Some states see economic benefit from prison farms

Milwaukee County Parks Director Sue Black's assertion last week that her department lacks the funds to take over the Farm and Fish Hatchery has reignited debate about the farm. This year's county budget transferred the program – a perennial target for cuts by the Walker administration -- from the sheriff’s office to the parks department midyear, at a reduced funding amount. The County Board's finance committee recommended a modified version of the plan to move the program, and the issue will be discussed by the full County Board on Thursday.

Supporters tout several benefits of the program: the harvested crops are donated to food pantries; the fish stock county ponds; and inmates learn work skills. Those less enthusiastic about the program question its appropriateness for a correctional environment and its necessity given the county's severe financial challenges.

Interestingly, Milwaukee's discussion about closing its farm due to lack of funds comes at a time when corrections facilities in other parts of the country are looking to prison and jail farms as a way to save money. Governing magazine, for example, cites two correctional gardens employed to feed inmates.

One Connecticut prison's savings of more than $5,000 in the summer of 2009 influenced the Corrections Commissioner to replicate prison farms across the state. Those prisons that already have gardens are being asked to expand them. In addition to lower food costs, savings include paying less to dispose of waste at the prison (kitchen scraps are composted), and not having to pay for flowers in landscaping (flowers are grown from donated seeds).

Meanwhile, an Ohio sheriff was so pleased with the way his jail farm is feeding the inmates that he plans to introduce a chicken-raising effort, estimating that for every 50 donated chickens the inmates raise, the jail cafeteria will get 300 pounds of meat. His actions, which in addition to growing food included eliminating all red meat and hot dinners, saved $25,000 on food costs in 2009.

Milwaukee's farm operation differs from the examples in Connecticut and Ohio in that the crops are used to feed the poor and not to feed the inmates. Prior to Milwaukee County's decision to privatize the House of Correction's food service in 2003, the crops were used to supplement inmate meals. Following privatization, however, Hunger Task Force stepped in to distribute the unwanted produce to area food pantries. In addition, while both the Connecticut prison and Ohio jail received their gardening supplies through donations, Milwaukee has found private support harder to come by.

It remains to be seen whether Milwaukee County's program will survive, but the Connecticut and Ohio programs show that in some cases prison farms may be opportunities for savings, as opposed to drains on already challenged budgets.

Is there an optimal rate for municipalities to use tax increment financing?

Tax incremental financing (TIF) is the most widely used economic development tool of local governments in Wisconsin. TIF uses future property tax revenue to provide up-front assistance for real estate developments. Notable projects such as Grand Avenue Mall and the recent redevelopment of Bayshore Mall relied heavily on TIF assistance. TIF plays an integral role in our region’s economic development.

While TIF use is growing throughout the state, its benefits and the extent to which communities should use TIF are still hotly debated.

The work of the Forum’s 2008-2009 Norman N. Gill fellow, John Kovari, has resulted in a research brief Too Much or Not Enough?: A Statistical Analysis of TIF in Wisconsin, which adds to the debate and takes a closer look at TIF and its economic benefits.

Specifically, the report explores the relationship between TIF and property values at the local and regional level using economic data from all Wisconsin municipalities between 1990 and 2006. Economic, statistical modeling provides an estimate of the average impact of TIF on property values in a way that might be useful for local officials in making economic development decisions.

The report’s key findings:

* TIF Growth. TIF utilization in Wisconsin municipalities has grown considerably (400%) since 1990, especially in the southern and central areas of the state. More than one quarter of the municipalities using TIF are now over the statutory TIF value limit.

* Who Uses TIF? Medium-sized municipalities (under 50,000 residents) and those with growing property tax bases are using TIF more often than those with lower rates of property value growth, including Wisconsin’s biggest cities. Although TIF was originally intended to spur economic development in struggling areas, TIF is being used more frequently by communities that are experiencing economic growth.

* TIF Benefits. TIF has the potential to be a useful economic development tool for villages and cities in redeveloping “blighted” properties and raising property values. On average, for every $1 increase of TIF value, total property value is estimated to increase by $6.

* Differences Across Communities. Differences in TIF use exist between Wisconsin’s largest metropolitan cities and outlying municipalities. On average, outlying localities are at risk of over-utilizing TIF. Statistical modeling estimates that if the average Wisconsin suburb were to increase its TIF amount by 10% (keeping all other factors constant), then its total property value would likely decrease by 0.2%. Meanwhile, Wisconsin’s largest cities appear to under-utilize TIF: the model indicates that a 10% increase in TIF value would likely increase property values by 2%.

