What Happened in Wisconsin in January 2011?

I don’t think it’s structural change associated with the recession.

In regard to my documentation that Wisconsin employment slowed significantly relative to counterfactual, reader Kirk writes:

…what you are doing is saying the difference in the change in coincident indexes between the US and Wisconsin remains the same in the future. You are right, it has not as your analysis clearly shows. I’m saying that it could be due to other factors than scott walker being elected, such as the US shift away from manufacturing, which was something that was in fact accelerated during the recession. ….

It’s possible a structural change happened during the recession. In fact your blog partner Jim Hamilton just wrote a peice about that idea regarding long term unemployment. Run your analysis out to 2009 or 2010 and see if the forecast starts to diverge immediately as well.

Great idea! I’d done it before for robustness tests, but here I’ll show it for completeness’s sake. To be explicit:

1. I estimate a single equation error correction model of Wisconsin and US nonfarm payroll (NFP) employment for the period 1990M02-2009M06 (the NBER defined trough).
2. Dynamically forecast out of sample using actually realized values of US NFP for the 2009M07-2015M11 period.

The ECM and methodology are laid out in this post; only the sample and forecasting periods differ.

Here’s the resulting graph.

new_wi_fcast

Figure 1: Wisconsin nonfarm payroll employment (blue), forecast from error correction model estimated over 1990M02-2009M06 (red), and 90% confidence band (gray lines). Dashed line at 2011M01 when Walker takes office, and light blue denotes sample period. Source: BLS, author’s estimates.

I will let readers decide. For me, the model tracks well for a year and a half, and then something happens in 2011M01, and it could be (contractionary) fiscal policy, or regulatory uncertainty. I don’t think structural factors all of the sudden hit that month.

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27 thoughts on “What Happened in Wisconsin in January 2011?

  1. PeakTrader

    There will be winners and losers closing the income or compensation gap between union & government workers and non-union private workers, based on productivity or actual value added, although higher disposal, or after tax, income benefits everyone.

    And, as the U.S. economy continues to move forward into newer industries, in each creative-destruction cycle, job growth may be slower in older industries. Wisconsin may have relatively fewer newer industries compared to many other states.

  2. dilbert dogbert

    As an economist you should be thankful that some policy experiments have been run in Wisconsin, Kansas and California. Seems those in Kansas and Wisconsin did not turn out well.
    I was looking at the “actual” line and wondering if there are any explanations for the “wiggles”, peaks and valleys. About 2012 there is a sharp jump in the curve. Was there a significant event then?

    1. Menzie Chinn Post author

      dilbert dogbert: There was a surge in government employment just before the May 2015 recall election, partly reversing the contraction that followed Governor Walker’s election. Coincidence, or political business cycle? I let you decide. If the latter is true, it would be consistent with an incredible amount of hypocrisy, given the Governor’s avowed aversion to government spending.

    2. PeakTrader

      Government policies in California may have turned out much worse, except California is much better compensating for suboptimal government policies than Kansas and Wisconsin.

  3. spencer

    Peak Trader — do I understand you correctly, government in California does a better job of compensating for government than government does in other states?

    Is that deep — or is it just internally inconsistent?

    1. PeakTrader

      Spencer, no, the private sector in California does a better job compensating for poor government policies than the private sectors in Kansas and Wisconsin.

      California has a stronger private sector, because of three huge metro areas with a large base of growing newer industries.

      California attracts wealth and high-skilled workers from the rest of the world and other states. It’s a virtuous cycle.

  4. Steven Kopits

    There was an oil shock in April 2011. This took down the European economies for two long years, but the effects are clearly visible in the US data as well. ECRI called this as a US recession, and I believe ECRI was right but for the effects of surging shale oil production. High oil prices and resulting shale oil production have certainly prompted structural changes. Prior to mid-2014, these included stress on energy intensive industries. Subsequently, it has meant a strong exchange rate. Both trends appear broadly negative for Wisconsin. (On the other hand, Dane County (Madison) has a 2.7% unemployment rate. I don’t know how much better it gets than that.)

    Personally, based on what I can see of the Wisconsin economy, it still seems too wedded to old line industries, and not a sufficient amount of start-up tech. To a certain extent, we have the same problem in Princeton, notably because the University has no meaningful graduate programs in business, medicine or law. So Princeton, as wealthy as it is, is under-performing its potential. And that’s the way both the local residents and university administration like it. Cozy, liberal, intellectual. Anti-business in rhetoric, but not in practice. It’s great to have enough money to profess its unimportance.

