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Equilibrium and Meltdown George Waters Illinois State University Equilibrium in economics is such a ubiquitous concept some might be surprised to hear that it is also controversial It is hard to imagine doing much economic analysis without examining the intersection of supply and demand but whether we should focus exclusively on equilibrium outcomes is a critical question Though the importance of equilibrium might seem like an esoteric debate the attitude toward this question has deep implications for economists views on the correct policy response to the current economic crisis Milton Friedman believed in equilibrium An example of the intensity of his belief was his argument against requiring medical licenses for doctors on the grounds that more doctors would be allowed to practice and market forces would weed out poor doctors and improve the quality of care This argument makes perfect sense if we focus on the equilibrium outcome but most people are instinctively repelled by this proposal The concern arises from the consideration of how the world gets to such an equilibrium To find out who the bad doctors are some patients have to try them get bad treatment and tell others about it Since patients have little expertise in making judgments about doctors a poor doctor could practice for many years without detection I know this happens even with licensing requirements but the situation could easily be worse without them An equilibrium outcome cannot be divorced from the path to arrive at that state This issue arises in the labor market with implications for macroeconomics If labor supply always equals labor demand then there is no such thing as involuntary unemployment Workers don t work because the wage offered is too low While undoubtedly true for some workers the picture of unemployment must be more complex Real Business Cycle RBC models of the macroeconomy focus on equilibrium in the labor market leading to the remark that in such a framework the Great Depression was really the Great Vacation There are other views of the labor market in macroeconomics Traditional Keynesian approaches focus on sticky wages and prices For example in a recession firms prefer to use layoffs rather than lower wages Labor search explicitly models the matching of unemployed workers and vacant positions Dynamic Stochastic General Equilibrium DSGE models are currently the dominant approach in macroeconomics They are descendents of RBC models in that they are general equilibrium models with microfoundations meaning they focus on household and firm behavior rather that make direct assumptions about the relationships between macro variables However the DSGE label applies to wide variety of models including monetary policy models with price and wage stickiness However the vast majority of DSGE models used for policy analysis still study uctuations around a unique equilibriuml 1 In the discussion of macroeconomic models multiple steady states is more accurate than multiple equilibria which could also encompass sunspot equilibria arising in indeterminate models I refrain from using steady state to avoid excessive jargon The desirability of scal stimulus in response to the current crises has been a point of contention producing much debate and unfortunately a number of muddled arguments One notable exception comes from Jim Hamilton who points out that the housing nancial and auto industries are going through necessary contractions and the process of those workers nding new jobs which could require retraining and relocating will be a long painful process that no scal or monetary stimulus can alleviate He goes on to add that government spending that increases productivity such as infrastructure improvements or maintains services such as block grants to states could still be bene cial I would add that spending to stimulate demand and prevent unnecessary contraction of healthy industries could help as well Nevertheless his point that the government should allow the labor market to adjust and not try to guarantee a certain level of employment at all times is very much on target Of course scal policy should not be considered in isolation from other aspects of the economic crisis The housing market continues to fall affecting households and putting the nancial sector is in danger of collapse with serious effects on the economy Monetary policy has reached the zero lower bound for the Federal Funds rate raising the possibility of a de ationary spiral Whether to Fed can avoid such a liquidity trap with quantitative easing which would involve buying longer term bonds is another important issue And what does macroeconomic theory have to tell us about the present situation As a macroeconomist I m sorry to say not enough to give con dent answers to the policy questions though we do have some helpful tools at our disposal Labor search models have the potential to analyze the frictional unemployment that Hamilton says should be tolerated Natural ways to describe the de ation that can arise in a liquidity trap include have been developed using a model with multiple equilibria or at least entertaining the possibility that the economy is not in equilibrium for signi cant periods of timez Furthermore one can think of recessions in general and nancial crises in particular as shifts between multiple equilibria However standard DSGE models with monetary and scal policy are single equilibrium models and do not incorporate these possibilities When Tom Sargent one of the godfathers of the DSGE approach says that quotthe calculations that I have seen supporting the stimulus package are backofthe envelope ones that ignore what we have learned in the last 60 years of macroeconomic researchquot he may be right in a narrow sense but his comment is more indicative of how far macroeconomic theory has to go to properly analyze complex economic environments such as the one we face To be more speci c we would like to know what combination of scal and monetary policy can avoid de ation maintain aggregate demand so that rms do not fail unnecessarily while allowing for necessary adjustments in the labor market To analyze such questions we need a model incorporating scal and monetary policy a nancial sector labor search while allowing for alternate equilibria or outorequilibrium behavior that can be interpreted as a de ationary liquidity trap and or a recessionary state Many macroeconomists would disagree with the details of this prescription but most in their heart of hearts know that a model with suf cient sophistication to give a con dent policy 2 Bullard and Cho Journal of Economic Dynamics and Control v 2911 and Evans Guse and Honkapohja European Economic Review v 528 are examine liquidity traps as distinct steady states recommendation does not exist That backoftheenvelope calculations are all we have should not be surprising In Keynes words macroeconomists should be humble We can better understand economists responses to the stimulus question through the lens of their preferred models Those who have spent their careers working with single equilibrium macro models tend to view the stimulus as wasteful contributing only to debt and in ation but not productivity Those who view unemployment as used resources in an outor equilibrium labor market believe government spending could put those resources to work Paul Krugman has advocated forcefully for the stimulus which is unsurprising given the nature of his research One of his major contributions is to show how multiple equilibria can arise in a model of international trade where industries have increasing returns to scale The notion of an economy shifting to a better equilibrium with a push like a stimulus is natural for him One reason models with multiple equilibria are not standard pa1ts of policy analysis is that their implications for data analysis are difficult to interpret Interestingly the most common macroeconometric methods that does allow for multiple equilibria is the regime shifting model of Jim Hamilton which estimates a probability of switching in or out of a recessionary state in each time period As noted above he has expressed some skepticism about the stimulus I suspect that he considers the current recession as a persistent change in our natural rate of growth or as necessary creative destruction Alternatively the economy could be in the process of shifting to a new state with high saving low consumption investment and employment Olivier Blancth describes the crisis in these terms and advocates for policy to reinvigorate demand to help the economy to shift back3 Distinguishing between a temporary shift to a new equilibrium and a persistent change in productivity is hard which points up the subtle issues arising when we take the idea of multiple states seriously Despite the difficulties there is good reason to extend our understanding of models with multiple equilibria4 Extending one of the models of a liquidity trap so that it could make quantitative policy recommendations would obviously be desirable There has been some loose talk among economists that the current crisis is not a gardenvariety recession The language of multiple equilbria could help formalize this idea Normal recessions are dips below trend for output growth that can be handled with monetary policy but we are experiencing a potential shift to a bad state that should be avoided using all available policy tools Ifthe keys are not to be found under the streetlight of a unique equilibrium we must look in the dark alley The restriction to a unique equilibrium is not the only problematic feature of many macro models Most microfounded models have representative agentss such as a single household representing the consumption saving and labor supply decisions for the whole economy A quick glance out most windows reveals that not all households are the same The vast majority also assume rational expectations which assumes all 3 See his Economic Focus column in The Economist January 29 2009 He does not explicitly talk about multiple states 4 The idea of multiple equilibria or steady states is far from new Cooper and John Quarterly Journal of Economics 103 August discuss a switch to an inferior steady state as a coordination failure 5 Peter Diamond among others has cautioned against relying on representative agent models for policy analysis economic actors use all available information to form forecasts a rather strong assumption It is not necessary to resort to arguments based on multiple equilibria to argue for the stimulus Standard Keynesian arguments support government expenditure to employ unused resources Some argue against spending on the grounds that government debt will grow unsustainably but there is no reason temporary stimulus should lead to an insoluble problem This essay is not an argument for throwing all of macroeconomic theory overboard Understanding each of the models described above gives insights into particular issues Furthermore the process of rejecting models as poorly founded or unrealistic forces us to articulate the reasons for doing so I am making the point that every economist should know in his or her bones models are tools not reality The current state of macroeconomic theory can help us to think through the relevant issues of our economics crisis but those who believe there is a clear answer to the question of whether fiscal stimulus will