* Regional TIF Effects. Within Wisconsin’s metropolitan regions, greater TIF investment in suburban communities may impair property value growth in the corresponding central city (i.e. Wisconsin’s largest cities). According to the model, a 10% increase in suburban increment value would likely result in an estimated 1.1% decrease in central city property value.

Overall, using historical data to model estimated TIF impacts suggests that excessive TIF use has the potential to negatively impact the economies of individual communities as well as Wisconsin’s largest cities. In other words, excessive TIF use (especially in outlying municipalities) may potentially create a scenario in which property value growth in the state is impaired.

At the same time, TIF can be a successful tool in redeveloping areas in Wisconsin’s largest cities. The model suggests that these cities (those over 50,000 residents) have not utilized TIF at the ideal rate to maximize property values.

Local and state officials are encouraged to look at TIF in a way that asks whether their communities are using TIF “Too Much or Not Enough.”

Special thanks to the Gill family for their generous support of this project through the Norman N. Gill Fellowship.

The Economic Impact of the Child Care Industry in Southeast Wisconsin

Lately, mention of child care is likely to evoke recollections of scandal and fraud. What sometimes gets ignored is that child care is an industry in its own right that makes a sizeable contribution to the regional economy.

The Public Policy Forum’s latest report from its three-year research project on early childhood care and education, “The Economic Impact of the Child Care Industry in Southeast Wisconsin” quantifies the size, impact and characteristics of the industry.

The aim is twofold: to provide policymakers and economic development officials with a sense of the economic magnitude of this industry, and to lay the groundwork for a follow-up report – to be released later this year – that will enumerate the costs and benefits of a potential high quality early childhood care and education system in southeastern Wisconsin. Taken together, these reports will provide insight for policymakers as to the scope of investments that would be required to achieve a high quality system, and the returns that might be generated should those investments materialize.

Key findings:

• Southeast Wisconsin’s child care industry employs roughly 12,400 people. It also creates and sustains approximately 7,000 other non-child care jobs in the region by generating additional employment in related industries.
• The region’s child care industry generates an estimated $661 million in gross receipts annually.
• Economic modeling using industry “multiplier” figures suggests that the child care industry’s purchases generate another $648 million in sales in other industries.
• Southeast Wisconsin’s child care industry frees up an estimated 15,914 parents of children under age 6 for work, who earn an estimated $742 million annually.

These findings indicate that the child care industry is a significant creator of jobs and economic activity in the region. Furthermore, they suggest that the industry functions as an element of economic infrastructure, meaning it might best be viewed similarly to roads, transit and electricity as a critical infrastructure component that enables people to participate in the workforce and the economy.

In light of this economic importance, policymakers who are considering regulatory changes and/or quality enhancements for the child care system must consider how such initiatives not only will affect providers and children, but also the larger economy that depends on this industry as a vital source of infrastructure and economic activity.

Click here to view the other research stemming from the Forum’s early childhood education project.

Entrepreneurship Drives Job Growth

The health of America’s big corporations dominates daily business and economic news. But as market watchers contemplate whether the latest corporate earnings statements signal that the current economic crisis has hit bottom, policymakers can ill-afford to overlook the role new and small companies can play in reviving the economy.

A series of papers from the Kauffman Foundation helps to refocus attention on entrepreneurs and start-up companies. The research uses Business Dynamics Statistics (BDS), a new data tool developed by the U.S. Census Bureau that tracks the life-cycle of businesses with data on openings, closings, start-ups, job creation, and destruction by firm size, age, industrial sector and state. The Kauffman analysis reveals some striking findings about young firms.

• Economic churning, defined as the number of jobs created versus the jobs destroyed through business contraction or closure, is a by-product of a dynamic marketplace, notes one report. While job loss and business closures are disconcerting for many, the churning of young businesses positively contributes to economic productivity as inefficient firms leave the marketplace and more efficient firms enter or expand their capacity.
  
• As expected, young firms experience a high rate of failure, but those companies that make it create jobs at higher rates than more established firms. “Very young firms (1 year) have a net employment growth rate of about 15%.” In comparison more established firms (29+ years) grow jobs at a rate of about 4%.
  
• Young companies are an important source for job growth. Private sector start-ups accounted for 3% of employment between 1980 and 2005, surpassing the average annual net employment growth rate for all firms of 1.8%.
  
