Budget & Tax

Oklahoma's shrinking private sector

December 2, 2015

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.