By Emil Pulsifer, Guest Rogue
Rogue Columnist readers may be surprised to learn than reading Robert Robb, editorial columnist of the Arizona Republic, is a guilty pleasure of mine. As often as I disagree with him, his arguments have a specious plausibility and level of detail that makes them worth refuting. I always learn a lot about a subject in deconstructing one of his columns — though not usually from Robb himself.
His column of December 7th, "Phoenix-area Recovery Better Than You Think" is a case in point. Not only does it elaborate Robb's longstanding thesis that "Phoenix doesn't have an economy dependent on real estate," it also argues that Phoenix's post-recession economy is doing better than that of most big cities.
This is astonishing. Even local-booster superstars like developer/economist Elliott Pollack, whose firm "currently serves as the economic department for Maricopa County" according to his company bio, and who also wrote the "Blue Chip Economic Forecast" for Phoenix appearing at ASU's W.P. Carey School of Business website, admits that "...the local economy cannot have much of a recovery without a significant increase in construction activity." Either Robb is a genius or else he's standing on his head.
Robb's attempt to shift the reference point of the discussion to 2003 in comparing the performance of cities isn't very interesting and can be easily dismissed: after all, the issue isn't how Phoenix performed eight years ago before everything changed; the issue is how Phoenix performs in a post-recession, post-housing crash environment in which the traditional growth strategy is not currently possible and by all informed accounts won't be for years.
Much more interesting is Robb's observation that "over the past year, Phoenix ranked seventh among the big-city economies in terms of percentage job growth".
It's certainly true. According to W.P. Carey's "Job Growth USA" database, of metropolitan areas with one million or more jobs, the Phoenix-Mesa-Scottsdale area ranked 7th out of 26 in total nonfarm jobs in October 2011 (most recent data) compared with the same month the previous year.
A counterargument can be made that "percentage job growth" is misleading because Phoenix lost so many jobs (more, as a percentage of then existing jobs, than nearly any other metropolis in the nation), and is recovering them from an unnaturally small base; a mathematical trick which allows a small absolute number of jobs added to masquerade as a large percentage job growth, thus giving Phoenix an artificially higher ranking. While there is something to this, I don't think it tells the whole story: Of the metro areas ranked lower than Phoenix among the 26 listed, only Los Angeles, Dallas, and Miami show greater absolute numbers of jobs added in the year over year comparison.
A second counterargument is that there is an important difference between percentage jobs growth and percentage economic growth. The Brookings Institution has just released the third quarter issue of its "Metro Monitor" comparing the economic performance of the largest 100 metro areas. Phoenix's performance in job growth from second to third quarter are laudable, placing it 26th best in this expanded field. But its change in gross metropolitan product (GMP), whether measured over this single-quarter change, or from trough (2009 Q3), or from peak (2007 Q3) place it from 94th to 96th rank out of 100.
But there's an altogether different dynamic behind this, also unremarked by Robb, that's truly fascinating. Of the 29,900 (net) nonfarm jobs added year-over-year in October, fully 54 percent were added in the "Educational and Health Services" sector, where metro Phoenix ranked No. 1. Fully 39 percent of net nonfarm jobs added were in the "Health Care and Social Assistance" subsector: This is by far the single largest source of jobs shown in Metro Phoenix; "Accommodation and Food Services" is a distant second at 25 percent; retail trade (11 percent) and construction (9.7 percent) lagged far behind; and the traditionally strong "Professional and Business Services" actually shrank substantially year over year.
Nor is this a fluke of the month: In a 12 month moving average (where the Phoenix metro area ranks 10th in total nonfarm jobs added), the Phoenix metro area again ranked No. 1 in both "Educational and Health Services" and in the "Health Care and Social Assistance" subcategory. The contribution of these categories to total (net) nonfarm jobs growth was substantially larger here than in the October year-over-year comparison.
This is where it helps to separate the education component out of "Educational and Health Services." First, it should be noted that this refers to private education: public education jobs are included in the "local government" category. "The private-education area is doing well because so many adults have been going back to school, particularly through online programs."
Clearly, the desperation of the long-term unemployed isn't a sustainable jobs engine, no matter how generous government is in funding private schools with taxpayer dollars, or in approving student loans and grants, or how lax the state is in regulating and supervising the "online learning" racket or other components of the private schooling system. And the healthcare and social assistance component accounts for the lion's share of job growth in the parent category anyway. So, let's concentrate on the Phoenix healthcare jobs miracle.
Before we examine this in greater detail, it's worth comparing the current economy to the more traditional distribution of job engines in the Phoenix metro area in pre-recession times when growth was strong.