• The Midwest and East lag the West and Southwest in new business development as measured by the percent of employment created by firms younger than 3 years old. Wisconsin ranks near the bottom at just over 6% of employment attributable to young firms. Nevada topped the list with almost more than 11% of jobs created by new companies.

The Kauffman analysis just scratches the surface in explaining early stage companies’ contributions to overall productivity and job growth. Policymakers, though, can benefit from this research and future research using BDS, which helps shed light on business dynamics. It will be particularly useful as policymakers develop strategies to spur economic recovery, especially ones that seek to advance entrepreneurship.


Locally, there seems to be recognition that entrepreneurial activity presents an opportunity - one that must be strategically fostered. Biz Starts Milwaukee, which was launched in 2008, is encouraging new business development, specifically promoting development in high growth industries. Its most recent initiative is Venture Track, which combines Fast Track business planning classes with a mentor program to increase a start-up’s success. Measuring Biz Starts' effect on increasing Milwaukee’s culture of entrepreneurship and the subsequent creation of successful businesses will take time, requiring local entrepreneurs and their supporters to persevere through many economic ups and downs, including the most recent retrenchment. Ultimately, though, active cultivation and support of business innovation and entrepreneurship could show results, translating into much needed jobs for the Milwaukee region.

An economist's take on Brett Favre and municipal budgets

In economic theory there's a notion called deadweight loss, or market inefficiency, which impacts a consumer when the value of an item's utility is less than the price paid for it. What does that have to do with Brett Favre? According to Stephen Dubner, one of the co-authors of Freakonomics, people who bought Brett Favre Jets jerseys earlier this football season are likely experiencing deadweight loss now, as Favre failed to get the Jets into the playoffs.

Dubner asks:

So how do all those people who paid $80 for Favre Jets jerseys feel today? Do they wish they’d spent their money elsewhere? How much would they pay for the same jersey today? Did they derive $80 worth of pleasure from it up to this point — i.e., was the thrill of the first two-thirds of the season worth the pain of the last third?

But this a particularly New York point-of-view (Dubner is a reporter for the New York Times). Here in Wisconsin, the question to Packer fans should be: Was it worth $80 to see Brett play one more season? (Or, for some Favre fans: Were you thinking it would be worth $80 to wear a Favre jersey and cheer the Jets during playoff season in protest of the Packers letting him go?)

But the concept of deadweight loss applies to more than expensive football jerseys. It is a concept that can apply to budgeting decisions as well. For example, what is the true price when the county keeps swimming pools open, but no one comes to swim? Arguably, the county's costs of maintaining and operating the pools are compounded by the deadweight loss in value due to the non-swimming taxpayers. In another example, MPS spent over $100 million to build and remodel neighborhood schools that now have classroom after classroom of empty desks--parents obviously don't value these schools to the extent the district anticipated they would. A final example, from the city's budget: what's the true price of a citywide free wi-fi network failing after the vendor discovers there's no money to be made in it? The risk of deadweight loss in this case was transferred to the vendor, but taxpayers with patchy wi-fi coverage were still the ultimate losers.

Favre fans are likely to recover their loss when Brett retires and is inducted into the football Hall of Fame; his one-season Jets jersey will become a collector's item. Local taxpayers, on the other hand, will find themselves continuing to struggle under the deadweight of lost value when short-sighted or uninformed budgeting decisions continue.

Despite article, some areas in the region lack banks

From the sound of this week’s Journal Sentinel article entitled, “Bank branches proliferate in state,” our community streets are being practically taken over by bank branches. The president of Community Bankers of Wisconsin is quoted as saying “There’s no doubt Wisconsin is very bank-heavy.” But count the banks in certain areas of Milwaukee, and you get a decidedly different story.

A report released just two weeks ago highlights the marked lack of banking options in northwest Milwaukee. The Federal Reserve and Brookings Institution report, “The Enduring Challenge of Concentrated Poverty in America,” includes case studies from 16 high-poverty communities across the country, each chosen to illustrate different facets of the poverty story.

The boundaries of the Milwaukee area they studied were based on Census data tracts. With a poverty rate nearly five times that of the rest of Milwaukee’s Metropolitan Statistical Area (MSA), the area includes all or part of the Sherman Park, Metcalfe Park, Uptown, Washington Park, Walnut Hill, Midtown, Martin Drive, and Cold Spring Park neighborhoods, covering parts of the zip codes 53205, 53206, 53208, 53210, and 53233.

This northwest area of Milwaukee, with over 23,000 residents, has just two bank branches (three banks lie just over borders of the study area). The area, however, is heavily populated with nontraditional financial service providers such as currency exchanges, check cashing, pawnshops, and payday lenders.