work whatever that means need to stop and think In light of these thoughts all the sound and fury in the discussions of the current situation is dismaying Of course the crisis is serious and the solutions are difficult and so passions run high but economists professional and otherwise should try to raise the level of the debate All of our arguments rely on fundamental concepts such as equilibrium that do not form as solid a foundation as we d like to pretend Let us proceed a bit more carefully and respectfully CHAPTER 3 JUDICIAL ELECTIONS ELECTORAL INCENTIVES AND CHECKS AND BALANCES by Alexander Tabarrok 3 JUDICIAL ELECTIONS ELECTORAL INCENTIVES AND CHECKS AND BALANCES Alexander Tabarrok Politicians serve the people who elect them But in serving the people who elect them do politicians serve the common interest Not necessarily A Senator from Alaska serves the people of Alaska a Senator from West Virginia serves the people of West Virginia and a Senator from California serves the people of California We hope that with debate compromise and trade these divergent interests will converge to produce something approximating the common interest But we also recognize that politicians are rewarded for bringing home the bacon Or in more scholarly terms politicians pursue policies that concentrate bene ts on their own constituents while diffusing costs over everyone else s constituentsieven when the concentrated benefits are considerably less than the sum of the diffused costs All of this is familiar to students of political science What is less well recognized by legal scholars is that judges especially elected judges are also politicians Just like other politicians elected judges have an incentive to serve their constituents Since plaintiffs typically sue in the state in which they live elected judges have an incentive to transfer wealth from outofstate defendants to instate plaintiffs In particular an elected judge has an incentive to transfer wealth from outofstate corporations with deep pockets to instate plaintiffs Some evidence that judges might act in this way is provided by Richard Neely a retired West Virginia Supreme Court judge who was unusually frank about the incentives he thought were faced by elected judges Neely wrote As long as I am allowed to redistribute wealth from outofstate companies to injured instate plaintiffs I shall continue to do so Not only is my sleep enhanced when I give someone s else money away but so is my job security because the instate plaintiffs their families and their friends will reelect me Neely 1988 4 And he continued it should be obvious that the instate local plaintiff his witnesses and his friends can all vote for the judge while the outofstate defendant can39t even be relied upon to send a campaign donation Neely 1988 62 16 THERULE OFLAW WHAT ABOUT JURIES Judges decide only a minority of tort cases directly ie in nonjury trials and occasionally they decide cases by overruling juries But judges are always in uential in the courtroom Judges must interpret the law for juries instruct the juries allow or disallow objections rule on motions and countermotions limit or not limit the lawyers to certain theories of liability and damages etc In order to transfer wealth to instate plaintiffs elected judges need not make blatantly biased rulings or often interfere in jury decisions Judges have significant control over the trial outcome even without making use of their highest powers BACKGROUND ON ELECTORAL SYSTEMS The dominant methods of judicial selection are partisan elections nonpartisan elections gubernatorial appointment legislative election and merit plans The merit plan however is gubernatorial appointment from a slate of candidates put forward by a nominating commission Furthermore the governor typically appoints at least some members of the nominating commission The governor also plays an important role when the legislature elects judges a process used in only three states The main categories are thus partisan elections nonpartisan elections and appointment systems Elected judges must cater to the demands of the voters and they must seek campaign funds from interested parties Appointed judges by contrast do not answer to the voters in competitive elections nor do they need to raise significant campaign funds Furthermore appointed judges tend to have longer terms than elected judges on average 21 percent to 27 percent longer for general and supreme courts respectively Hanssen 1999 Appointed judges are also more secure than elected judges they are returned to the benchithrough reappointment or a retention electionimore often than are elected judges1 Appointed judges are thus more insulated from direct political pressure than are elected judges and will tend to be more independent Hanssen 1999 Posner 1993 Dubois 1990 In a partisan election state judges run under a party banner just as do other politicians In a nonpartisan election state judges do not run under banners and are required by law to be independent of party Elections tend to be more competitive in partisan than in nonpartisan states Although judicial elections in nonpartisan states are more competitive than retention elections they are still not very competitive Many judges run unopposed and when they are opposed few incumbents are defeated Partisan elections tend to be contested more often and as a result voter turnout is higher and incumbents are defeated more regularly than in nonpartisan elections Dubois 1979 Glick 1983 Of elected states ten use partisan elections2 1 Many judges in appointed states maintain their office by running in a retention election These elections are unopposed elections in which the judge is either voted up or down Hall and Aspin 1987 find that retention elections return the incumbent to office 988 percent of the time Carbon 1980 points out that retention elections were designed to create lengthy judicial tenures and to insulate judges from the public Retention elections also insulate appointed judges from pressures from the governor Since retention elections are essentially perfunctory we define states using initial appointment followed by retention elections as appointed states 2 There are a few states with mixed systems that are sometimes classified differently across studies eg New York has a mixed system For more details on our classification of electoral systems see The Book afthe States CHAPTER 3 JUDICLAL ELECTIONS ELECTORAL INCENTIVES 17 Tabarrok and Helland 1999 nd that the primary difference between electoral systems with regards to tort awards is between partisan systems and all other systems Thus the focus here will be on the effect of partisan electoral systems on awards Although awards vary by electoral system electoral systems appear to have very little effect on the demographic characteristics of judges A large literature has tested whether judicial elections or appointments bring more minorities women conservatives and so on to the bench or whether the American Bar Association ratings of appointed judges are higher or lower than those of elected judges Almost unanimously this literature concludes that selection mechanisms have no significant effects on any judicial characteristics see for example Flango and Ducat 1979 Glick and Emmert 1987 Alozie 1990 and the reviews of the literature in Baum 1983 and Stumpf and Culver 1992 Notice that the hypothesis here however is that selection mechanisms affect outcomes through incentives even if they have little or no effect on measurable judicial characteristics 3 EVIDENCE Helland and Tabarrok 2002 use data on over 52000 tort trials to examine how awards vary with judicial electoral systems Figure 31 looks at the average award in five types of cases nonbusiness cases and the four types of cases we have a special interest in We have labeled the types of cases Partisan Out Partisan In Non Partisan Out and Non Partisan In Partisan Out denotes cases in states that use partisan elections to select their judges when the defendant was an outofstate business The other variables are defined similarly The primary idea is to compare Partisan Out with Non Partisan Out In other words is the bias against out of state businesses bigger in states that use partisan elections to select their judges than in other states Figure 31 indicates that in partisan states the average award against an outofstate business defendant is 936190 but in nonpartisan states the average award against an outof state business is only 272780 The difference Partisan Out 7 NonPartisan Out measures the total partisan effect Awards against outofstate businesses are on average 663410 higher in partisan than in nonpartisan states The difference is statistically significant at the far greater than 1 percent level F152540 1631 with p 00001 This evidence supports the hypothesis that awards against outofstate businesses are significantly higher in states with partisan elections than in states that use other selection mechanisms Awards against outofstate companies in partisan elected states may be higher than similar cases in nonpartisan states because awards are higher against outofstate companies in partisan states the partisan outofstate effect or because awards against businesses in general are higher in partisan states the partisan business effect The two effects can be decomposed The partisan outofstate effect is measured by Partisan Out 7 Partisan In 7 NonPartisan Out 7 NonPartisan In By subtracting out awards against instate businesses we control for any increase in awards against businesses in general in partisan elected states thus isolating the partisan outofstate effect The partisan outofstate effect has value and the discussion in Tabarrok and Helland 1999 Our conclusions are robust to reclassification of any states with significant mixing of elected and nonelected elements 3 The discovery that sociological characteristics do not differ across selection mechanisms strengthens our conclusion that the primary independent variable is the incentive structure Ashenfelter et al 1995 find that sociological characteristics of judges are of no help in predicting outcomes 18 THERULE OFLAW 393690 Fl52540 484 and p 0027 The partisan business effect is measured by Partisan In 7 Non Partisan In and has a value of 269720 F 1 52540 157801 p 0001 Awards against businesses in general are larger in partisan states than in nonpartisan states but the majority of the partisan effect is due to a particular bias against out of state business defendants Figure 31 Differences in Mean Award Variable Total Award all awards Constant NonBusiness Cases 252540 19524 Partisan Out 936190 143800 Partisan In 408450 60090 Non Partisan Out 272780 84070 Non Partisan In 138730 43003 Number of Cases 53545 Partisan Out Non Partisan Out 936190 272780 663410 denotes statistical signi cance at the 1 percent level Although suggestive these differences in means awards raise the question of whether the larger awards in partisan states are caused by differences in the electoral system or by some other differences which are merely correlated with differences in the electoral system Helland and Tabarrok 2002 refine the above analysis to control for a large variety of factors other than the electoral system that could in uence awards Helland and Tabarrok include controls for the type of injury eg death major injury minor injury emotional distress rape sexual assault and other types of