State by State, Year by Year, Employment by Sector & by Blue-Red Political Alignment [bumped]

This preliminary study started with a blog post I did several months ago entitled "New Jersey, the Sorry State", a deep dive into Bureau of Labor Statistics data showing that my state is hardly generating employment outside the government sector.

The blame for this sorry state of affairs I heaped on NJ's political culture, which is high-taxing, heavily-regulating, pro-union, anti-business, and Democrat-dominated. As the power of Democrats, the self-proclaimed friends of the working man, has risen in this state, fewer working men have actually had work.

One of my readers suggested extending the work to all states. A daunting prospect, but I have made a start. It's back to the BLS data for 51 deep dives. This time I'm looking longer term, with data from 1990 to the present.

To try to get to grips with party politics in all states through time, I researched affiliations of the governor and two senators and the plurality of the House of Representatives delegations and the state senate and legislatures for each year since 1990, using wikipedia and such other sources as I could find. No doubt there are some errors at this stage, particularly in identifying the leanings of state legislatures 15 or more years ago. These errors are minor; it's unlikely that I could mistake Idaho for a blue state or Washington for a red state, for example.

Those two next door neighbors bracket my best ranking of the 50 states + DC by political complexion, from most Democrat to most Republican:

>> bluest: WA DC WV MA AR NJ CA MD IL HI DE
>> next: NY VT IA WI RI MI OR CT ME NC
>> middle: NM MN MT LA COPA NH ND IN TN
>> next: SD VA MS NV AL MO NE KS OK FL
>> reddest: KY OH AZ SC WY AK GA UT TX ID

Let me point out a few things by way of caveats and highlight a few preliminary conclusions.

Conclusion 1: Government is not just New Jersey's growth industry -- it's a growth industry in most states, Democrat or Republican. In fact, it is only in a handful of blue states and territories that government employment has been static or falling: MA, MI, NY, DC, and RI.

Conclusion 2: The predominant pattern in the last ten years has been for employment in goods-producing industry to be declining, in service-providing business to be growing somewhat, and in government to be growing fastest of the three. That pattern is seen in no fewer than 37 states: AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, IL, IN, IA, KS, KY, MD, MS, MO, NE, NV, NH, NJ, NC, OH, OK, OR, PA, SD, TN, TX, UT, VT, VA, WA, WV, and WI; in MI it was declining but less than other employment. Government is growing at the expense of goods production. In the limit, this places fiscal drag on the economy, which reinforces the original trend and makes it worse. That is our New Jersey experience.

Conclusion 3: The states that have experienced the greatest declines in employment in goods-producing industry are (worst first): RI, MI, NJ, CT, NY, NC, OH, ME, MA, and PA. Mostly northeastern/midwestern, mostly unionized, and mostly Democrat.

Conclusion 4: The states that have done best in growing employment in goods-producing industry are (worst first): NE, CO, NM, SD, ID, MT, UT, WY, NV, ND. Near runners-up were TX, AZ, and OK. Mostly western, mostly right-to-work, and mostly Republican.

Conclusion 5: Only in Wyoming is employment growth in goods-producing industry consistently positive and higher than either services or government.

Caveat: A Democrat is not the same wherever you go, nor is a Republican. A Maine Republican is a very different animal than a Texas or Wyoming Republican; in fact, some say it is a RINO. A Mississippi Democrat in 2009 is not ever the same as a Massachusetts Democrat, nor does he necessarily resemble a Mississippi Democrat of twenty years ago.

Caveat, speaking of Massachusetts: In connection with the special election there on 1/19/2010, I and many others have taken to calling the Bay State "the bluest of all blue states." This is incorrect. Massachusetts yields to the blueness of the Washingtons (state & district) and West Virginia.

Caveat: Employment in goods-producing industry is not a holy grail and need not be the object of all economic policy. If someone leaves a job in the declining textile industry in North Carolina, retrains as a radiological technician and gets a better job in that field, no one argues that either that person or the state of North Carolina are worse off. The problem is when employment in the goods-producing sector as a whole is in total headlong decline. That means industry is giving up on a place. That means industry prefers to take its chances with the Chinese Communists than the Michigan Democrats.

Caveat: Productivity has improved in goods producing industry, meaning fewer workers are needed to do the same or greater work. I know that, of course. It's wonderful. But rising productivity itself should incentivize capital to come into a place and employ workers who have worked themselves out of their previous jobs. If it's not enough, other things are wrong, and the benefit of workers' productivity is not for workers to share. Politicians must ask the question, what else is needed to attract and retain industry? Republicans always ask that question. Democrats ask instead what other self-defeating social costs and regulations they can impose on job-creating enterprise, and the dismal results are there to see.