The report explains that an absence of basic banking services is linked to higher costs for financial transactions for working class and minority communities. While traditional financial institutions provide residents with access to cash, savings and capital, conducting financial transactions through nontraditional providers not only costs more, the report claims, but offers fewer ways to save money and plan for long-term financial management.

Residents in northwest Milwaukee are also likely to pay more for credit: In 2005, 65% of the area’s mortgages originated as sub-prime or other high-cost loans, compared to 26% in Milwaukee’s MSA.

The report identifies the myriad challenges related to concentrated poverty facing northwest Milwaukee, including high rates of returning ex-offenders, unemployment, and jobs that disappeared or moved to the suburbs. Local nonprofit programs working to improve the area are also highlighted along with some noteworthy successes.

While the newspaper quotes a Franklin resident exclaiming “Not another bank!,” the article’s juxtaposition with the recent Brookings Institution report underscores one of the many differences between inner city Milwaukee and other areas of southeastern Wisconsin.

All politics is local...and global

This week none other than The New York Times and National Public Radio are making national stories from news about local school districts in our state. It's a reminder that Wisconsin is, in fact, on the globe.

The story, covered locally by the Journal Sentinel, can be simplified as follows: Several school districts around Wisconsin participated in high-risk investments using borrowed funds and are now in danger of losing millions. The Irish bank to which these loans are owed is now on the hook, threatening the viability of that bank and the larger German bank that owns it. The German government has stepped in to save the banks, which now find themselves unable to conduct business as usual, affecting the many local governments around the world that have been their loan customers.

The details are not actually that important. The lesson to be learned is that local decisions can have a global impact. As hard as it may be to believe, your neighbor on your local school board is now a player in the German economy.

Couple this new paradigm with the observation from yesterday's Milwaukee Talkie post that deficient local decision-making could result in less local control should the state be required to step in, and you have a recipe for uncompetitive local elections and poor turnout. Who would want to serve on a school board, pension board, or village board when the decisions are this complicated, this tough, and this far-reaching? And even if there are enough people willing to run for these positions, do voters understand the true nature of the job and the types of decisions the elected officials will be required to make?

Unfortunately, the end result may be a vicious cycle in which low voter turnout and unchallenged candidates lead to ineffective leadership and justify loss of local control. Once that happens there is even less incentive for future voters to be informed or for qualified candidates to step forward. The market and the economy are indisputably global. Is it inevitable that governance shall be, too?

Home foreclosure crisis causes, Part I of II

What do Ed McMahon and Eric Rosengren, president of the Federal Reserve Bank of Boston, have in common? They've both faced foreclosure on their homes. It’s an interesting tale as told by Paul Willen, senior economist at the Boston Fed, who presumably had his boss’ permission when he recounted his story during the Governmental Research Association’s annual conference.

Mr. Willen’s story illustrates the results of his research into the causes of the mortgage crisis. A dataset of all mortgage loans in Massachusetts revealed some interesting findings.

Finding 1: Most of the defaulted subprime loans are not the purchase loan, but a refinance or a piggyback loan. The crisis isn’t solely the result of new homebuyers going after a house they can’t afford with an unwise purchase loan, as is often contended.

Finding 2: The rate adjustments after the initial lower-interest period, called resets, aren’t the sole problem either. The definition of a subprime loan is one in which the initial interest rate is already above the market rate; the reset didn’t push the rate too much higher. Resets on subprime loans are not like the interest rate resets on those cheap credit cards you can sign up for at Summerfest.

Finding 3: Housing prices are a contributing problem. In Massachusetts less than 0.1% of all homebuyers in 2002 went into default on their mortgage within 24 months; but 0.4% of all 2005 buyers went into default during that timeframe. Mr. Willen applied the home price appreciation experienced by the homebuyers of 2002 to those of 2005 and found the 24-month default rate would have gone down to 0.1% had 2005 buyers seen their home values go up as the 2002 buyers did.

It may be that the Federal Reserve Bank’s monetary policies, particularly the low interest rates of the early 00’s and the decision not to cut rates in 2007, had an impact on housing demand and thus housing prices. Even so, the bank's finding that declining home values are a source of the crisis is significant. It means the crisis is not acute—it will not be a sharp spike of defaults that will soon pass through the system, but a continuing problem until home values eventually start to recover.

For Southeastern Wisconsin, this may mean we’ll be insulated from the worst of the crisis, as the housing bubble here was never as expansive as in other metro areas. By never reaching the peak of the bubble, we may have been saved from experiencing the depths of the crisis.