injuries the type of case eg product liability medical malpractice and the major tort laws in a state eg weakened joint and several rule collateral source rule punitive cap rule In addition they control for case selection via settlement and winning CHAPTER 3 JUDICLAL ELECTIONS ELECTORAL INCENTIVES 19 The inclusion of a large number of control variables and procedures does not eliminate the partisan effect although it reduces it in size The best evidence is that moving a case with an outofstate defendant from a nonpartisan to a partisan state raises the expected award by 40 percent or about 362988 evaluated at the mean award The large size of the partisan effect indicates the potential profitability of forum shopping As a further test of the partisan electoral hypothesis Helland and Tabarrok 2002 look at awards when federal judges who are appointed not elected use state law to decide cases The US Constitution Article III Section 21 gives the federal courts the power to decide controversies between citizens of different states Historically federal diversity jurisdiction was supported by outofstate businesses that feared they would be disadvantaged in proplaintiffprodebtor state courts Friendly 1928 Today lawyers continue to cite outof state and antibusiness bias as one reason for removing cases to federal court Miller 1992 For more than a century federal judges decided diversityofcitizenship cases based on federal common law The Supreme Court however overturned this rule in the 1938 case Erie Railroad v Tompkins 304 US p 64 Since the 1938 Supreme Court decision diversityof citizenship cases have been decided on the basis of state law4 Helland and Tabarrok 2002 find that when federal judges decide tort cases there is little or no bias against outofstate firms even when these judges are using the law of partisan states to decide the cases This is further evidence that the partisan electoral effect is caused by judicial incentives and not by any differences in state law that happen to be correlated with electoral systems DISCUSSION Electoral incentives encourage judges to redistribute wealth from outofstate business defendants to instate plaintiffs It s difficult to see how these incentives cohere with justice If all tort cases were local the incentive to redistribute wealth from outofstate firms would be moot But in today s economy state judges andjuries are often called upon to decide cases involving outofstate firms Consider for example Garvey v Rota Rooter Services Co a classaction case filed in Madison County Illinois5 The single Madison County resident named in the suit is suing on behalf of customers of RotoRooter in thirty other states The complaint does not allege a defect in service but instead that the individuals performing the service were not licensed plumbers Put aside the concern that many economists not to mention consumers would consider the resulting lower prices a blessing and consider the absurdity that a judge and jury from Madison County Illinois will in effect be deciding plumbing laws and regulation for thirty other states Not surprisingly judges in Madison County are elected Classaction cases like this can be decided in state courts only because of an anomaly in federal law The Constitution provides that cases between citizens of different states be decided by federal judges but in implementing this constitutional requirement Congress and the courts decided that a case would be subject to federal diversity jurisdiction only if there 4 The definitive source for diversity of citizenship law is Wright 1994 Posner 1996 and Lieberman 1992 give short overviews 5 No 00L525 Ill Cir Ct Madison County filed June 13 2000 See Beisner and Miller 2001 for this case and others 20 THERULE OFLAW was complete diversity ievery defendant had to be an outofstate defendant6 As a result it becomes quite easy to defeat diversity by suing a local defendant In Jefferson County Mississippi for example the Bankston Drug Store has been sued hundreds of timesinot because the pharmacy did anything wrong but simply as a way to defeat diversity in lawsuits against outofstate pharmaceutical manufacturers Keeping the amount in controversy below 75000 can also defeat diversity Unfortunately this commonsense provision has been interpreted to mean that so long as none of the plaintiffs numbering possibly in the millions asks for more than 75000 the case can be kept in state court even if it involves millions of dollars in total Beisner and Miller 2001 Some of the defects in 28 USC S 1332 have been remedied by the Class Action Fairness Act CAFA first introduced into Congress in 1999 CAFA requires federal diversity jurisdiction if the class has at least one hundred plaintiffs and damages exceed an aggregate of 5 million CAFA is a modest step in the right direction toward tort reform It is especially appropriate because as compared with other cruder reforms it is consistent with American legal tradition The framers of the US Constitution gave federal judges control over cases between citizens of different states precisely because they feared that local courts would use their powers unfairly against outofstate defendants Friendly 1928 In 2000 a Senate Report on the CAFA emphasized this point Clearly a system that allows State court judges to dictate national policy from the local courthouse steps is contrary to the intent of the Framers when they crafted our system of federalism7 The defects of elected judges are being remedied in part at the federal level But should more be done at the state level First it s important to understand that the outofstate bias problem is not caused by elections that work poorly Indeed the better that elections work the worse we can expect the outofstate bias problem to getiwhich is one reason we see the effect most strongly in states which use partisan elections to select their judges Thus a defense of judicial elections based upon their similarity to other elections eg Bonneau and Hall 2009 does not counter the problems raised here Moreover the outofstate bias problem will not be solved by better informed voters or more transparency in campaign contributions There is a fundamental difference between electing judges and electing other politicians As noted in the introduction we hope that the divergent interests of politicians from different states or regions williwith debate compromise and tradeiconverge to produce something approximating the common interest But we cannot rely on this hope for judicial elections Judges from West Virginia and judges from Alabama do not meet to debate compromise and trade Nor even if this were to occur does it seem likely that two wrongs biases would make a right Plaintiffs and defendants in West Virginia and Alabama have more than a right to be heard and their interests weighed Plaintiffs and defendants throughout the United States have a right to justice 6 The key statute is 28 USC Section 1332 For court interpretation see Strawbridge vs Curliss 7 US 3 Cranch 267 1806 Note that the legislation and its interpretation long predate modern class action law 7 Class Action Fairness Act of 2000 S Rep No 106420 1063911 Congress 2000 at 20 Quoted in Beisner and Miller 2001 CHAPTER 3 JUDICLAL ELECTIONS ELECTORAL INCENTIVES 21 Judicial elections do not necessarily promote justice On the positive side electing judges may be thought of as part of the Us checks and balances systemia way of keeping judges closer to the people One problem with this interpretation however is that in most tort cases the people are on both sides Most tort cases are disputes between private parties and it s not obvious why we would want to make judges more responsive to one party the voting party typically the plaintiff In criminal cases the case for elected judges may have more merit and is similar to the case for juries Elected judges and juries provide a check on the government The founders thought the jury trial was important enough to be guaranteed in the Bill of Rights because they were impressed with the jury as a form of check and balance against oppressive government One person s check on the government however is another person s nullification From a larger perspective however it s not obvious that checks and balances require that all political actors be elected Consider the complicated issue of political representation Does a politician best represent the people when she does what the people want Or does she best represent the people when she does what the people would have wanted had they been as informed as the politician If the former is the right notion of representation then why not submit all decisions to referenda If the latter is the right notion then at some times and places citizens can be better off if they do not have the right to decide an issue How can citizens be better off without the right to decide an issue We all face dilemmas between our shortterm and our longterm selves The shortterm self makes decisions that our longterm self may regret Our longterm self fights back with commitment devices that take away our opportunities to make shortterm choices that we may regret In the public arena it seems wise to also have such commitment devices The Founders gave federal Senators longer terms than Representatives and they staggered the terms so that our shortterm political selves would not control all decisions In a sense the Supreme Court is the ultimate commitment device in that it gives power to a part of the polity who are long departed Nevertheless the long departed may better represent our longterm interests than will our shortterm selves Perhaps instead of insulating judges from the people we should think of appointed judges with long terms as a commitment device to better represent the people s longterm interests 22 THERULE OFLAW REFERENCES Alozie Nicholas 0 1990 Distribution of Women and Minority Judges The Effects of Judicial Selection Methods Social Science Quarterly 712 315326 Ashenfelter Orley Theodore Eisenberg and Stuart Schwab 1995 Politics and the Judiciary The In uence of Judicial Background on Case Outcomes Journal of Legal Studies 231 257281 Baum Lawrence 1983 The Electoral Fate of Incumbent Judges in the Ohio Court of Common Pleas Judicature 66 420430 Beisner John H and Jessica D Miller 2001 They re Making a Federal Case out of It In State Court Harvard Journal ofLaw and Public Policy 251 143207 Bonneau Chris W and Melinda G Hall 2009 In Defense ofJudicial Elections New York Routledge Carbon Susan B 1980 Judicial Retention Elections Are They Serving Their Intended Purpose Judicature 645 211233 Dubois Philip 1979 Voter Turnout in State Judicial Elections An Analysis of the Tail on the Electoral Kite Journal ofPolitics 41 865885 Dubois Philip 1990 The Politics of Innovation in State Courts The Merit Plan of Judicial Selection Publius 201 2342 Flango Victor E and Craig Ducat 1979 What Difference Does Method of Judicial Selection Make The Justice System Journal 51 2544 Friendly Henry J 1928 The Historic Basis of Diversity Jurisdiction Harvard Law Review 41483 483510 Glick Henry R 1983 Courts Politics and Justice New York McGrawHill Glick Henry R and Craig F Emmert 1987 Selection Systems and Judicial Characteristics Judicature 70 228235 Hall William K and Larry T Aspin 1987 What Twenty Years of Judicial Retention Elections Have Told Us Judicature 706 340347 Hanssen Andrew 1999 The Effect of Judicial Institutions on Uncertainty and