    1. Bruce Hall

      Steven, careful what you say about Wisconsin and old line industries. I mentioned that and got the “ECM” response. http://econbrowser.com/archives/2015/12/the-year-in-review-2015-the-ascent-of-the-blowhard#comment-194343

      It seems convenient to ignore the “great recession” impact on Wisconsin’s “old line” structure which resulted in abandonment of plants and businesses tied to them… prior to 2011 which has been an anchor on Wisconsin’s recover. Even Menzie’s chart shows the actual running at the lower end of the forecast for 2009-10. See my comment below.

      1. Steven Kopits

        I see in Wisconsin a continued process of downsizing and consolidation at old line industries there. That’s a good thing, I think. If Oscar Mayer wanted to open a meat packing plant in Madison, would Menzie support it? I have my doubts. In Princeton, it would cause protests in the street.

        And Dane County unemployment is at 2.7%. That’s essentially the best since the dot.com boom. Could it be better? Sure. During the Clinton Contract with America period, it was at nearly 1%. OK, so bring back Clinton: balanced budget and Federal spending at 18.2% of GDP. That works for me.

    2. Menzie Chinn Post author

      Steven Kopits: So slashing K-12 education spending and starving higher education, demoralizing the university faculty, reducing science posts in the government agencies, eliminating science bureaus, and so forth, will accelerate the transformation of the Wisconsin economy?

        1. PeakTrader

          What makes you think 537 politicians know how to raise growth and reduce debt?

          Perhaps, that should be their purpose and should be why they spend millions of dollars to get elected.

          However, it may not be.

          Otherwise, they would’ve done it without a bonus already.

          1. Steven Kopits

            The recently passed $680 bn spending bill would never have seen the light of day with an incentive plan. It would have cost each member personally more than $3 million in lost bonuses.

      1. Steven Kopits

        I think the notion of privatizing UW and moving to means-tested vouchers is a very interesting idea, but I agree that you don’t want to break too many eggs making an omelette.

        I don’t know all the details in Wisconsin, but I can speak to Princeton. Here, I would move to a means-tested voucher system to achieve greatest social equity both on the student and taxpayer side. As I have noted before, we have retirees paying handsome sums subsidizing the education of the children of millionaires. And we have, for example, a vibrant Hispanic population to whom I would like to make available higher quality primary and secondary education, partly in more specialized schools.

        Let me give a specific example: As you know, my younger son attended the American Boychoir School (anyone see the movie?), and this institution chronically suffers financial difficulties. (It is a very challenging financial model.) If we had a voucher system, this school’s situation would be much easier, ie, a voucher system would support a greater diversity of more cutting edge schools. And that’s as true in Wisconsin as it is here.

        For example, one could make a very exclusive sports tech school in Wisconsin based on the state’s professional and college teams. This is a large and rapidly growing business, and one in which UW could gain comparative advantage. A voucher system might let you do that. So, yes, moving to a voucher-based from a state-education model might do quite a bit for the state’s outlook.

      2. Steven Kopits

        And while I’m at it…

        Restructuring an economics department:

        1. Add the Three Ideology Model up front. We spend a lot of time debating ideology–on an econ blog. This alone would suggest that any economics curriculum should start with ideologies–the objective functions–and then move on to their optimizations.

        2. Develop and teach conservative theory.
        Conservatism is the second of the three ideologies. Murray Rothbard and Burke are essentially useless for conservative theory: no coherent theory exists today. I would add one. This, as ever, is based on the group as the unit of analysis (due to increasing returns to group scale) and principal-agent theory as the primary analytical framework. It focuses on the allocation of effort, risk and reward in the group (‘culture’) and introduces the notion of non-market transactions (we can finally rid ourselves of the irrational notion of altruism). Social specialization is allowed.

        3. Develop and teach coherent egalitarian theory.
        Egalitarian theory is much discussed from Marx on down. Nevertheless, egalitarians are afraid to discuss egalitarianism in either dynamic terms or using liberal or conservative vocabulary, for example, using concepts like accountability or duty, or absolute vs relative income. It’s time to develop a more serious approach to questions of equality.

        4. Internet Age Data and Statistics
        I probably track as wide a variety of global data (statistics) as anyone I know. The quality, consistency and timeliness of data are almost uniformly horrible. (They are principally collected by governments.) We could do much better. For example, did you know that no VMT data is collected on European continent? We have it for the US and UK, with a delay of 6-8 weeks, but none for Europe. Now, those blue dots on your smartphone maps contain all the data (when processed through an algorithm) to provide real time VMT data. Granular VMT data. And those blue dots exist throughout the world. So one could obtain effectively real time, global VMT data by essentially nothing more than signing data agreements with telecoms providers and developing algorithms. And since VMT tracks closely to GDP, you could essentially track a reasonable proxy for global GDP in real time this way.

        And this same technology would allow you to track traffic through airports and railway stations, as well as through markets and shopping malls.