And Mr. McMahon's and Mr. Rosengren's story? While they’ve both faced foreclosure on their homes, the outcomes were very different. When Mr. Rosengren became “upside down” on his home loan in the 90’s, he did not default, but tightened his belt and stayed in the home, waiting for home prices to increase.

Mr. McMahon, in default in 2008, entered foreclosure—for him, and thousands of others, the market turnaround is too far off. Luckily for Mr. McMahon, Donald Trump came to the rescue, buying the house and leasing it back to him. That’s a rather unlikely scenario for any other homeowner facing foreclosure.

(Part II, tomorrow: How can state and local policies blunt the impact of the crisis?)

Smoking ban research: policy kills

A recent issue of The Economist includes a small blurb on new research published in the Journal of Public Economics by two Wisconsin economists. Scott Adams, of UWM, and Chad Cotti, of UW-Oshkosh, have found that when public smoking bans are implemented at the county level, drunk driving fatalities in adjacent counties can rise. Presumably, this is due to smokers no longer patronizing local establishments and driving to and from bars in the counties that have not prohibited public smoking.

For instance, they found that when Colorado's Boulder County banned smoking, fatal accidents in Jefferson County, between Boulder and Denver, went up by 40%.

Smoking ban opponents will find this research useful in arguing that the ban's benefits may not be outweighed by its other impacts. Smoking ban proponents may use the findings to argue that a statewide ban is the most appropriate, so as to reduce the potential for cross-county drunk-driving by smokers.

However, the economists also looked at statewide bans, finding, for instance, that accidents increased 26% in Pennsylvania's Delaware County after the neighboring state of Delaware introduced a smoking ban in 2002.

However, it's unclear which way this finding cuts for Wisconsin, as our neighbors Minnesota and Illinois both have new smoking bans in effect this year, while Iowa's goes into effect soon. Would a statewide smoking ban endanger our citizens on the road, forcing them to drive to Michigan's Upper Peninsula? Or, without a statewide ban are we (at least in our southern and western border counties) about to see an influx of intoxicated drivers from the Twin Cities and Chicagoland?

Milwaukee's mortgages compare favorably

Sometimes a picture is worth...well, you know. The New York Times recently had a graphic mapping the subprime mortgage foreclosure crisis nationally, using data from major metropolitan areas. The map indicates Milwaukee isn't experiencing the crisis to the extent of many of our neighbors.

What it shows (in less than a thousand words) is that in metro Minneapolis/St. Paul, between 9% and 12% of all mortgages are subprime mortgages, and of those, 17.1% are in foreclosure. It's worse in metro Detroit, where over 15% of all mortgages are subprime and 20.6% of the subprime mortgages are in foreclosure.

The map indicates that in Wisconsin, metro Green Bay has been hit the hardest, with 12.8% of subprime mortgages in foreclosure, although less than 9% of the total mortgage market in Green Bay is subprime.

Reasons southeastern Wisconsin may weather the subprime crisis: The two accompanying maps show we were below the national average in new housing construction from 2004 to 2007 and had a lower unemployment rate than the national average during the same period.

NAFTA bashing does not jibe with Milwaukee's high-tech reality

NAFTA bashing is the new blood sport on the presidential campaign trail. As both major democratic candidates were quick to discover in the Wisconsin and Ohio primaries, their populist message of blaming the upper Midwest's economic woes on free-trade deals certainly made for catchy sound bites.

But, is NAFTA really to blame for the Midwest's slow job and income growth?

And, are things really that bad? To the contrary, some suggest that it could be (gasp!) the Rust-Belt which could lead us out of our country's recession based on the strength of its manufacturing exports. This week, the Federal Reserve Bank of Chicago threw additional cold water on the fiery NAFTA rhetoric. The Chicago Fed highlighted new data from the International Trade Administration which reported that the four-county Milwaukee region exported $6.8 billion worth of goods in 2006, up 14% from 2005. Fed contributor Bill Testa concluded that "the outlook for Midwest exports remains strong."

A double digit growth in exports is a good thing for Milwaukee. Well, actually, it's a very good thing for Milwaukee. The 14% increase in exported goods is a critical economic indicator that should intrigue those with even a passing interest in economic development policy. After all, sustainable economic development can only be realized if you sell more "stuff" outside of your region so as to bring new dollars into your region. Without new money coming in, your region's "secondary" economy (housing, retail, etc.) will slowly starve.