the Rate of Litigation The Election versus the Appointment of State Judges Journal of Legal Studies 281 205232 Helland Eric and Alexander Tabarrok 2002 The Effect of Electoral Institutions on Tort Awards American Law and Economics Review 42 341370 Lieberman J K 1992 The Evolving Constitution New York Random House Miller Neil 1992 An Empirical Study of Forum Choices in Removal Cases under Diversity and Federal Question Jurisdiction American University Law Review 41369 369 Neely Richard 1988 The Product LiabilityMess New York The Free Press Posner Richard 1993 What Do Judges Maximize The Same Thing Everybody Else Does Supreme CourtEconomic Review 3 141 Posner R A 1996 The Federal Courts Challenge and Reform Cambridge MA Harvard University Press Stumpf Harry P and John H Culver 1992 The Politics of State Courts New York Longrnan Tabarrok Alexander and Eric Helland 1999 Court Politics The Political Economy of Tort Awards Journal ofLaw andEconomics 421 157188 CHAPTER 3 J UDICLAL ELECTIONS ELECTORAL INCENTIVES 23 Wright C A 1994 Law ofFederal Courts Fifth ed St Paul Minn West Publishing Co Entrepreneurship by Russell S Sobel An entrepreneur is someone who organizes manages and assumes the risks of a business or enterprise An entrepreneur is an agent of change Entrepreneurship is the process of discovering new ways of combining resources When the market value generated by this new combination of resources is greater than the market value these resources can generate elsewhere individually or in some other combination the entrepreneur makes a pro t An entrepreneur who takes the resources necessary to produce a pair of j eans that can be sold for 30 and instead turns them into a denim backpack that sells for 50 will earn a pro t by increasing the value those resources create This comparison is possible because in competitive resource markets an entrepreneur s costs of production are determined by the prices it takes to bid the necessary resources away from alternative uses Those prices will be equal to the value that the resources could create in their next best alternate uses Because the price of purchasing resources measures this opportunity costithe value of the forgone altemativesithe pro t entrepreneurs make re ects the amount by which they have increased the value generated by the resources under their control Entrepreneurs who make a loss however have reduced the value created by the resources under their control That is those resources could have produced more value elsewhere Losses mean that an entrepreneur has essentially turned a 50 denim backpack into a 30 pair of jeans This error in judgment is part of the entrepreneurial learning or discovery process vital to the ef cient operation of markets The pro t and loss system of capitalism helps to quickly sort through the many new resource combinations discovered by entrepreneurs A vibrant growing economy depends on the ef ciency of the process by which new ideas are quickly discovered acted upon and labeled as successes or failures Just as important as identifying successes is making sure that failures are quickly extinguished freeing poorly used resources to go elsewhere This is the positive side of business failure Successful entrepreneurs expand the size of the economic pie for everyone Bill Gates who as an undergraduate at Harvard developed BASIC for the rst microcomputer went on to help found Microsoft in 1975 During the 1980s IBM contracted with Gates to provide the operating system for its computers a system now known as MSDOS Gates procured the software from another rm essentially turning the 30 pair of jeans into a multibillion dollar product Microsoft s Of ce and Windows operating software now run on about 90 percent of the world s computers By making software that increases human productivity Gates has expanded our ability to generate output and income resulting in a higher standard of living for us all Sam Walton the founder of WalMart was another entrepreneur who touched millions of lives in a positive way His innovations in distribution warehouse centers and inventory control allowed WalMart to grow in less than thirty years from a single store in Arkansas to the nation s largest retail chain Shoppers bene t from the low prices and convenient locations that Walton s WalMarts have provided Along with other entrepreneurs such as Ted Turner CNN Henry Ford Ford automobiles Ray Kroc McDonald s franchising and Fred Smith FedEx Walton signi cantly improved the everyday life of billions of people all over the world The word entrepreneur originates from a 13mcentury French verb entreprendre meaning to do something or to undertake By the 16th century the noun form entrepreneur was being used to refer to someone who undertakes a business venture The rst academic use of the word by an economist was in 1730 by Richard Cantillon who identi ed the willingness to bear the personal nancial risk of a business venture as the de ning characteristic of an entrepreneur In the early 1800s economists Jean Baptiste Say and John Stuart Mill further popularized the academic usage of the word entrepreneur Say stressed the role of the entrepreneur in creating value by moving resources out of less productive areas and into more productive ones Mill used the term entrepreneur in his popular 1848 book Principles of Political Economy to refer to a person who assumes both the risk and management of a business In this manner Mill provided a clearer distinction than Cantillon between an entrepreneur and other business owners such as shareholders of a corporation who assume nancial risk but do not actively participate in the daytoday operations or management of the rm Two notable economists in the 20th century Joseph Schumpeter and Israel Kirzner further re ned the academic understanding of entrepreneurship Schumpeter stressed the role of the entrepreneur as an innovator who implements change in an economy by introducing new goods or new methods of production In the Schumpeterian view the entrepreneur is a disruptive force in an economy Schumpeter emphasizes the bene cial process of creative destruction see CREATIVE DESTRUCTION in which the introduction of new products results in the obsolescence or failure of others The introduction of the Compact Disc and the corresponding disappearance of the vinyl record is just one of many examples of creative destruction cars electricity aircraft and personal computers are others In contrast to Schumpeter s view Kirzner focuses on entrepreneurship as a process of discovery Kirzner s entrepreneur is a person who discovers previously unnoticed pro t opportunities The entrepreneur s discovery initiates a process in which these newly discovered pro t opportunities are then acted on in the marketplace until market competition eliminates the pro t opportunity Unlike Schumpeter s disruptive force Kirzner s entrepreneur is an equilibrating force An example of such an entrepreneur would be someone in a college town who discovers that a pro t opportunity has arisen in renovating houses and turning them into rental apartments because of a recent increase in college enrollment Economists in the modern Austrian school of economics See AUSTRIAN SCHOOL have further re ned and developed the ideas of Schumpeter and Kirzner During the 1980s and 1990s state and local governments across the United States abandoned their previous focus on attracting large manufacturing rms as the centerpiece of economic development policy and instead shifted their focus to promoting entrepreneurship During this same period there was a dramatic increase in empirical research on entrepreneurship Some of these studies explore the effect of demographic and socioeconomic factors on the likelihood of a person choosing to become an entrepreneur Others explore the impact of taxes on entrepreneurial activity This literature is still hampered by the lack of a clear measure of entrepreneurial activity at the US state level Scholars generally measure entrepreneurship by using numbers of selfemployed people the de ciency in such a measure is that some people become selfemployed partly to avoid or even evade income and payroll taxes Some studies nd for example that higher income tax rates cause higher rates of selfemployment This counterintuitive result is likely explained by the higher tax rates encouraging more tax evasion through individuals ling taxes as selfemployed Economists have also found that higher taxes on inheritance result in less likelihood of individuals becoming entrepreneurs Some empirical studies have attempted to determine the contribution of entrepreneurial activity to overall economic growth The maj ority of the widelycited studies use international data taking advantage of the index of entrepreneurial activity for each country published annually in the Global Entrepreneurship Monitor These studies conclude that between one third and one half of the differences in economic growth rates across countries can be explained by differing rates of entrepreneurial activity Similar strong results have been found at the state and local levels Infusions of venture capital funding economists find do not necessarily foster entrepreneurship Capital is more mobile than labor and funding naturally ows to those areas where creative and potentially profitable ideas are being generated This means that promoting individual entrepreneurs is more important for economic development policy than is attracting venture capital at the initial stages While funding can increase the odds of new business survival it does not create new ideas Funding follows ideas not vice versa One of the largest remaining disagreements in the applied academic literature concerns what constitutes entrepreneurship Should a smalltown housewife who opens her own daycare be counted the same as someone like Bill Gates or Sam Walton If not how are these di erent activities classified and where do we draw the line This uncertainty has led to the terms lifestyle entrepreneur and gazelle or high growth entrepreneur Lifestyle entrepreneurs open their own businesses primarily for the nonmonetary benefits associated with being their own bosses and setting their own schedules Gazelle entrepreneurs often move from one startup business to another with a welldefined growth plan and exit strategy While this distinction seems conceptually obvious empirically separating these two groups is difficult when we can t observe individual motives This becomes an even greater problem as researchers try to answer questions such as whether the policies that promote urban entrepreneurship can also work in rural areas on rural 39 391 have recently shown that the Internet can make it easier for rural entrepreneurs to reach a larger market Because as Adam Smith pointed out specialization is limited by the extent of the market rural entrepreneurs can specialize more successfully when they can sell to a large number of online customers 1 What is govemment s role in promoting or sti ing entrepreneurship Because the early research on entrepreneurship was done mainly by noneconomists mostly actual entrepreneurs and management faculty at business schools the prevailing belief was that new government programs were the best way to promote entrepreneurship Among the most popular proposals were govemmentmanaged loan funds government subsidies govemmentfunded business development centers and entrepreneurial curriculum in public