Philadelphia Drowns in Government; Needs Market Liberalization

After living in Philadelphia for some time now, I have seen a multitude of headlines with various degrees of optimism. Walk Score praises Philadelphia and the New York times ranked it as a top travel spot. To the one stage thinker, this points to an improving environment. They are, however, purely subjective measures that only account for a very small portion of the city. On the other hand, we see headlines about under-funded education and economic distress.

Philadelphia cannot be both flourishing and collapsing. As someone who fell in love with the city, I decided to voice my concern after fully examining the economic and political climate.

The city has recently become one of the top ten cities for desperate poverty. The unemployment rate sits at 7.1%, which is about 2% more the national average. Furthermore, mean household income is only $35,386, or about $16,000 less than the national average. All of these point me to one conclusion: a lack of employment. You might think it was caused by the recession, but Philadelphia’s employment decline began well before 2008.

Employment losses are the result of a bloated government creating a harsh business environment. In a 2000 paper for NBER, tax policies in major cities, including Philadelphia, were examined to understand their effect on employment.

For Philadelphia, they concluded that a 10% wage tax increase leads to a 5.4% decline in total jobs. Conversely, their evidence shows that reducing these taxes would lead to an employment increase for the poorest citizens. Their results unsurprisingly correspond with a major decline in Philadelphia employment.

At 17.6%, Philadelphia has the 2nd highest tax burden for a family of three out of all the states’ largest cities. To put that in perspective, New York City is only 10%.

Not only are high taxes holding down job creation, but so is big government.

Unsurprisingly, government spending is out of control in Philadelphia. Despite having wildly underfunded schools, begins FY 2015 with $7.5 billion. The budget will likely increase another $500 million for FY 2016. According to the city’s 2012 annual report, net assets amounted to negative $1.7 billion. The biggest gap is clearly unfunded liabilities and employee benefits. As a result, total debt is now over $8 billion. In other words, the spending will only continue.

Houston, a similarly large and diverse city, has an annual budget around $5 billion and a better-than-average unemployment rate of 4%.

In what BizPhilly called “well sourced”, Wallet Hub ranks Philadelphia the 109th best city to start a business. Even more damning, the city received a “D” for small business friendliness in the ThumbTack.com annual report. Without diving into the details of the Philadelphia regulatory code, I can tell there are a litany of useless regulations and excessive taxation that dampen growth.

The result has been a poor economic climate that is most damaging to low income citizens. In a recent worldwide analysis of economic performance in metropolitan areas, Philadelphia ranked 250 out of 300. To put that in perspective, Detroit ranks 237.

The city is broke. The economy can’t attract businesses to create jobs. Taxes are weighing down income growth. Can anything be done? I think so, but it must be done fast. Politics must be put aside. No one can get to the dinner table if the house burns down.

Cutting spending is more politically painful than deregulating. That doesn’t mean liberalization won’t result in positive outcomes. Economic freedom and market liberalization correlate to positive growth patterns and higher incomes. Philadelphia should loosen their business regulations to attract new enterprises that will create jobs.

The government structure has exceeded optimal levels on the Rahn Curve – a model that illustrates the point at which government spending is harmful to the economy. I believe fiscal stimulus via tax cuts will be a more effective boost for Philadelphia, but will require offset spending cuts. In the current political climate, however, that is very unlikely in the near term. Just from the numbers I can tell that the tax burden has become the heaviest weight on economic growth, especially considering the below average household income.

Without a doubt, many Philadelphians are concerned with the lackluster education system. There is a systemic and ongoing budget crisis in the Philly school system. To my surprise, Philly spends less than average amounts per student – about $12,000 on direct educational costs. I speculate that results from teacher unions and bloated bureaucratic administrations.

I have previously offered solutions to providing education. Unfortunately, the politics of education run deep and all the way up the D.C. I do not pretend to be familiar with the political structure of the education regime. If possible, Philly needs to get out from that structure. Localizing education would be hugely beneficial to city residents and government budgets.

Philadelphia is not yet too far gone. I fear the city politicians are not heading in the right direction, either out of self-aggrandizement or blissful ignorance. It seems like every day the city is trying to spend more money or implement new regulations. Unfortunately, increasing outlays only reduces growth and increase unemployment. While I hope things change dramatically, I have strong doubts that will actually happen.

The center city district will continue to be vibrant with activity, but the surrounding areas will become a greater financial burden under the current central planning methodology. There will reach a breaking point, but that has yet to be seen.

If the city wants to maintain long term growth, there will need to be a dramatic policy change away from the tax-more, spend-more. In present day terms, that approach has been a disastrous fail.

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