Thankfully, we are not starving in Milwaukee. In fact, with the weakening dollar and explosive growth in developing countries, the stars are aligned for continued manufacturing export growth in our region. Perhaps this is one reason why the Milwaukee region was recently highlighted in a Chicago Tribune article as one of only 4 US regions (in a survey of 25 large metro areas) where housing prices didn't fall in 2007. This could be an example of our region's foreign export growth propping up local housing demand. After all, Milwaukee's exports made up 37.3% of all the exports out of Wisconsin - this despite the region only comprising 27% of the state's population. In the midst of such export strength, it may be no wonder that Milwaukee is experiencing relative price stability in a treacherous housing market.

To the extent that NAFTA has accelerated Milwaukee's investment into the research and development of new "high-end" manufactured products, the trade deal may deserve a bit of praise. Milwaukee 7 representative Jim Paetsch recently stated, "Some places believe that manufacturing is dead or dying. We don't." The quote was pulled from an article at Forbes.com which highlighted new research that showed how Milwaukee's manufacturing base was acting as an important platform for high-tech innovation and patent generation. Perhaps this means that southeastern Wisconsin has finally figured out that competing on cost for low-end of manufacturing jobs is a fruitless "race to the bottom."

But while we pat ourselves on the back, let's not forget that NAFTA has contributed to the upheaval of thousands of households in Milwaukee which were, for decades, firmly rooted in family-supporting, high-wage manufacturing jobs. Many of these low-end production jobs have left Milwaukee for China, Mexico and other countries that are pulling in massive amounts of foreign capital investment based solely on their lower cost structure. With these jobs gone, the workers that remain need an effective and seamless workforce development system which trains capable workers for high-end manufacturing and service jobs in our region. This is going to take money - a cooperative effort with public, corporate and foundation financial support.

Corporate profits also need to be plugged back into research and development to ensure new patent and product development. To encourage such investment, there is a need to align local and state government economic development programs with our new economic reality. The Wisconsin Tech Council hits on several such changes to state policy in this 2003 report. The City of Milwaukee is also getting in on the innovation game with their recent investment into the development of a new line of lithium-ion batteries at C&D Technologies in the Riverwest neighborhood.

The 20th century's economic development paradigm was jobs. The 21st century economic development paradigm is innovation. Like it or not, NAFTA has played a role in ushering this new economic reality - which Milwaukee seems to be embracing.

The middle class ticket to...nowhere?

The Forum does not advocate on behalf of anyone and generally uses a taxpayer's perspective in our analyses. However, some policies are focused on particular demographics, which require us to analyze their effectiveness from the perspective of both the intended beneficiary and the average tax-paying citizen. School choice is an example: How does the program impact the educational achievement of low-income students using vouchers and how does it effect the state's taxpayers?

Early childhood education could be another example. Most research on the effects of high quality early childhood education have found greater benefits for low-income children than for middle class children. Many states have focused their early childhood policies on low income families for that reason: to get the most bang for their buck. For a taxpayer's group like the Forum, maximizing the return on a public investment is a worthy goal.

The problem with such narrowly focused policies is that they may provide a perverse incentive for families to languish in poverty, or at minimum they may introduce unanticipated barriers to transitioning out of poverty and into self-sufficiency.

A past Forum research project called Making Work Pay found that government benefit programs with steep drop-offs of benefits at certain income levels prevented many families from moving out of poverty. In 1999 we found:

Wisconsin’s working poor face “disincentives” at certain income levels due to the tax structure and the phase-out of federal and state benefits. A single parent of two moving from an income of $17,000 to $18,000 experiences a marginal tax rate of 190% due to loss of food stamps and reduced tax credits.

New research from the Brookings Institution shows that not only can these poorly-designed policies prevent this parent from moving up in economic status, they can effect her children's eventual status as well.

Julia Isaacs asked the question: "To what extent do American families improve their incomes over a generation?" Her findings are worth noting. First, she found that 42% of children born to parents in the bottom fifth of the income distribution remain in the bottom after reaching adulthood. Also troubling, she found children of middle-income parents have a near-equal likelihood of ending up in any other quintile, "presenting equal promise and peril for those born to middle-class parents."

(Side note: The most provocative finding is the link with race:

Almost half (45 percent) of black children whose parents were solidly middle class end up falling to the bottom of the income distribution, compared to only 16 percent of white children. Achieving middle-income status does not appear to protect black children from future economic adversity the same way it protects white children.