schools These programs however have generally failed Govemmentfunded and managed loan funds such as are found in Maine Minnesota and Iowa have suffered from the same poor incentives and political pressures that plague so many other government agencies My own recent research along with that of other economists has found that the public policy that best fosters entrepreneurship is economic freedom Our research focuses on the public choice reasons see PUBLIC CHOICE these government programs are likely to fail and on how improved rules of the game lower and less complex taxes and regulations more secure property rights an unbiased judicial system etc promote entrepreneurial activity Kreft and Sobel 2005 shows that entrepreneurial activity is highly correlated with the Economic Freedom Index a measure of the existence of such promarket institutions This relationship between freedom and entrepreneurship also holds using more widely accepted indexes of entrepreneurial activity from the Global Entrepreneurship Monitor and of economic freedom from Gwartney and Lawson s Economic Freedom of the Worlgl that are available selectively at the international level This relationship holds whether the countries studied are economies moving out of socialism or economies of OECD countries The accompanying figure shows the strength of this relationship among OECD countries Economic Freedom and Entrepreneurship in OECD Countries 2002 Entrepreneurial Activity Index TEA 00 60 65 70 75 80 85 Economic Freedom Index EFW The dashed line in the figure shows the positive relationship between economic freedom and entrepreneurial activity When other demographic and socioeconomic factors are controlled for the relationship is even stronger This finding is consistent with the strong positive correlation between economic freedom and the growth of per capita income that other researchers have found One reason economic freedom produces economic growth is that economic freedom fosters entrepreneurial activity Economists William Baumol and Peter Boettke have popularized the idea that capitalism is significantly more productive than alternative forms of economic organization because under capitalism entrepreneurial effort is channeled into activities that produce wealth rather than into activities that forcibly take other people s wealth Entrepreneurs note Baumol and Boettke are present in all societies In govemmentcontrolled societies entrepreneurial people go into government or lobby government and much of the government action that resultsitariffs subsidies and regulations for exampleidestroys wealth In economies with limited governments and rule of law entrepreneurs produce wealth Their idea is consistent with the data and research linking economic freedom which is a measure of the presence of good institutions to both entrepreneurship and economic growth The recent academic research on entrepreneurship shows that to promote entrepreneurship government policy should focus on reforming basic institutions to create a better environment in which creative individuals can ourish That environment is one of welldefined and enforced property rights low taxes and regulations sound legal and monetary systems proper contract enforcement and limited government intervention About the Author Russell S Sobel is James Clark Coffman Distinguished Chair in Entrepreneurial Studies and professor of economics at West Virginia University He was founding director of the WVU Entrepreneurship Center Introductory Readings Rosenberg Nathan and LE Birdzell Jr How the West Grew Rich New York Basic Books 1986 Gwartney James D and Robert A Lawson Economic Freedom of the World 2002 Annual Report Vancouver The Fraser Institute 2002 Information about this book can be found on line at httpwwwfreetheworldcom Hughes Jonathan RT The Vital Few American Economic Progress and Its Protagonists expanded edition New York Oxford University Press 1986 Kirzner Israel M Competition and Entrepreneurship Chicago University of Chicago Press 1973 Information about Kirzner and his works can be found on line at http wwwworldhistogcomwikiIIsrael Kirznerhtm Kirzner Isreal M Entrepreneurial Discovery and the Competitive Market Process An Austrian Approach Journal ofEconomic Literature v35 n1 March 1997 6085 Lee Dwight R The Seeds of Entrepreneurship The Journal of Private Enterprise v7 n1 Fall 1991 2035 Reynolds Paul D Michael Hay and S Michael Camp Global Entrepreneurship Monitor Kansas City Missouri Kauffman Center for Entrepreneurial Leadership 1999 Information about this book can be found on line at httpwwwgemconsortiumorg Schumpeter Joseph A The Theory of Economic Development Cambridge Mass Harvard University Press 1934 1911 Information about Schumpeter and his works can be I found on line at httpcena V 1 39 39 html Schumpeter Joseph A Capitalism Socialism anal Democracy New York Harper 1942 Zacharakis Andrew L William D Bygrave and Dean A Shepherd Global Entrepreneurship Monitor National EntrepreneurshipAssessment Uniteal States of America Kansas City Missouri Kauffman Center for Entrepreneurial Leadership 2000 Information about this book can be found on line at httpwwwgemconsortiumorg Advanced Readings Bates Timothy Entrepreneur Human Capital Inputs and Small Business Longevity Review of Economics anal Statistics v72 n4 November 1990 551559 Baumol William J Entrepreneurship Productive Unproductive and Destructive Journal of Political Economy v98 n5 1990 893921 Baumol William J The Free Market Innovation Machine Analyzing the Growth Miracle of Capitalism Princeton NJ Princeton University Press 2002 Blanch ower David G and Andrew J Oswald What makes an Entrepreneur Journal of Labor Economics v16 n1 January 1998 2660 Blau David M A TimeSeries Analysis of SelfEmployment in the United States Journal of Political Economy v95 n3 June 1987 445467 Blomstrom Magnus Robert E Lipsey and Mario Zejan Is Fixed Investment the Key to Economic Growth The Quarterly Journal of Economics v111 n1 February 1996 269276 Boettke Peter J Calculation anal Coordination Essays on Socialism anal Transitional Political Economy New York NY Routledge 2001 Boettke Peter J and Christopher J Coyne Entrepreneurship and Development Cause or Consequence Aalvances in Austrian Economics v6 2003 6787 Bruce Donald Taxes and Entrepreneurial Endurance Evidence from the SelfEmployed National Tax Journal v55 n1 March 2002 524 Evans David S and Linda S Leighton Some Empirical Aspects of Entrepreneurship American Economic Review v79 n3 June 1989 519535 Hamilton Barton H Does Entrepreneurship Pay An Empirical Analysis of the Returns to Self Employment Journal ofPolz39tz39cal Economy v108 n3 June 2000 604631 HoltzEakin Douglas David Joulfaian and Harvey S Rosen Sticking It Out Entrepreneurial Survival and Liquidity Constraints Journal of Political Economy v102 nl February 1994 5375 Kreft Steven F and Russell S Sobel Public Policy Entrepreneurship and Economic Freedom Cato Journal 25 No 3 Fall 2005 pp 595616 This article and some related research can be found on line at httpwwwbewvuc3m 139 s Lcll Vohtme 15 0 Winter 2008 West Virginia University College ofBusiness and Economics Highlight if the Wm Virginia Economic Outlook 2008 by George W Hammond Associate Director BBER h West Virginia economy continued to expand through the rst half of 2007 but at a signi cantly slower rate than the previous year Indeed according to preliminary estimates the state added just 4700 jobs IN THIS ISSUE Highlights ofWV Economic Uutlook Metropolitan Gross Domestic Produc Teachershartages VW Economic Indicators sonal income growth also decelerated during the past four quarters The goodsproducing sector sum ofmining con RegisterNdw struction and manufacturing lost 1000 jobs during the for the past year while the serviceproviding sectors combined to generate 5700 net newjobs Job losses in the MPrgantown MSA goodsproducing sector were driven by losses in manu Economic Outlook COHfEI39EHCE facturing 1500 as construction employment was at We nesday March 1 2 08 and natural resources and mining rose byjust 500jobs Waterfront Place Hotel Morgantown WV Growth decelerated signi cantly in construction during 8 the last year as the state has begun to feel the effects mm of the housing correction Job growth in natural re Registration and Continental Breakfast sources and mining also decelerated during the last Welcome and Overview year as coal production and employment respond to slowing national growth rising costs regulatory uncer tainty and increasingly challenging geologic conditions Manufacturing employment continued to decline Outlook for theUS Economy Nigel Gault Managing Director Global Insight 39Outlook for the MorgantoWn Metropolitan Slatistical Area during the past four quarters with job losses concen George W Hammond Associate Director WVU trated in durable goods although nondurable manufac ER turing jobs declined as well Manufacturing job losses Emerging Issues Affecting Morgantown rs Economic are related in Piquot to SIDWing national grthh as we as Develo ment Intense competitive pressure from rivals around the country and around the worl West Virginia s in ationadjusted personal income growth hit 28 percent during the second quarter of 2006 to second quarter 2007 period That s below the pace of Panel discussion with business leaders Closing Remarks R Stephen Sears Milan Puskar Dean WlU College of Business amp Economics WV Business amp Economic Review 1 Vl nter 2008 the previous fourquarter period 31 percent VEst Virginia s personal income growth during the past year fell short of the national rate 39 percent West Virginia s per capita personal income hit 27897 in 2006 while national income per capita was 36276 West Virginia posted an average annual in come growth rate of 41 percent since 2000 West Virginia s per capita income growth exceeded the na tional average during the decade so far 33 percent per year which implies that the state has made progress in closing the income gap with the nation The per capita personal income gap has indeed fallen from 266 per cent in 2000 to 234 percent in 2005 and again to 231 percent in 2006 The outlook for the state economy calls for sus tained growth during the next five years assuming the national economy avoids recession However the state forecast calls for modest growth during the next year as the national economy slows in response to the hous ing correction The forecast calls for the state to add only 2600 jobs on an annual average basis from 2006 to 2007 This is dangerously close to no growth and suggests that the state will flirt with recession during the next year Table 1 below summarizes the outlook forthe major macroeconomic indicators of state performance Job growth in the goodsproducing sector of the state economy is expected to decelerate significantly Job gains in natural resources and mining slow as coal mining activity in the state stabilizes in the neighbor hood of current levels The forecast calls for coal min ing jobs remain between 19000 and 18000 during the next five years Coal production is forecast to remain in the 150153 millon ton per year range during the next five years While coal remains the largest component of natu ral resources and mining the oil and natural gas sector is expected to add jobs at a faster rate This reflects in creased production and exploration activity in the state during the forecast with the investments planned by Chesapeake Energy among others