The Oregonian today contains a fascinating article on an equally fascinating report about the Portland economy from the Value of Jobs Coalition (and prepared by ECONorthwest). It is fascinating reading and something that will now stick in my head as I sit and ponder what characterizes the Portland economy. And the conclusion that we should focus better on eduction and work to increase the number of STEM graduates is spot-on and universally correct no matter what the economy looks like.
But there is a big problem in the interpretation that what we are seeing is the result of how we have engineered the economy and that by increasing the locally produced STEM graduates we will increase the tax revenues we take in. The problem is that this is a partial equilibrium analysis - where we assume lots of other things stay fixed (like for example, the wage differentials, and the migration of workers). In fact this snapshot is of a general equilibrium. You may not like it but it is hard to engineer away and it is easy to come to false conclusions if you don't consider the wider general equilibrium implications.
Let's take a step back and look at the 'puzzle' they are trying to solve:
|Figure 1 from: Higher Education and Regional Prosperity|
Portland has fared poorly in terms of per capita personal income relative to other US metro areas. Looks pretty bad but a better comparison would be to look at cost of living adjusted personal income and apparently if you take away a couple of outliers like Washington DC and NYC, Portland is pretty close to average. In a general equilibrium, prices rise with incomes as upward pressure is put on the demand for goods and services.
But to the extent that Portland is below the national average it is very important to remember that wages are also an equilibrium price. The first thing you should ask is that if STEM graduates are so scarce and needed why aren't their salaries above the overage? And if local salaries are low to what extent does that reflect a compensating wage differential where people are willing to accept less to live and work here.
This is what I mean about general versus partial equilibrium. You can look at the figures and say we need more of those high paid engineers, but if you make more wages could just as easily decline. And certainly there is nothing in theory that suggests that MORE STEM types will raise local within occupation pay to something closer to the national average!
The worry that lower incomes mean lower tax bases also seems misguided - from recent poll results folks are also willing to pay more in taxes to support public goods and I suspect that the two are related: the same folks that are willing to take less to work less and enjoy the Portland area are also willing to contribute more to public goods.
Really the story that is being suggested is a long term growth effect: that by investing more in education and focusing more on STEM areas the local economy will evolve in a way that creates high-tech industries that will employ folks at relatively high salaries. I agree with that but looking at current relative wages isn't entirely appropriate - or I guess I should say ONLY looking at current salaries is not appropriate. This is an general equilibrium growth story not a static, partial equilibrium story. Yes the former is much harder to communicate to lay folk so I am not prepared to condemn the exercise but the point should be made by someone somewhere (thank goodness for blogs!). I support investments in education in general for growth reasons and I support emphasizing STEM fields for the same reason. There is not much in this report however, that confirms or undermines my conviction.
And finally, circling back to cost of living and tax revenues. Higher local wages are no guarantee of funding anyway. When local costs go up you have to pay teachers more, principals more, and so on. What is most important is the willingness of the electorate to pay for such things and I would argue (as above) that the self-selection that is bringing all the humanities-types to Portland is probably hugely positive for future funding of schools.
Okay, this is a bit disjointed because I am rushed and now I have to get back to work! Apologies.