Thus, this new research indicates the most effective policies have to not only avoid disincentives to increased income to truly raise a family's economic status, but must help families maintain the gains over future generations, as well. The hurdles to achieving this long-term effectiveness are two-fold: elected officials do not often plan beyond the next election cycle, and longitudinal studies on social policy effects are rare.

When it comes to early childhood education, there are several studies tracking children well into adulthood (see our matrix of research on early childhood outcomes). Whether the long-term benefits found in these studies outweigh the immediate political and economic costs is the focus of the Forum's current research.

Minnesota in recession, Wisconsin not....yet.

The Packers lost a big game last weekend. While the loss was painful, at least the Pack were in the playoffs and not sitting at home like the 2nd place Minnesota Vikings. I actually felt bad writing that last comment because you hate to kick a state when it's down. I'm referring to the news in which a Minnesota state economist declared his state to be in recession. Ouch.

Needless to say, this declaration was not fully embraced by Minnesota Gov. Tim Pawlenty who described the economist as someone who “tends to err a little bit on the pessimistic side.”

Regardless, the economist cited a significant increase in Minnesota's unemployment rate to 4.9% in December from 4.4% a month earlier and a net loss of 350 jobs over the last 12 months.

If we use the Minnesota example as a benchmark to define "recession," we can see that, for now, Wisconsin seems to have avoided the recession bug. Last week, the Wisconsin Department of Workforce Development reported an unemployment rate of 4.6% which was less than the previous month's 4.8% and less than the current national unemployment rate of 4.8%. In tandem with a lower unemployment, the state benefited from a net addition of 21,700 jobs over the last 12 months.

In short, 2007 was good to Wisconsin. A researcher in this week's Milwaukee Journal Sentinel agrees and states that "overall, Wisconsin is doing better economically than most Midwestern states."

This is not to say that Wisconsin doesn't have it's share of challenges. The article points out that Wisconsin's job mix is still predominantly low-pay (Competitive Wisconsin recently announced plans to address this issue) and that the state should expect job losses in construction and manufacturing due to the housing downturn. Additionally, state tax receipts have slowed and spending cuts may be needed.

How long will labor market data stay positive in Wisconsin? Is it just a matter of time before Wisconsin sinks into recession like our neighbor to the West? We can't be sure of what our future holds but for this very moment let's enjoy our relative economic health and a Packers season to remember.

Feeding the Red Dragon

Governor Doyle's trip to China has highlighted Wisconsin's strong export growth to the world's largest country. A recent article in the Milwaukee Journal-Sentinel points out that the state's growth in exports to China grew at an annual average of 23% over the last decade and jumped 29% just last year. In this time, China has become Wisconsin's third largest trading partner behind Canada and Mexico.

This growth trend shows no sign of abating.

Looking at the most recent export statistics, we see that Wisconsin exports to China accelerated at an even faster clip than usual in 2007. In the first quarter of 2007, $297 million worth of Wisconsin goods were exported to China. This represents an impressive 75% increase in exports over the first quarter of 2006. Although this is just three month's worth of data, Wisconsin moves up from China's 19th largest US state trade partner, to 14th largest. Not bad for a state that ranks 20th in population.

Wisconsin's export increase to China was fueled by a $71 million year-over-year gain in exports from the state's machinery manufacturers - think engines, turbines, mining equipment and other industrial machines.

In other words, if the past decade was good for Wisconsin-China trade, 2007 might be exponential. Maybe Wisconsin manufacturers are beginning to get the picture when it comes to competing with China: stop trying to slay the Red Dragon - feed it exports instead.

So, what does all this mean for the typical Wisconsinite? It means that if you need a job, a good place to look would be to our export related industries. For example, in my neighborhood there is a large manufacturer of mining machines, P&H. I encourage you to take a look at their current job openings on their website. WARNING: It's going to take you awhile to view all of the listed jobs as the list seems to go on forever.

The problem for P&H and other high-end manufacturers has been finding skilled workers to fill current opening. This problem should only worsen as baby-boomers drop out of the workforce over the next twenty years.

With China's continuing hunger for highly-engineered manufactured products showing signs of acceleration, it's logical that we step up efforts to train workers. A strong partnership between local, state and federal government, private foundations and the employer's themselves will be needed to meet our workforce development needs.

Big in Japan

According to a recent The Wall Street Journal (WSJ) article, there are 92 skyscrapers under construction in Tokyo, Japan. Even at this pace of construction, it is reported that the supply of office space in Tokyo will not keep up with demand due to years of robust expansion in Japan's service sector.