The outlook for construction calls for employment to stabilize at a high level between 40000 and 41000 jobs Stability in construction employment is driven by declining residential activity in the state which reflects the national housing correction This correction is ex pected to be concentrated in the Eastern Panhandle counties which have experienced the strongest gains in activity during the decade so far Manufacturing continues to lose jobs during the forecast although at a slower rate than during the pre vious five years Most of the job losses are expected in primary metals primarily steel chemicals and glass products The forecast calls for job gains in transporta tion equipment a sector which includes aircraft produc tion autos and auto parts and defense munitions as well as plastic products Wood products and furniture fabricated metals and food products jobs are expected to stabilize around current levels As usual the serviceproviding sectors drive net employment gains during the forecast The largest job gains are expected to come in health care leisure and hospitality and professional and business services These three sectors combine to add an expected 3900 jobs peryear during the forecast Government trade transportation and utilities and financial activities also add jobs during the next five years although at slower Table 1 WestVirginia Average Annual Growth Rates Actual Forecast 20012006 2007 2012 2001 2006 2007 2012 WVa US WVa U S Jobs OOOS 6851 7047 7073 7321 06 07 07 11 Real Per Capita lnoo me 2000 22783 24475 25092 27791 14 13 21 24 Population 0005 1801 1818 1823 1858 02 10 0 2 09 Unemployment Rate Percent 52 50 45 44 01 00 0 0 00 Covered by unemployment ir surancefor West Virginia Nonfarm payroll for U 8 Growth rate is average annual change WV Business amp Economic Review 2 Winter 2008 rates Continued job growth sets the stage for continued inflationadjusted wage growth during the next five years This in turn contributes to growth in personal in come which is forecast to average 21 percent per year below the national rate of 24 percent per year but above the average growth during the last five years 14 percent The expected growth rate difference be tween the state and the nation implies that the per capita personal income gap is forecast to rise during the next five years Indeed the forecast calls for the gap to increase from 231 percent in 2006 to 248 per cent by 2012 Income and job growth contribute to population growth during the next five years The forecast calls for the state to add 3000 residents per year which trans lates into an average annual growth rate of 02 percent This is slightly above average growth so far this decade 01 percent per year but is well below the national rate of growth of 09 percent West Virginia s population gains during the forecast are driven by modest net inmigration because the state s rate of natural increase remains negative Popu lation stability during the forecast implies a continued gradual aging in place of the state s residents The im plications of this are the population losses in the younger age groups birth17 and 1844 and popula tion gains in the older age groups 4564 and 65 and older as Figure 8 shows The 65andolder age group is forecast to grow the fastest during the next five years particularly after 2010 as baby boomers begin to reach age West Virginia s economic growth depends on the growth of our trading partners If national economic growth decelerates significantly this will set the stage for slower state growth as well However there are state specific risks to consider as well West Virginia depends to an unusual degree on the performance of the mining sector especially coal min ing Overall if national economic growth decelerates that will reduce demand for energy and thus demand for coal Further the industry faces environmental pres sure on a number of fronts including concerns regard ing clean water and air as well as global warming The housing correction underway nationally re mains a major concern for future economic growth House price appreciation for the state as a whole never hit the heights experienced by the nation This suggests that the housing correction may not hit the state as hard as the nation during the next year However the metro politan areas including VEst Virginia s Eastern Pan handle counties HagerstownMartinsburg Washington Winchester posted house price appreciation far above W794i A Rdmz39an As defined by the National Bureau of Economic Research NBER a private nonprofit research or ganization a recession is a sustained diffused and signi cant decline in the level of economic activity Let s take a closer look at each of the key terms Sustained a recession must be sustained for some minimum period of time which is left unspeci fied by the NBER The gist of this requirement is that a recession must last longer than a month or two In practice the shortest national recession during the post World War II period lasted six months January 1980 to July 1980 The average recession during the post World War II period lasted 10 months Diffused A recession must be diffused through most sectors of the economy Thus a downturn in one industry ie construction would not be suffi cient The impact of this requirement is that the NBER uses a variety of indicators of aggregate economic performance such as total jobs real in come production and spending Significant a recession must involve some minimum degree of decline which is left unspeci fied by the NBER In practice this means that in or der for an economic downturn to be classified as a recession it must be at least as large as the small est previously defined recession Level In defining a recession the NBER looks for a decline the level of economic activity Thus a growth slowdown such as a decline in the growth rate from 40 percent to 20 percent would not qualify as a recession the national average and thus are in danger of experi encing a more severe correction Continued population job and income growth in these regions has the poten tial to moderate fallout during the next year The manufacturing sector remains an important part of the state economy These sectors will con tinue to face intense competitive pressure during the forecast as well as continued high oil and natural gas prices compared to 1990s levels If that pressure results in the closure of one or more major operators it would generate significant job losses that would impact overall job growth in the state WV Business amp Economic Review Mnter 2008 Metropolitan Stotixtz39ool Arm GDP 20012005 by Alexander J Kazmierczak Graduate Research Assistant Background In rmaiz39on On September 26 2007 the U S Bureau of Eco nomic Analysis released its firstever measure of metro politan areas Gross Domestic Product GDP This annual data is available from 2001 to 2005 GDP mea sures the value of all final goods and services produced during a given time period less any intermediate goods For example a new car would be counted in the GDP but the intermediate parts ie windshield seats steel etc would not A used car sold would not be counted because nothing new was produced The US Office of Management and Budget OMB defines Metropolitan Statistical Areas MSAs as areas with a core urban area that has a population greater than 50000 Each MSA will include at least one county but if the core urban area lies in more than one county or an adjacent county has a high amount of social and economic activity associated with the core urban area more than one county may be included Currently the OMB recognizes 363 MSAs within the US and the ma jority of these include more than one county This coupled with the fact that economic activity often crosses state borders implies that there are MSAs that are defined in more than one state In 2005 there were ten MSAs with counties in West Virginia Two of these include exclusively West Arginia counties the Charles ton WV MSA and the Morgantown WV MSA These two MSAs accounted for approximately 31 percent of West Arginia s GDP in 20051 Atotal of 21 West Virginia counties are included in MSAs The GDP for MSAs is calculated in nominal and real terms Nominal GDP is the dollar value of all final goods and services produced in a given period Real GDP indexes the value of a dollar to a specific time pe riod base period and then adjusts other periods to re flect output in terms of the base period s prices Put another way real GDP adjusts the data for inflation The BEA currently rebases the national US real GDP data to 2000 At this time the nominal and real GDP were the same 981 trillion dollars In 2006 the nominal GDP was 1319 trillion dollars an increase of approximately 34 percent After accounting for the pricelevel increase between 2000 and 2006 the US real GDP in 2006 was 1132 trillion dollars or approxi mately a 15 percent increase Because it adjusts for in flation real GDP data provides better insight into how many goods and services are being produced in an economy this is why it is often used instead of nominal GDP To simplify this explanation consider a small economy that last year only produced 100 steel frames for automobiles nothing else Each of these frames is valued at 1000 so the nominal GDP would be 100000 Now consider this year when the same small economy again produced 100 steel frames but each Table 1 WV Metropolitan Statistical Area GDP GDP Rank GDP per Capita Rank WashingtonArlingtonAlexandria DCVAMDVW 347631 4 66195 5 Charleston WV 12491 132 40796 102 HuntingtonAshland WVKY OH 7904 184 27689 302 HagerstownMartinsburg MDVW 7095 197 28285 292 ParkersburgMariettaVienna WV 4915 247 30293 249 Wheeling WVOH 4417 265 29785 263 V nchester VAVW 4411 266 37999 139 Morgantown WV 4279 270 37324 152 WeirtonSteubenville WVOH 3336 321 26414 316 Cumberland MDWV 2184 361 21800 356 Out of 363 total US MSAs In millions of dollars WV Business amp Economic Review 4 Winter 2008 Table 2 Metropolitan Statistical Area GDP Growth Rates GDP GDP per Capita m m m m M Winchester VAWV MSA 290 101 177 72 HagerstownMartinsburg MDVW MSA 259 83 138 54 WeirtonSteubenville WVOH MSA 211 81 251 90 Cumberland MDVW MSA 208 80 223 87 Wheeling WVOH MSA 266 79 294 87 WashingtonArlingtonAlexandria DCVAMDWV MSA 314 78 235 63 Morgantown WV MSA 344 76 309 69 West Virginia 224 64 173 62 United States 230 64 156 53 HuntingtonAshland WVKY OH MSA 219 52 227 54 Charleston VW MSA 187 46 192 48 ParkersburgMariettaVienna WV MSA 147 35 159 38 now sold for 1100 The nominal GDP would now be 110000 or a 10 percent increase Real GDPfor this economy would still be 100000 and the RGDP growth would be zero percent MSAs accounted for over 89 percent of all nominal GDP for the entire US in 20052 The New YorkNorth New JerseyLong Island NYNJPA was the largest MSA in 2005 and contributed over 1056 billion to the US total GDP The New York MSA accounted for ap proximately 85 percent of total US output The Lewiston lDWA MSA contributed the smallest amount of any MSA 1597 billion The BridgeportStamford Norwalk CT MSA had the greatest GDP per person at 80708 This was almost five times as much as the BrownsvilleHarlington TX MSA which had a GDP per person of 16165 the least for any MSA in 2005 Metro politan areas tended to have greater purchasing power per person than the country as whole 44940 vs 41934 respectively The Currmz Situatzb 2 WM Vigim39a f MAI The nominal 2005 GDP for each of West Virginia s MSAs varied from 21 billion to 3476 billion