Ohio's Public Sector Economy Rolls On

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The biggest news in last week's elections appeared to be the success that public sector union forces had in overturning Ohio's new law that would have required more contributions from government workers toward their benefits and would have suspended some collective bargaining rights. In the wake of the referendum revoking the legislation that he had proposed to gain control of state and local spending, Ohio Gov. John Kasich told towns, cities and school districts that they would have to go back to the negotiating table and extract concessions from public workers to fix their budget problems because there was no money left in state coffers to bail them out.

That won't be an easy task for localities. One of the biggest growth industries in Ohio in the last 30 years has been government. The ranks of its workers have expanded robustly, producing higher taxes on a relatively stagnant population and struggling private economy. Now the state will need to figure out how to continue paying for its bigger government. Given the long-term trends in Ohio, don't look for a private sector boom to bail out the state.

The standard explanation for Ohio's woes is that its blue-collar economy fell victim to global outsourcing, as did other Midwestern and Northeastern industrial states. And indeed Ohio has lost half of its manufacturing jobs in the last 30 years. But as Ohio faced this economic difficulty its state and local governments nonetheless hired robustly and raised taxes accordingly to pay for the expansion. Since 1980 the ranks of municipal and state government employment in Ohio have expanded by 17 percent. At the same time the state's population, which local government workers are supposed to serve, grew by less than 7 percent while the state's private economy struggled.

Someone had to be taxed to pay for this. It appears to have been largely the business community. In the late 1970s, according to the Tax Foundation, Ohio had one of the lowest tax burdens among the states. Since then, the state has done a complete turnaround. Its overall tax burden is 18th highest in the country, but significantly, its burden on businesses is the 4th highest in the nation. No wonder that business executives surveyed by Chief Executive magazine ranked Ohio this year as one of the 10 worst states to do business in.

It shouldn't be surprising, then, that even before the financial meltdown of 2008, the decade of the 2000s was already a lost decade for Ohio. In the national peak employment years of 2006 and 2007 Ohio's job rolls were already hundreds of thousands below the count at the beginning of the decade.

It's not just that businesses around the country don't see it as a good place to do business; the state's own businesses are in retreat, too. According to the National Establishment Time-Series database, which measures specific job dynamics like employment created through job migration and through expansions of existing firms, Ohio ranked 46th in the country in jobs created by its existing businesses from 2000 through 2008, and 43rd in jobs created by new businesses.

What kind of political environment emphasizes increasing taxes on the private sector when jobs are in short supply? One dominated by public sector unions. When the union movement in Ohio was largely a private-sector movement, Ohio could count on unions to vie for their workers interests, something that actually included supporting pro-growth economic policies. But in Ohio and elsewhere as private-sector union membership has faded the movement has become dominated by public unions, whose agenda often emphasizes bigger government and public sector solutions to problems. In states across the country government unions are now the biggest advocates for higher taxes to pay for this bigger government.

You can see this in the way the state's economy increasingly works. The state capital metro area, greater Columbus, is one of the few growth areas in Ohio. Going back to 1990 (the earliest data available on the BLS website for Ohio metro areas), employment in greater Columbus is up nearly 25 percent. Meanwhile, it's down in greater Cleveland, Dayton, Toledo, and Youngstown, and up only slightly in Akron.

State and municipal governments face several more years of slow grow in tax revenues and hence budget constraints. Some states are in worse shape than others because their private economies weren't doing well even before the financial meltdown. And a few states like Ohio face an additional burden, a public workforce whose growth has outstripped the ability of a struggling private economy to pay for bigger government. It's not clear given the vote on last Tuesday where Ohio goes next.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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