In a 12 month moving average based from October 2006, for example, Phoenix metro still ranks No. 1 of 26 in "Educational and Health Services" but this contributes only 13.2 percent toward net nonfarm jobs added; in "Accommodation and Food Services" Phoenix ranked No. 2 but this category contributed only about 8 percent to net nonfarm jobs; "Construction" contributed nearly one-fifth of nonfarm job growth (19 percent). Retail trade contributed 11 percent (but this is mathematically more significant here because in 2006 very few if any sectors were shrinking and competition from other job-contributing categories was significantly greater than recently); while professional and business services contributed a whopping 21.7 percent of net nonfarm job growth.
Back to the present: The local economy is less diversified than ever, and without the strong growth in the healthcare sector, Phoenix would be a basket case. Phoenix seems to have been consistently in the top 3 in this category before and even during (most of) the recession, but took a nosedive in the rankings in 2009 when the size of the city's labor force declined temporarily: by July of that year Phoenix's rank in this category sank to 14 of 21; at that time Phoenix's rank for total nonfarm job growth was 25 of 26. But by October 2010 Phoenix was back at No. 1 in healthcare jobs growth (though recovery had come in fits and starts since January 2010). Remarkably, Phoenix has remained No. 1 every month since in year-over-year job growth rankings in the health services category, except for January 2011 (when Phoenix ranked second).
It shouldn't be surprising that, pre-recession, Phoenix ranked so high in "Health Care and Social Assistance", since Arizona routinely vied with Nevada for No. 1 state in population growth during the 2000s, Phoenix was the top destination in Arizona, and healthcare is a basic need for any population.
What is more puzzling is the city's enduring strength in health-services job growth compared to other large cities. Most sources agree that Phoenix has seen essentially no population growth since 2007; though it's difficult to get good numbers on this, labor force size is a useful if crude proxy in this context; it has been essentially flat since the end of 2008, though seeing a temporary dip through 2009.
In order to explain the healthcare jobs miracle, it's useful to ask what else Phoenix has ranked highly in recently. Robb himself notes that among large metro areas, Phoenix lost more jobs than any other city except Riverside, California (really, the Riverside-San Bernardino-Ontario metropolitian statistical area). Other sources place Phoenix at first or third in job losses depending on which measure is used.
As a result, poverty in Arizona also grew. According to the East Valley Tribune citing Census Bureau statistics, at just about the time Arizona regained its No. 1 rank in healthcare and social assistance jobs growth back in October, 2010, Arizona was No. 2 in poverty rates among U.S. states, second only to Mississippi. Nearly a third of Arizona's children were living in poverty.
The same article noted that, at the time, "the Arizona Health Care Cost Containment System, the state's Medicaid program, provides free care for anyone in a family below the federal poverty level. And it has nearly free coverage for children in families where the earnings are twice that level. Federal Medicaid regulations have much lower income limits, though states are free to set their own higher figures. As a result, more than 20 percent of Arizona residents receive care through AHCCCS. The nationwide figure for Medicaid recipients is less than 16 percent."
A year later, more Census data revealed that "the percentage of people covered by health insurance increased slightly in Arizona while it decreased slightly across the nation. This appears to largely be due to gains in public health coverage outpacing cutbacks in private coverage."
In fact, from July 2007 to July 2011, Arizona's AHCCCS population grew 334,000. As poverty rates (and especially child poverty rates) increased, many marginal households which previously could not afford private healthcare insurance (but also hadn't been poor enough to qualify for the state's Medicaid program) were added to the rolls of the insured thereby. Long deferred healthcare needs were now serviceable, adding to consumer demand in a sector increasingly subsidized by state and federal matching dollars. Could this explain Phoenix's comparative strength in healthcare jobs growth, even after the economy tanked and population growth zeroed?
Well, according to the Arizona Healthcare and Hospital Association, when it was lobbying against proposed AHCCCS cuts, "the governor’s budget would eliminate health benefits for 310,500 low-income adults and 47,000 children". Note that the combined figure is only slightly larger than the number actually added to the rolls over four years during and post-recession. This much is uncontroversial.
The hospital association has an ax to grind where estimates of job loss are concerned, but the Seidman Research Institute at ASU's W.P. Carey School of Business does not, and the executive summary of its January, 2011 study, "The Potential Economic Impact of Withdrawing from Medicaid in Arizona" is offered. This showed that in the first year, in Maricopa County, roughly 46,000 healthcare jobs would be lost. (Note that many of the secondary changes to AHCCCS coverage which were proposed by the governor, were subsequently rejected by the feds.)
Though neither the timing nor the extent of AHCCCS enrollment were identical to this, and other dynamics were in play, it seems reasonable to conclude that if losses in coverage would equate to lost healthcare jobs, comparable gains in coverage actually resulted in the addition of health care and social assistance jobs.