        Add to this some facial recognition technology which allows you to distinguish between cars and trucks (using webcams aimed at certain roads), and you could make some pretty good inferences about personal versus commercial traffic.

        Thus, with essentially off-the-shelf technology, we could be tracking global GDP and key aspects of economic activity almost real time in every country willing to participate. Can you imagine?

        So, were I shaking up my econ department, I would add an entrepreneurial data and statistics group, dedicated to identifying data gaps and finding unique (and commercial!) solutions. I’d run it as a de facto incubator. You could do that in Wisconsin. You could also do it at MIT, for example.

        5. Drop a semester of econometrics, add a semester of accounting
        I have a couple of reservations about statistical analysis. First, it encourages economists to be Amateurs or Tourists (two of my most biting epithets). Tourists are experienced economists who poach in a dataset they don’t understand. Amateurs are the same, but are also inexperienced. (We see it from time to time in oil markets, a lot in climate issues.) Thus, statistics tends to make economists sloppy and lazy, and substitute for an understanding of the historical narratives and practical limitations of various data sets.

        Second, if you have to use statistics to identify a problem, then you’re probably working on too small a problem. If a problem is not visible to the naked eye, then it’s probably not worth dealing with.

        On the other hand, accounting–mundane as it is–is central to understanding things like systemic risk at banks. If you don’t understand how P&L’s and balance sheets work, you’re not going to understand how the housing crisis will bring down the banking sector. Mostly economists didn’t. (I’ll have a separate comment on ‘self-bonding’, ARO’s and the coal industry.)

        Add a semester of accounting to your econ curriculum. It will be the most useful course your students take.

        So, that’s my New Year’s resolution list for the econ education biz. Any of those five points above would add some value to an econ department, including the one as UW.

  5. Bruce Hall

    A sampling of “non-structural” changes in Wisconsin during 2009

    A year after GM plant closure, Janesville stays afloat however it can http://www.jsonline.com/news/wisconsin/79145747.html
    Chrysler Dealers: Who’s getting shut down http://money.cnn.com/news/specials/storysupplement/chryslerdealerclosings/WI.html
    Wisconsin Clopay plant to be closed http://www.bizjournals.com/milwaukee/stories/2009/06/01/daily64.html
    Edgerton facing uphill fight to fill vacant industrial space http://www.gazettextra.com/news/2009/nov/27/edgerton-facing-uphill-fight-fill-vacant-industria/
    Mercury Plant Shutdown Will Torpedo Town’s Future http://inthesetimes.com/working/entry/4800/mercury_marine_shutdown_will_torpedo_towns_future
    Plant closings and mass layoffs – 2009 https://docs.google.com/viewer?url=http%3A%2F%2Fworknet.wisconsin.gov%2Fworknet_info%2Fdownloads%2FPCML%2F2009pcml_log.xls

    Could also look prior to 2009 and into 2010.

    The devil’s in the details.

    1. Gridlock

      Mercury Marine did not shutdown in Fond du Lac, and in fact has expanded operations there, contrary to the 2009 story posted above.

  6. PeakTrader

    Wisconsin non-farm employment is only 50,000 short of the forecast, based on prior data. However, Wisconsin population grew 6% from 2000 to 2010 and grew only 1.2% from 2010 to 2014. Moreover, there have been demographic changes, e.g. an aging population and a possible “brain drain,” to other states.

  7. PeakTrader

    The private sector should be allowed to expand and therefore expand the tax base to support the government rather than the government almost constantly propping-up the private sector.

    We need growth before raising taxes and paying for regulations. There are too few pro-growth policies and too many anti-growth policies.

    1. baffling

      conservatives instituted a “pro growth” economic policy during the bush administration. growth in jobs during the bush years pales in comparison to what obama has achieved during his administration. to continue to proclaim “anti-growth” policies is pure ignorance of the reality.

  8. Ricardo

    The ramifications of these Gestapo tactics of Democrats in Wisconsin will be around well into 2016. The courts are still sorting through the abuse of power. Is it really any wonder that Wisconsin is struggling.

    1. Phil

      There is a one party rule in Wisconsin. Period. Democrats have NO power. Period.

      Blaming them for anything that has gone on in the past seven years is sad and desperate.

      Conservative economic policies fail for lower and middle income citizens wherever they are attempted, without exception.

  9. Richard

    Reading through these posts on Wisconsin policies and economic performance, I was reminded of the Kauffman Index of state startup activity. That survey finds Wisconsin’s 2015 rank to be 50th out of 50, down from 46th in 2014. Question: Are Wisconsin’s pro-growth policies simply overwhelmed by declining structural issues, or are the policies themselves just not performing as advertised?

    http://www.kauffman.org/microsites/kauffman-index/rankings/state

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