Tom Martin's Q&A: Economist says Kentucky has 'green light now on economic growth'

Contributing columnistFebruary 10, 2014 

Paul Coomes

Paul Coomes is an emeritus professor of economics at the University of Louisville. He advises the Kentucky Chamber of Commerce and is recognized as one of the most knowledgeable and experienced economists in the commonwealth. He sat down with Tom Martin to discuss the state of Kentucky's economy.

Tom Martin: It seems as though signals are flashing green for the economy. Do you agree with that assessment and what do you see out there?

Paul Coomes: You're exactly right. There seems to be a green light now on economic growth. I've recently examined this nationally and regionally to see which regions were participating in the economic expansion and recovery. I found that Kentucky actually outpaced the United States in employment growth since the recession. We make a lot of heavy durable goods here that are very sensitive to unemployment rates. General Electric, Ford, even Toyota had slowdowns in their production. In the case of Ford and General Electric there were a lot of layoffs. As the economy picked back up they've added the same number of people back.

As far as the regions go, the fastest growing in terms of raw job growth since the recession ended was the Bowling Green, Hopkinsville region. Bowling Green has been a fast-growing place for a couple of decades largely due to I-65 and Western Kentucky University. They've gotten a lot of growth in manufacturing and a lot of new people moving in there. They've had 2 or 3 times more housing starts than Owensboro, which is about the same size city. So Louisville and Bowling Green and Northern Kentucky have been the three fastest growing since the recession.

Others are not doing so badly. Cumberland is doing fine. Owensboro, Henderson — fine. And Lexington has come back slightly stronger than the U.S., about 9 percent job growth since the recession ended, which is about 3 percentage points more than the U.S.

Martin: We're seeing improved industrial robotics, automated translation, artificial intelligence — machines becoming more intuitive, adaptive, on their own. And these are being adopted in manufacturing, clerical, retail work, professions like law, financial services, education and medicine. What are the implications?

Coomes: All of that has made each employee more productive in the sense that each employee is responsible for more total sales or more total production. So from one point of view it displaces labor; from the other point of view it makes the economy bigger — people have more income and then they buy different things and more things, which makes the economy grow. There are always these technological innovations and waves of them coming on.

Martin: Change has always been pervasive. Have we become less able to adapt to change?

Coomes: No, in fact I think people are more adaptable. You have to be as a matter of survival. It's just that the waves that we are having now are an information revolution as opposed to a tractor replacing a shovel or a horse. It's not a physical thing. It's information processing which actually puts a premium on having a good analytical education. Those that don't have much formal education or don't know how to handle large quantities of information, how to search for things, how to deal with ambiguity are having the toughest time. So there is a premium on being able to think for yourself and process contradictory, scattered information. Those people do the best in this kind of revolution.

Martin: Is there a cause for concern for the younger workforce? The unemployment rate among 18-to-24-year-olds is about 15 percent, which is double that of the general labor force. Why is it more difficult for them?

Coomes: Businesses are not eager to add to their payrolls at a time of soft demand. It's only after you've had years of pretty strong demand and you can't work your existing workforce anymore and pay them overtime or bonuses that you start adding people that are probably not quite as able as the ones in the corridor of your workforce. I've seen this before in my lifetime and I've been around awhile and you do see that later on in the maturity of a business cycle expansion you will see people with more marginal skills being added to the workforce.

I've seen it in grocery stores and retail. Whereas the core people are very good, they can make change, they can make decisions, they show up on time, deal with complexity and technology. The people more at the margin, they may not show up, they need more training, more hand-holding, they don't like to figure things out on their own. Those are the people that businesses won't hire on the first two or three waves. But if demand gets really strong and labor gets in demand they will add those people to their payrolls. So it's somewhat cyclical.

Martin: Do you feel that Kentucky is up to the demands of industry and the economy when it comes to developing a workforce?

Coomes: Well, yes and no. We do tend to fill jobs of firms and industries that locate here, but then you have to ask yourself why do those firms locate here and thrive here compared to the firms that thrive in other markets? We tend to get operations here where we assemble things and we move things around; package handling, call centers and yes our workforce is capable of doing that. That is why the businesses are coming here. It's not very expensive labor. It doesn't require a lot of formal training. The pay is relatively low, particularly on the manufacturing side. We don't have many headquarters of major manufacturing operations here. We don't have the design, we don't have the engineering operations here.

There are some, but compared to other places the things that we assemble here tend to be managed, designed, financed and organized from headquarters in Chicago, Atlanta, New York, California, etc. Kentucky has not historically gotten its share of professional jobs that competitor places, particularly Indiana, Tennessee, have been really strong against Kentucky. Tennessee has been for quite a while and Indiana has made some reforms the past decade that have caused them to compete more. So you'll see more high-end managerial professional job growth in those markets because they are getting more of the brain operations, the design, the high-end service operations, whereas Kentucky is getting more of the back-end assembly: put it together, put it in a box, ship it.

Martin: What is your educated guess about which way the economic winds are blowing for Kentucky?

Coomes: Well, they'll keep blowing the way they've been blowing unless we change dramatically our policies and investments in the state.

Martin: Are you referring to tax policy?

Coomes: Our pension problems here are just ... it's pretty disturbing. The practice of not putting money into the pension plan for 20-25 years and promising huge benefits. Well, the bill is coming due and it's billions and billions and billions. A company might be reluctant to move to a state that has that sort of liability sitting on its books because they are thinking, "Well, all they can do is raise taxes on me to pay for the pensions they promised people." It's pretty scary. I think it will be a big deal in the governor's race in 2015. So, yeah, tax policy.

If you look north and south of us we're squeezed by two states that tend to not tax income as much as Kentucky. They tax consumption. Most economists will tell you that's a better strategy. Anything you tax you're going to get less of. So if you tilt your tax system towards income you're going to get less effort, less productivity, less risk taking. Tennessee, for example, has no income tax on wages and salaries; zero. And we've lost lots of high-end companies to Nashville, in particular. In Tennessee the income tax rate is 3.4 percent flat. Kentucky goes up to 6 percent. I can't represent all economists' views on tax policy, but I do think economists prefer a tax system based more on consumption, which is a voluntary decision to purchase something.

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