Here's one final caveat, and it is important. I don't know which way the causation runs. I am not sure whether the growth states of the West are Republican because they are prosperous, or prosperous because they are Republican. I am more certain that employment grows in right-to-work states because it can, without restriction; that's just economic common sense. "Capital goes where it is welcome and stays where it is well treated," as the great Milton Friedman said.

This much is clear. The employment restrictions and the class struggle nonsense offered by those friends of the working man, the Democrats, are utterly failing him. In the the Democrat fastness of the post-industrial Northeast and Midwest, there's little tangible economic return from workers' long-term political investment.

I say if you want to work, go R. If you want to stand on the unemployment line complaining about the Man, go D.

_______________________

Notes:

1 My original post was inspired by William McGurn's article in the December 30 2008 edition of the Wall Street Journal, "New Jersey Is the Perfect Bad Example".

2 Next best alternative ranking is so similar to the first. Different methodology; of course the data set and workings are available:

>> bluest: DC WA WV MA AR MD CA HI NJ DE VT
>> next: IL RI NY MI OR CT IA WI LA NM
>> middle: NC ME MN ND MT IN PA VA NV CO
>> next: TN AL SD GA NH KY MS MO FL NE
>> reddest: AZ KS OH TX OK AK SC WY UT ID

3 It was Ted Kavadas, proprietor of the Economic Greenfield blog, who suggested doing the study nationally.

Dispatches from the Front Line of the Real Estate Wars

In March, I contributed a piece called "The Coming Real Estate Recovery By The Numbers". I have also written extensively on various plans for real estate recovery policy, my own and other people's, and got some excellent feedback from people in the academic and policy establishment. But in general, the phone has not not stopped ringing. As Chris Mayer of Columbia told me, there is a loss of momentum for all real estate plans.

I can't just sit around writing, as I am among other things a real estate practitioner, a licensed salesperson in the state of New Jersey. Most of my work has been investment and commercial in the urban areas near New York City , but I do residential, I go out of my local market, and have trusted contacts all over the east coast and in California.

At the moment I am working with a couple who have two young children and want to buy in one of the elite towns with a top-rated school system. They have very particular requirements with respect to price, condition, proximity to public transportation, and several other factors. Even in a buyer's market, these limitations make the search challenging.

The action of several recent weekends and the treatment of various offers makes me believe that conditions are moving away from buyers having it all their own way.

On one miserable cold and wet Saturday morning, we found ourselves queuing up to see a new listing that had come on the market at the extreme low end of the price. The wife was hopeful. "It must be a wonderful opportunity at such a low price, and with so many people come to see it." Inside, what a let-down it was. Dirty, small, poor condition. Garbage, even at the price, and disgraceful really to market a house complete with dirt and cobwebs.

And yet the couple who viewed it before us stood across the street in the rain after finally letting us go in, with the husband gazing longingly at it all goo-goo as if it were Megan Fox in her birthday suit instead of a knock-down. The house went under contract immediately, probably to them. If they got any competition for it, no doubt they paid more than asking.

My clients did not compete for the dirty house. On the next one they saw, they did compete and aggressively so, through not one but two rounds of "best and final" offers. This house had the following good points: clean and tastefully decorated living room, dining room, and three good-sized bedrooms, all with good re-done hardwood floors. And it had the following bad points: lousy bathrooms, lousy kitchen, central air on its last legs, and washing machine separated from dryer by 25 feet of dirty unfinished basement. On balance I rated this house just OK, nothing special, and yet if the listing agents are to be believed (agents lie -- I make no judgments on these particular agents) there were a dozen offers. However many offers there were, my clients' full-price offer with 20% down and no house sale contingency was not successful.

If that sounds more like sellers' market conditions, so too did the response of sellers through their agent to my clients' next offer. This time they bid on a house they liked at 95% of asking price. The sellers countered at 99.6% of their asking price, essentially throwing my clients' offer back in their faces with little consideration. Moreover they told us haughtily not to come back without meeting a number of onerous conditions that are not customary in this market.

Guess what? We did not extend ourselves to meet those conditions, and we did not go back to them. My clients found something else instead and had their full-price offer accepted.

A few days later the haughty agent called, and was more than a little miffed that we had done exactly as she told us to do.