Oh, the irony! Not only did the recession kick the housing leg out from under the local economy, it replaced it with a crutch dependent on state and federal subsidies: A form of deficit-funded Keynesian stimulus spending which conservatives cannot politically acknowledge. Now the termites at the state legislature and governor's office are diligently gnawing away at the crutch. They call it "tough love." But if you get sick after being cut or frozen off the rolls, it's just "tough luck." Though it will take time for cuts and freezes to have effect once the final legal battles are resolved, Phoenix can look forward to "interesting times" ahead.
Returning to Robb's main thesis, he demonstrates that he understands Phoenix's pre-recession economic dynamic as poorly as he does the new one. He writes: "[An economy dependent on real estate] cannot exist. Real estate does not create its own demand. If it did, there wouldn't be so many empty houses in the Valley."
This is a straw-man argument. Nobody has claimed that real estate is independent of such factors as massive layoffs, scarce job openings, massive foreclosures and bankruptcies, massive numbers of underwater mortages restricting mobility, stricter credit standards and down-payment requirements, etc..
Robb gets much closer here but he still doesn't get it: "If you are a place growing faster than other places, you will have an oversize real-estate sector compared with other places. But that doesn't mean that real estate is driving the economic activity."
There are four basic ways to achieve local economic growth, defined as an increase in gross metropolitan product:
- Create/attract industries that produce goods or services of superior value. Examples include manufacturing (especially defense and aerospace, computers and electronics, and pharmaceuticals), research and development, medicine, and higher education. These require an educated workforce (hence properly funded schools and universities emphasizing specialized skills and degrees in the sciences). Because these jobs pay better they increase consumer disposable income and stimulate the broader economy in ways that Mcjobs don't (though in Arizona there is plenty of room for non-unionized, low-wage flunkies in the medical assistance category).
- Attract outside dollars through tourism (or foreign dollars through weak U.S. currency, a strong factor in Arizona's resurgent "accommodation and food services" category).
- Grow export industries.
- Attract as many new residents as possible to do more of the same old stuff (i.e., retail sales, wait-staff and cashiers, store clerks, etc.) thus boosting total output at the expense of median personal income, because this dilutes the average standard of living (or at least fails to increase it significantly). As the storm clouds of recession approached, Phoenix had been increasingly reliant on mere population growth: get the warm bodies here so we can tax their purchases.
Aside from sunshine, the main attraction for the warm bodies was affordable (and ever-appreciating in value) new single-family homes in fringe areas where infrastructure was new, property taxes were low, and blight had yet to develop. The infrastructure and social services bills for older portions of the city (and these as they aged) could always be paid by the following waves of new residents attracted to newly developed suburbias, in the glorious Ponzi scheme that was the modus operandi of city developers.
The new suburbias were developed with new retail space to service the consumer needs of the new population (and to employ them); and new office parks and industrial centers sprang up also. This is how real estate drove the economy: Indirectly.
To sum up, Phoenix's old economy was driven by population growth, which was indirectly driven by real estate. The new economy features nearly zero new housing, nearly zero population growth; jobs growth inordinately reliant on the health care and social assistance sector, which itself relies for growth not on new population but on poverty-driven and subsidy-funded social programs which the state's legislative and executive branch is determined to kneecap; and it features a gross metropolitan product whose performance ranks close to the bottom of the 100 largest cities by any of three major measures (recent quarter, from trough, and from peak).
The November employment data were just released, and the (seasonally adjusted) unemployment rate in Arizona is down 0.3 percentage points in a month. The Arizona Republic, predictably, crowed that this is its lowest rate in two years and that the rate heralds the light at the end of the tunnel for Arizona's economy. A look at the data provided by the Arizona Department of Administration's Office of Employment and Population Statistics shows a different picture: Most of the decrease in the unemployment rate is due to a decrease in the size of the state's labor force.
Total employment increased by 4,100 from October to November; however, the labor force decreased by 11,400 over the same period; this means that 74 percent of the 15,500 decrease in the number of unemployed was due not to hiring but to individuals dropping out of the state's labor force. Whether they are the long-term unemployed who have given up hope, or individuals jumping ship (moving to another state), is difficult to say.(See page 7 of 34).
Note also that there was ZERO growth in November when compared to the same month last year, in the "Educational and Health Services" category. (See p.2 of 34). That's right: the same powerhouse noted in this essay has crapped out for the first time in ages, using the same measure employed above. Could the governor's cuts and freezes be taking their toll?
Contrary to Jefferson Starship, we built this city (new Phoenix) not on rock and roll, but on welfare: and Governor Grinch done stole even this itty-bitty Christmas. Happy trails.
The writer is a longtime resident of Phoenix.