Budget & Tax
Jonathan Small, J. Scott Moody & Wendy Warcholik, Ph.D. | December 2, 2015
Oklahoma's shrinking private sector
Jonathan Small, J. Scott Moody & Wendy Warcholik, Ph.D.
The following excerpt is from an article published in the December issue of Perspective titled Oklahoma's Shrinking Private Sector. – Editor
When it comes to government spending in Oklahoma, the 800-pound gorilla in the room that many people ignore is this simple question: Should government grow faster than the private sector’s ability to pay?
To answer that question, a little history needs to be explored. There are two major components of government spending in Oklahoma—state and local government worker compensation (SLGWC) and personal current transfer receipts (Social Security, Medicare, Medicaid, and welfare).
Chart 1 illustrates the growth differentials between Oklahoma’s state and local government worker compensation and private-sector income. The data are for calendar years 1929 (the earliest year of available data) to 2014 (the latest year of available data).
During the Great Depression in the 1930s, SLGWC grew faster than private-sector income, but by 1944 SLGWC and private-sector income were virtually identical.
However, after 1944 the situation is very different as the growth in SLGWC begins to pull away from the growth in Oklahomans’ private-sector income. Between 1944 and 2010, the gap between the two reaches its furthest point.
Since 2010, however, growth in SLGWC has plateaued while the oil and gas boom at the time reinvigorated private-sector growth. Nevertheless, much more needs to be done to close the chasm.
Chart 2 illustrates the growth differentials between personal current transfer receipts (PCTR)—which mostly consist of Social Security, Medicare, Medicaid, and welfare—and private-sector income.
As bad as SLGWC has been, the growth in PCTR has been meteoric in comparison. The growth in PCTR outstripped private-sector income right out of the gate in 1929 and has not looked back. Fortunately, since 2010, growth in PCTR has also plateaued.
What can Oklahoma policymakers do to prevent the further crowd-out of private-sector income? SLGWC is most under the control of state policymakers; both employment levels and compensation levels must be critically examined. At a minimum, a hiring and pay freeze would be welcome relief to the private sector, especially if the savings were invested into a complete overhaul of the income tax system (such as a flat tax) or as a down payment to eliminating the income tax altogether.
However, PCTR is a much bigger problem. Ordinarily, Medicaid reform would help reduce private sector crowd-out, but Obamacare’s maintenance of effort provisions block many sensible state-based reforms.
Finally, policymakers at the state and local levels must refrain from imposing unnecessary regulations on businesses. Such regulations only make it harder for the private sector to do its job—creating new jobs and income.
Read the entire article here.
Jonathan Small
President
Jonathan Small, C.P.A., serves as President and joined the staff in December of 2010. Previously, Jonathan served as a budget analyst for the Oklahoma Office of State Finance, as a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department. Small’s work includes co-authoring “Economics 101” with Dr. Arthur Laffer and Dr. Wayne Winegarden, and his policy expertise has been referenced by The Oklahoman, the Tulsa World, National Review, the L.A. Times, The Hill, the Wall Street Journal and the Huffington Post. His weekly column “Free Market Friday” is published by the Journal Record and syndicated in 27 markets. A recipient of the American Legislative Exchange Council’s prestigious Private Sector Member of the Year award, Small is nationally recognized for his work to promote free markets, limited government and innovative public policy reforms. Jonathan holds a B.A. in Accounting from the University of Central Oklahoma and is a Certified Public Accountant.
J. Scott Moody
OCPA Research Fellow
OCPA research fellow J. Scott Moody (M.A., George Mason University) serves as chief executive officer of State Budget Solutions. Formerly a senior economist at the Tax Foundation and a senior economist at the Heritage Foundation, he has twice testified before the Ways and Means Committee of the U.S. House of Representatives. Moody is the co-creator of the Tax Foundation’s popular “State Business Tax Climate Index.” His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications. This article is an updated version of an analysis published in 2008.
Wendy Warcholik, Ph.D.
OCPA Research Fellow
Wendy P. Warcholik (Ph.D., George Mason University) is an OCPA research fellow. She formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”