as shown in Table 1 Out of the 363 MSAs located within the US the West Virginia MSAs rank between 4th and 361st in total dollar value of output The ten MSAs that include counties from West Virginia cover a wide range of output The Washington DC is the fourth largest metro area in the country1 and includes Jefferson County VW however the vast majority of the economic activity of our nation s capital comes from nonWest Vir ginia counties Other than the GDP for Washington WSA the GDPforWest Virginia s MSAs ranged from about 22 billion to 125 billion in 2005 Another way to interpret GDP data is by adjusting for the population of an area Dividing the GPD by popula tion indicates how much output is produced per person Table 1 shows that some of the WV MSAs with higher GDP data actually produce less per person than some of the MSAs with lower GDP For example the Huntington Ashland MSA had a GDP of 798 and a per capita GDP of 27689 whereas although the Morgantown MSA had a GDP of only 448 its per capita GDP was 37324 almost 10000 higherthan the HuntingtonAshland MSA Growth rates in the West Virginia MSAs have been very robust over recent years suggesting that economic activity is strengthening relative to the state and the na tion Between 2001 and 2005 five of the ten MSAs that are part of West Virginia had greater GDP growth than the state of West Virginia as a whole and the entire US as shown in Table 2 Looking at the growth between 2004 and 2005 the GDP of seven ofthe ten MSAs grew faster than West Virginia and the US Between 2001 and 2005 the per capita GDP growth in all but the HagerstownMartinsburg MSA was greater than that of the US as a whole Rm GDP Table 3 shows data for the real GDP of West Virginia s MSAs As mentioned earlier real GDP mea sures economic activity and adjusts for inflation As the WV Business amp Economic Review Mnter 2008 Table 3 MSA Real GDP per Capita 2005 Data m RGDP per Capita Rank WashingtonArlingtonAlexandria DCVAMDWV MSA 59682 4 United States Metro Portion 40651 United States 36842 Charleston VWMSA 35731 114 V nchester VAWV MSA 34846 127 Morgantown WV MSA 32501 164 ParkersburgMariettaWenna WV MSA 26805 252 Wheeling WVOH MSA 26049 278 HagerstownMartinsburg MDVW MSA 25459 294 West Virginia 24662 HuntingtonAshland VWKY OH MSA 23997 313 WeirtonSteubenville VWOH MSA 22764 330 Cumberland MDVW MSA 19444 358 Out of 363 total US MSAs Assuming positive inflation these values are likely to be slightly understated relative to MSA data table shows the real GDP per person tended to be lower for the West Virginia MSAs than for the nation as a whole This is the case for every MSA except the Washington DC MSA The Charleston Winchester and Morgantown MSAs real per capita GDPs are relatively close to that of the nation and the real GDP per person in seven ofthe ten MSAs is greater than that of the entire state of VEst Virginia Table 4 provides growth rates in real GDP for 20012005 and 20042005 Between 2001 and 2005 growth rates for real GDP per capita were greater for six of the ten West Virginia MSAs than for the US This basically Table 4 Growth Rates for MSA Real GDP per Capita Real GDP per Capita 20012005 20042005 Morgantown WV MSA 140 25 Wheeling WVOH MSA 132 38 WashingtonArlingtonAlexandria DCVAMDWV MSA 113 35 Cumberland MDVW MSA 91 50 V nchester VAWV MSA 80 36 WeirtonSteubenville VWOH MSA 78 26 United States 68 20 HuntingtonAshland VWKY OH MSA 63 03 West Virginia 60 15 Charleston VWMSA 44 03 ParkersburgMariettaWenna WV MSA 26 04 HagerstownMartinsburg MDVW MSA 25 21 WV Business amp Economic Review 6 Winter 2008 Table 5 Comparisons of MSA GDP by Population and Employment 2005 Area GDP WV Total 53091 VW MSAs 33016 of Slate Total 622 Charleston MSA 12491 of Slate Total 235 Morgantown MSA 4279 of Slate Total 81 Population Employment 1814083 909828 999119 542421 551 596 306179 177032 169 195 114644 69 909 63 77 In millions of dollars means that after adjusting for inflation each person s productivity growth on average was greater in West Vir ginia MSAs than in the US as a whole Seven of the ten MSAs had real per capita GDP greater than the en tire state of West Virginia during the same period In fact between 2001 and 2005 growth in real GDP per capita in the Morgantown and Wheeling MSAs was about twice that of the US How mat9 do MM contribute k1 war Virgin39m r GDP One interesting question is what percentage of West Virginia s GDP the MSAs account for Another question is whether this percentage is consistent with the MSAs population and employment shares Answer ing these questions can be tricky because MSAs are defined across slate lines making it difficult to sum the GDPs of each MSAto find a proportion of state GDP Fortunately though MSAs are defined by counties which allows the GDP of each county included in the MSA to be calculated Once these estimates are calcu lated it is possible to analyze the MSA s portion of West Arginia s economy West Virginia s MSA portion accounted for approxi mately 62 percent of the state s GDP in 2005 as shown in Table 5 This means that 21 of West Virginia s coun ties produced 62 percent of all final goods and ser vices while the other 34 counties produced about 38 percent It might seem that production would be greater in MSAs because they tend to have greater populations however the population in these 21 urban areas only accounted for 55 percent of West Virginia s population This indicates that the 45 percent of indi viduals not living in metro areas produce just 38 per cent of final goods and services Looked at another way employment in these 21 counties was 60 percent of West Virginia s total nonfarm employment Looked at either way the urbanized areas in West Virginia appear to produce more final goodsservices per capita or per employee which implies that West Virginia s urban ar eas are more productive Nam 1 For more detailed definition of MSAs visit http wwwcensusgovpopulationwwwestimates metroareahtml 2 Comparisons between US real GDP and MSA real GDP cannot be made here because US real GDP is based on the 2000 price level and MSA real GDP is based on the 2001 price level The results comparing real GDP would be similar to those found here using nominal GDP 3 In terms of 2005 total dollar value of output Keep up with Morgantown developments Subscribe to the Morgantown MSA Monitor A quarterly newsletter offering economic analyses forecasts and pertinent data about the Morgantown MSA in print or electronic format Offered free of charge To subscribe go to bewvuedubber WV Business amp Economic Review 7 Mnter 2008 Tamoer Sbortazgw Natioml mm Regional Pmpm z39var by Dr Tom Witt Amy Higginbotham Dr Tami Gurley CalvezArzu Sen Nationwide deaer Shmggw The impact of teacher shortages is being felt around the nation The latest data show that 737 per cent of public schools in the US had teaching vacan cies for the 200304 school year Of these almost 65000 vacancies most were filled by fully qualified teachers however others were covered by hiring of less than fully qualified teachers cancelling or enlarg ing classes and using substitutes Of the public schools with vacancies general elementary school teachers were the most soughtafter 862 percent had general elementary school teacher vacancies The second most soughtafter position for the 200304 school year was special education teachers especially in the public schools that had student enrollment over 1000 Schools in 200607 had a different demand for teachers According to the Teacher Shortage Areas Nationwide ListingM for the 200607 school year teach ers of science special education and mathematics were the most soughtafter Of the 40 states that listed specific subject area shortages 37 reported science teacher shortages and 36 reported special education shortages Wm Vigin39m Tamyer Sbon agw West Virginia is also facing teacher shortages Ac cording to data for the 200607 school year 3868 K l2 positions were posted for public schools in West Vir ginia Approximately 90 percent of those positions were filled 2269 were filled by individuals employed in that county s school system during the previous year Of the 390 positions that were not filled 66 percent were for multicategorical special education teachers Other po sitions not filled included 32 mathematics teachers 29 speech pathologists and 24 Englishlanguage arts teachers Reasons reported for the unfilled positions in 2006 07 varied by subject but the majority of vacancies over 75 percent were attributed to the lack of qualified ap plicants Of these 53 multicategorical special educa tion positions were left vacant and 120 general education positions were not filled The most common general education categories were mathematics 28 Englishlanguage arts 17 and reading specialist 13 Only one of the 390 positions was not filled due to fiscal restraints and it was for a specialized vocational edu cation teacher Despite the shortage of qualified candidates in some areas 3478 positions were filled by qualified in dividuals in 200607 Approximately 85 percent of those positions were filled by individuals holding a profes sional or vocational certificate including 880 individuals with certifications in elementary education Of the 3868 positions posted in 200607 for K12 educators 1483 were due to nonreturning educators Of those individuals who did not return 53 percent re tired Almost 400 individuals did not return for the 2006 07 school year because they accepted education positions in another part of West Virginia or outof state Only 53 individuals did not return due to a reduc tion in the number of educators needed and of those 29 elementary education teachers were terminated An Eanmzlrff View 9 Shortagw and Emilia Rmmm r Sbon agw a her shortages result from the inability to fill po sitions with qualified personnel in a timely fashion at the prevailing market wage including benefits Teacher shortages are being felt nationwide as current data show that 737 percent of public schools in the US had teaching vacancies for the 200304 school year and anywhere from 39 percent elementary education to 336 percent foreign languages of these vacancies were difficult or impossible to fill Public policy address ing the issue of teacher shortages should examine the factors in the teacher labor market that increase the de mand for teachers and reduce supply resulting in teacher shorages O Uncompetitive wages and fringe benefits compared to other professions decrease the number of pro spective teachers Since the 1970s salaries of teachers have lagged behind the salaries of non teaching jobs for college graduates This reduces the supply of highly qualified teachers because pro spective teachers compare the salaries they expect to earn as teachers to salaries available in other occupations In addition to higher salaries other WV Business amp Economic Review 8 Winter 2008 professional occupations might be more attractive due to better equipped work settings more continu ous training higher social status and better opportu nities for rapid career advancement O Uncompetitive wages and poor working conditions also result in high teacher attrition rates Teachers with fewer than five years of experience are likely to leave the profession and look for more attractive jobs in other professions As retirement age ap proaches some teachers cut short their teaching careers mostly due to poor working conditions 0 Requirements for teacher preparation and certifica tion as well as