of psychology, which includes some statistical analysis)is that whenever you have statisticians trying this hard to find some something that no else is finding, there may be a problem. From what I could glean these studies are all in the same vein in that they all claim to have found a previously unrecognized robust negative correlation between taxes and economic growth.

    There are two things to remember: 1)There are a lot studies being done and published. It’s important to cast a wide net when looking at any academic subject. These researchers are responding to an existing body of evidence, one must always be familiar with the existing body of evidence before accepting challenges as valid. 2) That these researchers are in the minority does not in and of itself render their work invalid, they may have found something everyone else missed. However, when articles are published in peer reviewed journals, there are frequently responses and critiques from other researchers in the field, it’s important to look at those. If the research area is too new to have provoked any responses, then one must be very careful in accepting those conclusions. It can take a while for qualified people to examine new work. Just because these guys have found a negative correlation, doesn’t mean it’s really there, the claim has to be tested.

    In psychology back in the 80s a lot of garbage about recovered memory, multiple personalities, and repression got published for a few years. It took almost a decade for the field to respond with critiques and replications that eventually devastated the “emerging” field of “dissociative studies”.

    In other words, just because these studies exist and have been published in peer reviewed journals doesn’t mean they’re reliable. And another thing, journals are not all equal. In any field there are gold standard journals and not so gold standard journals. I don’t know which is which in the field of Economics but it makes a difference. The version of Mr. Reeds article I was able to find (but not read) was a working paper that had not been peer reviewed yet. Working papers are sometimes published in journals just to provoke thought in the field.

    Again, I’m not saying the articles provided here are flawed, I don’t know if they are. All I’m saying it these are the things you need to keep in mind if you want to figure out whether or not they’re flawed.

  17. Submitted by chuck holtman on 10/15/2010 - 11:49 am.

    Mr Schoch’s summary (#11) is very well stated, top to bottom. However, I also want to offer a caution to those who are thoughtful, critical minded and tending toward the progressive to avoid falling into the logically erroneous mode of argumentation that most characterizes the Right – namely, that a well-aimed criticism of one party constitutes support for the other (i.e., that “not A” means “B,” which only is true when there is not “C,” “D,” “E,” etc). The Right tends this way because for them it isn’t about building and keeping a society, it’s about winning a battle of “us vs. them.” That is, it really is a (self-constructed) world of just “A” and “B.” Our present economic straits are due chiefly to three things: 30 years of tax-cutting, trickle-down and removing constraints on the global movement of capital; Glass-Steagall repeal; and the steroidal “soak the middle class” policy of the eight Bush years. None of these could have occurred without Democratic connivance and utter fecklessness. It is correct that the Obama policies haven’t even started to take effect, but it is also correct that, contrary to the laughable characterizations from the Right (“Socialist,” etc), they are deeply compromised by Democrats’ and Obama’s fealty to corporate interests and Democrats’ unwillingness/inability to compete on the battlefield of propaganda. Both houses deserve a pox (though one house certainly deserves to itch alot more than the other).

  18. Submitted by John E Iacono on 10/15/2010 - 03:10 pm.

    I find it puzzling that, whenever Minnesota tax burden is discussed, those on the left ALWAYS seem to find the need to include local property taxes.

    Each year, as he has fought new state taxes, TP has pointed out he has no control over local property taxes, but he urges restraint.

    These taxes are levied by counties and cities largely in control of dems, who regularly — instead of real belt tightening — persist in raising taxes to the maximum amounts they can.

    It seems to me unfair to load their continual effort to add to the taxpayer’s burden onto the shoulders of the governor, and then say “Aha! We are a higher tax state!”

    I would prefer to see these comparisons done on the basis of STATE imposed taxes only.

  19. Submitted by Paul Udstrand on 10/15/2010 - 04:19 pm.

    //Each year, as he has fought new state taxes, TP has pointed out he has no control over local property taxes, but he urges restraint.

    The effects of state tax cuts on local taxes is predictable, and was predicted. I guess some of us on the left realize that tax policy doesn’t occur in a vacuum.

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