The general point is this. At current rates, the inventory in this town will take 10.3 months to clear compared to over 11 months around the county; however, there are micro-markets within the town that are much hotter than that and the behavior of buyers and sellers has to adjust accordingly.

There are other factors to note. One, the $8,000 first-time homebuyer tax credit is going away soon if nothing is done, and the direction of policy-making in DC suggests nothing will be done. That provides impetus in this segment of the market, at least. Two, rising mortgage interest rates can also get buyers off the fence -- if they have been hanging in for lower rates and instead see them going the wrong way, they may be pushed to act for fear their inaction will cost even more later.

Tax-Efficient Exchange via Sec. 1031 . . . Safe Ex?

The Section 1031 Exchange mechanism has been a means of affluent people getting and keeping fortunes since the 1920s. Though it has in recent years been reaffirmed by the IRS, one has to be concerned that the device may not survive the coming drive for higher tax revenue from high-income earners.

But on the other hand, the Obama administration is keen on big thinking. This is small beans in the overall scheme of things, and may just escape their attention. So for as long as it lasts, one ought to know what it is and how to use it.

I believe my article on Section 1031 Exchanges is the clearest, most informative, and overall best brief treatment of the subject. It is available for free for a limited time at http://www.dhsmith.net/1031s.pdf and I am glad to consult with readers on it.

Some Reaction to the HIP

I ran the Household Initiative Plan by the strong free market advocates of the Ayn Rand "Atlas Shrugged" group on Linkedin, and got back strong opinions. One comment:

“The defect [of the HIP] is that it's just minor tinkering. Instead, let's repeal the community investment act, privatize or abolish the GSEs. Repeal the income tax, lay off all government employees . . . this plan is illogical since it seeks to artificially make real estate go back up again . . . "

Another:

"The defect [of the HIP] is that is a plan and a planned economy never works. You describe it as a plan to turn the housing market around. Around from what and in which direction? I don’t know if real estate has to come down [and] neither do you . . . the only way to know what should happen is to free the market and watch it work."

I answered as follows. First, there is no way that liberating 46 million accounts and trillions of dollars constitutes minor tinkering.

Second, I think my use of the word “plan” has caused more grief than the actual contents of the plan. Among strong free market believers it is a word that elicits negative reactions. I only chose the word plan in order to try to compete for attention among all the other plans that are out there -- Zingales, Hubbard/Mayer, Feldstein and all the rest. I could have called it a proposal, an idea, or following an ancient Fed official, a banana.

My plan, or banana if you object to the word plan, is non-interference, a level playing field, clearing away the regulatory debris, and letting the owners of capital decide how to apply their capital.

The "planned economy" is not part of my proposal. On the contrary the "planned economy" was introduced to this situation years ago when the current structures of IRAs, Keoghs, SEPs Simples and all the IRS apparatus that goes with them were created. By the way, it should be understood by one and all that this whole apparatus was a giant gift for investment companies, banks, financial planners and accountants.

Surely I am not the only one with money in IRAs, losing money in financial assets and thinking about the future, who might choose to buy a condo in Florida instead with the money if the restrictions were lifted. That would be my choice, freely made, well considered, possibly wrong, but I'm willing to take the risk on that if I am permitted and not ask for a bailout if I am wrong. If someone else chooses to stick with their Fidelity and Putnam funds, I would be the last to tell them they can't.

At least for now, the money in these accounts belongs to the people who own the accounts. (There are professors at the New School who are advising the administration to do something about that too.) Let the people make their own choices. I don't see how that can be objectionable.

Kung Pao Chinese Stocks Ding

I worked in China from 1986-88. People I trained were later instrumental in the establishment of Chinese securities markets. Some of what I did, as theoretical as it seemed then, helped lay a basis for their subsequent development. Before there were Chinese stocks, I owned Chinese bonds. When the first issue of Chinese shares was offered to foreign investors, China Southern Glass in 1991, my company bought in.

I have been involved in modern China’s financial system since before its creation, and stayed involved continuously. So let’s declare biases honestly and note that I am not impartial. I am called a China hand by my Chinese friends, and dismissed as an apologist by . . . others. I’m not a dreamy China head (though I did go through that dreamy China head phase for about three weeks in 1986). I am sharply critical of what I see as deficiencies of their system.

I have been fortunate to make money in Chinese financial markets. Sometimes it has been a simple matter of doing the diametric opposite of whatever the top Wall Street firms advise in their China strategy. But when they have gotten it right and their clients have done well, as during the latest Chinese bull markets, it has been a wonderful thing to see. I’m glad so many people have good success, because in the 90s it sometimes seemed that everyone who ever invested in China lost money and ended up sour on the experience.