hiring and reassignment policies and practices may also aggravate teacher short ages 0 Shortages are not spread evenly among schools and districts There is a sorting of less qualified teachers to highpoverty lowperforming schools Moreover teachers are more likely to leave poor ur ban schools than higherincome suburban schools 0 Increasing teacher retirement rates due to an aging teacher force also reduce supply 0 Rising public school enrollments contribute to the increased demand for teachers particularly those with specialties in STEM and foreign languages 0 Increased demand in special education results in persistent teacher shortages In 20002001 about 12 percent of the special education teaching force was less than fully certified College and university preparation programs have been unable to meet the growing demand in this area increasing the need for alternative routes to certification Opiiom r Comidemz z39on in WI Vigim39a Loan Scholarship and Fee Waiver West Virginia code 18A33a provides for reim bursement of tuition registration and fees for courses completed toward certification renewal or additional en dorsement in a shortage area As a recruiting incentive West Virginia could expand this legislation to include the full or partial repayment of student loans to new teachers specialized in shortage areas This incentive could come with various stipulations including a mini mum teaching service commitment Signing Bonuses Signing bonuses for teachers that are certified ex perienced or are subject matter experts in highneed subjects are used by other states to address teacher shortage problems These bonuses not currently used in West Virginia can be provided to new teachers in highneed subject areas and can come with stipula tions including weekly mentoring sessions and mini mum service requirements Housing Assistance Housing assistance bonuses are currently an option for West Virginia county boards of education This pro cess needs to be expanded to offer housing assistance such as annual bonuses down payment assistance or closure cost assistance to attract new teachers to high need highgrowth areas This assistance can be used with minimum teaching service commitments Streamlined Hiring Process The process of hiring of new teachers in West Vir ginia is complicated and time consuming If a county has increased net enrollment of at least 100 students superintendent approval or a reduction of force it must go through a lengthy process of hiring or relocating teach ers To increase the chances of hiring highly qualified teachers this process could be streamlined and com pleted early in the calendar year so that reassignment lists and information on vacant positions is available in time to be competitive in the labor market Teacher Licensure Speci cation and Standardization Teacher standards in West Virginia are lacking in specificity and do not clearly define the knowledge and skills necessary for new teachers For example the state requires that new teachers have taken coursework in reading instruction but does not require a licensure test to ensure that the teachers fully understand the material The state also allows new teachers to teach for up to one year prior to passing the state s licensure tests Also the state needs to recognize exempla academic achievement at initial certification to indentify promising new teachers Teacher Evaluation and Compensation Currently West Virginia teachers are not held ac countable for performance or evaluated consistently The state s efforts to promote teacher effectiveness are undermined by lack of valueadded data a short tenure process three years and a mandated minimum salary schedule These conditions could be addressed while also developing policy to support differential pay in high needs areas Alternative Routes to Teacher Certi cation The state could benefit from improving its alternate route for teacher certification The current alternative WV Business amp Economic Review Mnter 2008 route described in 18A3 1a has structural shortcom ings and low and inflexible admission standards It does not ensure adequate support to new teachers allows excess coursework and does not hold alternative certi fication programs accountable for teacher quality This situation could be addressed Preparation of Special Education Teachers The state could raise the standards for special edu cation teachers Current standards do not ensure that special education teachers are well prepared to teach students with wideranging disabilities Also the state s policy does not ensure that teachers receive relevant K6 subject matter preparation as a subject area ma jor is not required Further there is no limit on the amount of professional education coursework that teacher preparation programs can require leading to program excesses Finally the state needs stream lined routes to help secondary special education teachers meet additional subject matter require ments The full detailed report on this topic can be found on the Bureau of Business and Economic Research s webpag e httpwww bber wvu edu Nam l The US Department of Education defines a shortage in the Teacher Shortage Areas Nationwide Listing 199091 through 200607 as either 1 short ages by subject matter as designated from the top 10 academic disciplines identified in an annual survey of school divisions or 2 a school personnel vacancy for which a school division received three or fewer qualified candidates for a position and plus state and national pro les spreadsheet formats Now Available The 2007 West Virginia County Data Profiles Get the latest business and economic information about every county and every metropolitan micropolitan statistical area in West Virginia a total of 73 pro les 55 counties 16 MSAs Data can be ordered in book or CDROM format Files on the CD are in both PDF and Excel Each profile and summary costs 20 including postage and handling or 15 for orders of 10 or more The best value is a complete set of 73 profiles a book costs 400 CD cost 125 West Virginia residents must pay 6 sales tax To order or more information please contact Erin Carter erincartermaiwvuedu3042937884 or visit our website wwwbberwvuedu WV Business amp Economic Review Winter 2008 West Virginia and United States Economic Indicators 06 Q3 06 Q4 07 Q1 07 Q2 07 Q3 2004 2005 2006 United States Real GDPBiI 2000 ChainWtd 113367 113955 114126 115201 116307 106757 110035 11319Z C ge 11 06 38 3 Consumer Price Index CPIU 198284100 2034 2017 2038 2077 208 1889 1953 201 Chan e 23 34 41 79 1 27 34 3 Total Nonfarm Payroll Employment Mil 1364 1370 1374 1379 138 1314 1337 136 Chan e 16 15 15 12 0 11 17 1 Unemployment Rate 47 45 45 45 4 55 51 4 Initial Claims for Unemployment Ins Thous 315 320 321 317 31 343 332 31 Industrial Production1997100 1123 1119 1122 11 2 114 1036 1069 111 00 ange 40 15 11 5 4 25 32 4 Capacity Utilization Rate 823 815 814 8 7 82 781 802 81 Housing Sarts Mil 1704 1555 1460 1454 129 1950 2073 181 Retail 8 Food Service Sales Bil 4360 4370 4437 4496 454 3833 4085 433 7 ge 33 10 63 4 4 61 66 6 Federal Funds Ratequot 525 525 526 525 50 135 321 49 Bank Prime Loan Ratequot 825 825 825 825 818 434 619 79 30YearConcentionaI Mortgage Ratequot 656 625 622 637 655 584 587 641 Westwrginia otal Nonfarm Payroll EmploymentThous 75 6 75 75 6 75 I 75 736 74 5 75 Chan 4 0 1 1 3 Natural Resourcesand Mining 2 2 2 2 5 2 2 23 260 2 Change 4 4 8 2 Construction 3 3 3 3 2 3 4 34 368 3 Chan e 0 7 7 1 1 5 4 Manufacturing 6 7 6 5 7 5 5 1 63 622 6 0 ange 6 2 3 TradeTransponationand Utilities 14 8 14 1411 14 14 t 137 13 5 14 Change 7 1 I 1 6 Information 1 5 1 1 1 1 11 1 7 1 o ange 7 1 4 7 FinanciaIActivities 3 0 3 3 3 3 30 2 7 3 C ange 0 6 1 0 Professionaland BusinessServices 5 7 6 6 6 6 1 58 5 9 6 0 ha 8 3 9 Educational and HealthServices 11 3 11 11 11 11 110 11 0 11 0 Ch 9 1 6 6 1 0 Leisure and Hospitality 7 8 7 7 I 7 68 6 3 7 00 Change 7 I I 39 2 6 OtherServices m 5 8 5 5 5 5 1 55 5 7 5 Chan e 3 0 4 Government 1415 14 141 141 14 143 14 7 141 Change 7 0 3 6 Unemployment Rate 2 I I I 5 0 1 Initial Claimsfor Unemployment Ins Thous 1308 136 128 133 119 1411 1365 129 Avg Wkly Hrs Natr l Rsrces and Miningquot 467 47 4 4 4 466 467 4 Avg Wkly Hrs Manufacturing 415 41 4 41 4 41 I 414 4 1 Avg HIy Earnings Natr l Rsrces and Mining quot 2062 206 203 210 216 18 3 1951 204 Change 24 1 4 1 124 61 5 Average Hourly Earnings Manufacturing 1802 181 186 187 1865 165 1714 178 oChange 46 3 10 2 17 3 34 41 Real Personal Income Mil 2000 44460 4509 4548 45527 na 4218 42974 4450 Chan 15 5 3 04 na 1 19 3 Wage and Salary 21080 2157 2163 21674 na 2033 7 20609 2118 0 C 9 1 08 na 2 Other Labor 6488 656 655 6564 na 605 7 6363 649 Change 1 6 5 0 na 2 Proprietors 2945 297 299 2997 na 283 2947 296 Change 62 2 09 na 101 38 0 Dividends Interest and Rent 5954 595 6021 6082 na 542 5477 5916 Chan e 13 0 47 41 na 3 09 8 Transfer Payments 11298 11 41 11672 11581 na 1066 10765 1126 AzChan e 36 41 93 31 na 239 10 4quot NonBuilding Const Contracts mil NSAAR 1007 8639 6047 2041 830 681 990 917 NonResidential Const Contracts mil NSAAR 497 1665 568 1974 478 532 727 1030 Residential Const Contracts milAR 1035 974 1086 1058 826 871 1134 1226 otal Const Contracts mil 2539 3506 7702 5074 2133 2084 2851 3174 Change 70 264 2229 81 97 23 37 11 VIN ExportWeighted US 1980100 1236 1236 1242 1202 1170 1325 1278 1245 Change 09 01 18 122 103 66 36 26 ates West Virginia average weekly hours average hourly earnings and initial claims for unemployment insurance data are obtained from the West Arginia Bureau of Employment Iquot 39 39 39 n Iquot 39 n L U 39 39 j J n viiginia Bureau of Employment Programs Personal income data are seasonally adjusted by the Bureau of Economic Analysis US Dept of Commerce Components may not sum to totals due to rounding A percent g r ensus US Dept of Commerce Not Seasonally Adjusted na NotAvaiIabIe quot 39 lassi cation Sstem NAICS ie iou ly llll data Qt quotd quotI Industrial Fquot quot quot 39 Code Consists ofthe following subsectors Repair and Maintenance Personal and Laundry Services and Religious Grantmaking Civic Professional and Similar Organizations WV Business amp Economic Review 11 Mnter 2008 Nonpro t Org US Postage PAID Morgantown Bureau of Business and Economic Research s College of Business and Econom c Permit 34 West Virginia University 0 PO Box Morgantown VW 265066025 Emmac Research course of Business demons Reglster Now 5 ty Morgaanrnn WV 2650676025 It is available free of for the charge in either print or electronic versions To subr scribe conmct the BBER M 0 rg a ntow n M PHONE 304 29377831 Fix s m srom Outlook Conference WEBSITE wwwbberwvuedu R Stephen gem Vlbdnesday March 12 2008 W1 Waterfront Place Hotel Morgantown WV BI ER Research Smff may Childsseconomist 8 am to Noon ami GurleyCalvezs research assismnt professor reorge Hambmot ds associate director my Higgin 0 am economist r lexander Kazmierczaks gmduate research assistant F dewquot and eg39smmn f quot V39s Jan Leguizamon graduate research assismnt 3ka Maan research associate and professor or economics memes wwwbberwvuedu Smtt Murdoch gmduate research assismnt Ann S hgmduate research assismnt West Virginia Unive is governed by the WVU Board of Ads visors and the we t irg in Higher Education Poney commission a is an Equal OpportunityAffirmative Action Institution 2003 West Virginia University Research Corporation WV Business amp Economic Review 12 Winter 2008
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