New Hampshire has one of the best of all economic problems to have. It has very low unemployment. The Granite State has consistently retained its near full employment status. In economics there are micro-economic and macro-economic applications. Microeconomics is the study of economics at an individual, group or company level; it is more about management options. Macroeconomics, on the other hand, is the study of a national economy as a whole; it is more about political options.
A convention among economists is that on the macroeconomic level low unemployment brings rising inflation. The Phillips Curve, attributed to A.W. Phillips, purports to show there is an inverse relationship between the rate of unemployment and the rate of increase in nominal wages. That means a lower rate of unemployment is associated with higher wage rate or inflation, and vice versa. There is a tradeoff between wage inflation and unemployment. The reasoning goes that during boom times demand for labor increases. Due to greater bargaining power of labor then wage rates increase. The relationship is curvilinear; it’s not a straight line.
Now, let’s move on to New Hampshire. With its population of about 1.3 million people, the total economy of the state is smaller than that of most of the larger cities in the country. So does microeconomics or macroeconomics apply in working through state policy issues? Well, let’s look at the evidence. We know Granite State unemployment is around 2%. We also know that inflation is not rising much and neither are wages. They are staying below the Fed’s action point, so less than 3%. If the Phillips curve were working as expected this result does not match the expectation.
Riddle me this…
So the questions become: Is the Phillips curve wrong? Why are wage rates not rising? Why is inflation got going up? Does what the state produces have anything to do with it? Is the state’s business climate different than other states in some way? Are we applying macroeconomic principles in a microeconomic situation? Is comparative analysis helpful or does it simply muddy the water? Should the state be attempting to solve politically perceived economic issues or should the state be letting the market sort it out?
Politicians make their living finding problems and acting. Sometimes the problems they find are real and sometimes they are not. The New Hampshire legislature deals with about a thousand bills per session. Do we really need that volume of legislation? How many of those bills are solving actual problems and how many are well intentioned do gooders attempting to take action?
For example: If there is a need for more housing in the southeastern corner of the state is that a local problem or should the state insert itself? For the future of the state, is the best public policy to follow a policy of “if we build it they will come?” Is that the highest and best use of scarce resources? Should the state raise taxes on current residents in hopes of attracting new residents? If the state builds “workforce housing” is it doing communities a favor or creating future blight areas, slums? What does history tell us about such efforts?
Is comparative analysis valid?
Direct state to state comparative analysis does not work for two reasons. First, the tax structure of New Hampshire is different than almost all other states. That gives New Hampshire non-comparable economic dynamics in both boom times and bust times. New Hampshire’s tax structure mitigates the huge swings in revenue level other states have built into their tax structures. Second, New Hampshire’s economy is not dependent on any single industry or commodity. For a small state it is quite diverse and small business dominated.
New Hampshire is a comparatively old state. That too is cited as an opportunity to improve. But think about it. The politically stated need is professionals with advanced degrees to participate in an increasingly high tech economy. Those retiring are boomers who do not fit that description. Are the policy solutions under consideration going to be effective in addressing the demographic change? Which entity better addresses economic change the market or big government?
New Hampshire does not compete with Vermont or Maine or Massachusetts. Trying to out Boston, Boston is a fool’s errand. The Granite State has a niche. It needs to understand what it is and what it can be. New Hampshire does not need a legislatively controlled economy. That approach has not worked with electric rates and it will not work any better elsewhere in the economy.
Progressives Herbert Hoover and Franklin Roosevelt were wrong with their government supported high wage policies. Those policies deepened and greatly prolonged the Great Depression. So too is it inappropriate for an untrained but well intentioned legislature to meddle in New Hampshire’s economy.
If it ain’t broke… Don’t fix it.
New Hampshire’s path to success has been that we do not want business to invest in government. Instead we want business to invest in their people, plants and equipment for their future. The future of business in New Hampshire will determine the prosperity of the people of New Hampshire. Lowering the cost of doing business in New Hampshire is what makes New Hampshire attractive.