Certainly there have been problems that have bedeviled the Chinese markets all these years.

As a nominally communist country, China struggled at first with the very concept of financial markets. When they began to be introduced in the late 80s, they were described as “experimental.” The designation endured for a long time. It is not much of an endorsement, is it? “Welcome Capitalist Roaders to Invest in Our Experimental Markets that We Might Shut Down if We Don’t Like the Way it Goes.”

If markets were purely experimental, the social scientists running the experiment figured they might as well do lots of trials. To that end, the Chinese markets have been finely sliced and diced like Kung Pao Chicken Ding. The authorities set up a Shanghai A share market for local people and a Shanghai B share market for foreigners. Then they replicated the pair in Shenzhen – that’s four venues in China for the trading of Chinese shares. Two classes of Chinese shares, the H shares and the Red Chips, traded in Hong Kong. There were N shares, for which the initial listing was on the NYSE – China Brilliance (CBA), Shandong Huaneng (SH), and Huaneng International (HNP). Later they lost control of the process, and various stray Chinese companies did IPOs in Singapore, Tokyo, Sydney, London, and I lose track of where all else. There has been a major boom in backdoor listings of Chinese companies on junior stock exchanges around the world.

And that’s a big problem – no one can keep track. If I want Italian shares, I pretty much know where to look. If I want Chinese shares, where do I start?

(I met a Chinese market regulator, an executive of the Chinese Securities Regulatory commission, in May 2007 during the raging bull market. He was in a self-congratulatory mood, and invited me to offer congratulations too. I demurred, and instead took the opportunity to point out that their sclerotic regulatory process had prevented too many decent Chinese issuers from doing IPOs in the Chinese markets where home-team investors would most welcome them, sending them instead to go for Rube-Goldberg RTO and SPAC listings on junior stock exchanges abroad where they would struggle to gain a following or a fair valuation.)

The B share markets in particular became bogged down in a morass of low liquidity and poor quality. There were a few corporate governance issues. Many foreign institutions believed that the Chinese securities market experiment was designed to let the Chinese government move garbage off its books into foreign portfolios. I have had big investors tell me with a straight face that they assumed the Chinese meant to hose them.

Some of the international stock offerings have had that effect, but I don’t believe it was ever intentional or malicious. The Chinese thought they would impress us by making their biggest enterprises available to us – their giant steelworks, shipyards, and petrochemical complexes. It turns out that bigger is not better. The social burdens on these cities-within-factory were hard to lift.

It can be quantitatively proven that the closer a share gets to the domestic Chinese investor the better the average quality, if such a concept can be distilled from growth rates and balance sheet items. H shares that do not also list A shares are worse than H shares that do, and A shares that do not issue any class of share to foreigners are of the best quality. I have done the work on this. I’ll report the research in this space shortly.

More than one fund manager has rejected my research finding, without offering to rework the numbers. But the alternative is to believe that they have sold us better stuff than they sold themselves. Does that make sense to you? No, it is intuitively hard to accept. It could not be, because whole attractive parts of the Chinese economy, including retail/wholesale trade and part of the telecom and media space, have been off limits to foreign investment in the past or even now. That alone would raise the quality of the average domestic Chinese share, and it has nothing to do with the Chinese government going out of its way to dump its garbage on foreigners.

If you run an international mutual fund, then the Chinese markets are just one part of your opportunity set. Given that they are sliced and diced beyond comprehension and riddled with pockets of low liquidity and poor quality, you could always make the case that it’s more bother than it’s worth.

But if you are a domestic Chinese saver, then Chinese A shares are a huge part of your opportunity set. As a Chinese investor, what alternatives do you have? Interest rates on bank deposits have been reduced from 24% to very, very small, bonds are not popular, and real estate is relatively illiquid. And some of the stocks in the opportunity set are really good after all.

For most of the time, this fact has eluded detection by the so-called experts of Wall Street, who have not generally examined domestic Chinese shares as long as they remained off-limits to their international clientele. But one feature of this latest bull market has been that some foreign investors are gaining access to the domestic Chinese opportunity set, while some Chinese investors are venturing abroad. That means Chinese investors, at least the biggest exemplars of the breed, are now clients of Wall Street, and Wall Street had to open its mind and its eyes and assign some analysts to take a look at the A shares.