With Milwaukee's downtown office vacancy rate hovering around a dismal 15%, it might be time to look to Japan for a quick lesson in downtown development.

The catalyst in Tokyo's office building boom, according to the WSJ article, is Japan's shift from a manufacturing economy to a high-end service economy built on marketing and finance jobs.

Milwaukee is going through a similar economic restructuring. But a recent report by The Brookings Institution highlights Milwaukee's inability to adequately replace lost manufacturing jobs with high-value service sector jobs. In other words, don't get caught up in the hype that blames Milwaukee's economic woes on manufacturing job losses. Instead, blame our economic malaise on the region's sluggish employment growth in its service economy (see below chart by Brookings).

The story is simple: Everyone is losing manufacturing jobs (yes, even China). Some regions are transitioning. Some are not.

Sure, we could subsidize developers in hopes of spurring new downtown construction. But, if the Tokyo boom teaches us anything, finding ways to bolster a high-end services economy may be a more efficient strategy in building a postcard-worthy skyline for Milwaukee's downtown.

Race relation-omics?

The Forum's public opinion survey on race relations released late last year found race relations in SE Wisconsin are poor and not perceived as getting better. But we also found that in areas of interpersonal relations, such as marriage, adoption, friendship, etc., attitudes toward people of another race have improved across the board since we last surveyed on the issue in 1991. How can one survey find such disparate results? The answer may lie in economics.

A recent column by Tim Harford in Forbes magazine highlights the research economists have done on racism and concludes:
Economists tend to assume that people respond to the incentives they face. If that's true, we have to face up to the fact that young black Americans are facing some lousy choices. There is a lot of work for all of us to do.

Turns out economists are making a distinction between "taste-based" discrimination and "statistical" discrimination. The former is when discrimination occurs because of a dislike of minorities, the latter is when race is used as a marker for a trait to be selected out. Harford explains:
Non-racial statistical discrimination is actually rather common: An insurer will consider your age and your sex when deciding how much to charge for auto insurance. Why? Because the stereotypes, however crude and however unfair to individuals, contain a bit of extra information.

Harford's pessimistic conclusion arises from the realization that statistical racial discrimination by employers could be an economically reasonable position, if race is, in fact, a relatively reliable marker for something such as the quality of school attended. In that case an employer will respond to the positive incentive resulting from discrimination:
A racist who turns down workers even though he knows them to be competent will take a hit to the bottom line, but statistical discrimination could improve profits, which makes it harder to stamp out. As long as an employer can learn something extra from an applicant's race that he can't learn from looking at a résumé...then the worrying possibility for profitable discrimination exists.

So, the longer most minority children are attending the country's worst schools, the more reliable race is as a marker for quality of schooling. Even more troubling, however, is evidence that statistical racial discrimination based on an unreliable marker can cause the marker to become more accurate.
[Roland] Fryer and two colleagues, Jacob Goeree and Charles Holt, showed how statistical discrimination could easily lead to a vicious circle. They used computer-based classroom games that assigned students the role of employers, "purple" workers and "green" workers. Students in the role of employers quickly jumped to the mistaken conclusion that purple workers were uneducated, and that view became self-fulfilling, as purple workers abandoned hope of getting hired and stopped paying for education. Once the downward spiral set in, a color-blind employer would actually lose money.
"I was amazed," recalls Fryer. "The kids were really angry. The purple workers would say, 'I'm not investing [in an education] because you won't hire me', and the employers would respond 'I didn't hire you because you weren't investing.' The initial asymmetries came about because of chance, but people would hang onto them and wouldn't let them go."

Thus, if people feel that the instances in which they make distinctions based on race are not due to dislike of that racial group, but to a racially-relevant factor, we can find individuals reporting that their own attitudes about race have improved while race relations overall continue to be dismal. Because, if you're on the receiving end of the discrimination, does it really matter what label an economist has given it?

Is the value of higher education diminishing?

A new study released by the Chicago Federal Reserve Bank attempts to find out why the economic value of an additional year of education flat lined over the past ten years. The explanation given is a robust increase in wages paid to low-income workers during the roaring 90s. The author speculates that this trend will continue if the recently proposed minimum wage increase becomes law.

Despite the flat line, having a college degree still nets you double the annual average income of a high school graduate.

Could this signal a softening of the divide between the rich and poor? Perhaps, but the author notes that low-wage earners could have been particularly burdened by a loss of health benefits compared to their high-wage counterparts over the past ten years. Accounting for benefits, this "flat line" effect might disappear entirely.