Formerly, when the A share markets have gone crazy on the upside every once in a while, the foreign brokers who ostensibly “cover” Chinese markets have had nothing to say. These periodic bull moves have been totally incomprehensible to them. Don’t they just prove how stupid and gullible the Chinese individual investor is? Well, no . . . there has been another obvious conclusion, but these foreigners have not always had enough information to arrive at it. That conclusion is: some domestic shares are good, and there is a time and place to buy them, if you can.

China is complicated. More than once I have had to argue with analysts over points of fact – not opinion, fact -- arguments of the Kafkaesque “Black is white” variety. Well, the facts are sometimes obscure. So who does Wall Street send to deal with this most confusing and delicate market? Often its youngest, least experienced, least capable analysts, of course! Since China is relatively speaking a small part of the global opportunity set, why send a top gun analyst? You need that guy back in Hongkong to write the thirtieth report this week on HSBC.

So what is changing these problems? The passage of time. The action of price, making China a bigger piece of global market capitalization, bringing in more investors in the good times and lately attracting more critical scrutiny in the bad. How about regulation? The financial markets’ place in modern China is not the subject of an experiment anymore. They are clearly here to stay. With this belated acceptance the worst of the slicing and dicing should be undone. Short of allowing A and B share markets to merge, the regulators can easily allow domestic investors to gain access to B and H shares and expand foreigners’ access to A shares. My sense is that China emerges from the current global financial crisis with its relative position enhanced compared to other economic players. It has national savings, it has surpluses, it can adjust policy at short notice. Sclerosis now is a bigger problem for the developed west.

I still hope for root and branch restructuring of the regulatory system that allows these changes and many others to come more quickly. But my CSRC official as well as many other Chinese advise me not to hold my breath. Even though it is a relatively new bureaucracy, it is still a bureaucracy, and an entrenched, calcified one at that.

Beat up trade partners over exchange rates? No!

American trading experience with Japan shows there’s much more to trade balances than just the exchange rate, and beating up trading partners over exchange rates is useless. In 1985, the Japanese yen traded at 250 to the dollar, and Japan ran a $46 billion surplus with America. In spite of billions wasted by the Bank of Japan in costly and ineffectual currency market intervention between 1985 and 2005, the value of the yen more than doubled to 109 per dollar. During the same two decades, Japanese industry suffered barriers against its motorcycles, semiconductors, and steel in the U.S. market, accepted voluntary export restraints on cars, and localized production in America through its investments of over $100 billion. Neither the huge currency appreciation, nor the restraints on trade, nor the transplanting of Japanese industry stateside prevented Japan’s trade surplus with the U.S. from rising to $75 billion by 2004.




(Source: US Dept. of Commerce, DH Smith)

Consider America’s trade deficit with China – it certainly is growing, having quadrupled between 1996 and 2004. Note that this was a period during which the dollar/renminbi exchange rate was stable to within 1.1%. During the exact same period, the Mexican peso declined by about one-third against the dollar. If the exchange rate were the principal factor in relative competitiveness, we might expect Mexico’s export performance in the United States market to be better than China’s. In fact, Mexico did increase its surplus by a factor of three — a strong performance, but not as strong as China’s.

Harry Markopolous flays the SEC

It is damning stuff. Root and branch restructuring is coming soon to the SEC.

If you take their money you will take their direction

President Obama took another shot at Wall Street today. "I saw an article today that indicated Wall Street bankers had given themselves $20 billion worth of bonuses. That is the height of irresponsibility. It is shameful."

We are uneasy about the anti-business tone being taken by the new administration and Congress. There's a ready market for this kind of populism, but after the bankers are burned alive on pyres of corporate jets and commodes, the economy catches no rise thereby.

American businesspeople are facing a world in which all their contracts and undertakings are examined line-by-line by government officials, second-guessed by PIRGs, NGOS, and the media (which is doing such a bang-up job managing its own affairs after all), and subjected to subpoena or prosecution by career-making politicians.

To advance themselves, they will not scruple to destroy you.

If you take their money, you will have to take their direction. Simple as that.

Dangerous New Phase of Financial Crisis (3)

Let me just send you to the account in The Independent newspaper of the UK: "America Goes Green" The title tells you a lot, but there is much more. As the article says, "Tilting at Mr Bush has become a hallmark of the Obama presidency," and today's windmill is the Bush admininstration's approach to environmental regulation of the motor industry, CAFE standards and so on.

The light touch is going away. At a time when the US auto industry is fighting for survival, this administration wants to lay whole new environmental regulatory and compliance burdens on them. I really don't believe they can bear up.