President, Caesar Rodney Institute
Two simple questions are addressed in this article: How will Delaware’s economy perform in 2015? And how could Delaware’s economy perform in 2015?
By two out of the three standard measures used to gauge an economy’s performance, Delaware is doing well.
OUTPUT: As shown in the graph, the annual rate of growth in total output of final goods and services generated in Delaware (gross state product) rebounded in 2013.
With its concentration of financial-services jobs, Delaware’s output fell much further and faster than the nation’s during the recession. Between 2006 and 2008, as total output in Delaware dropped over 5 percent, output in Delaware’s financial services industry plunged by almost 18 percent. The overall consequences for the state’s economy were huge, as nearly one-third of all of Delaware’s output is accounted for by the financial services industry.
Similarly, the growth rate in Delaware’s output in 2011 and 2012 was nearly zero, as output in the financial services industry was flat.
Finally, during 2013, growth in Delaware’s output climbed back toward the nation’s, with an annual increase of 1.6 percent, relative to 1.8 percent across the U.S. While Delaware’s output in manufacturing and entertainment and recreation (the casinos) fell between 2012 and 2013, it soared in construction, finance, and temporary help services (the new Amazon warehouse).
The consensus outlook for the nation in 2015 is a 3-percent growth rate for GDP (output). Delaware’s total output will continue to rise, but at a rate below the U.S., as hiring in temporary help peaks and financial services are constrained by low interest rates and the burden of Dodd-Frank regulations.
There are no indicators of a recession for Delaware through 2015.
JOBS: Since mid-2013, there has been a welcome upsurge in employment in Delaware. After losing jobs for more than two years, Delaware employment started to edge slowly forward at an annual growth rate of less than 1 percent through early 2013. Over the most recent 12 months, Delaware’s job growth rate has been a robust 2.2 percent. In October of this year, a milestone was reached as total employment in Delaware finally surpassed the peak level of employment reached before the recession.
Despite the strong jobs growth, the state’s unemployment rate has been rising for five months. In August, the Delaware unemployment rate was 6.4 percent, while the national rate fell to 6.1 percent. And this jump occurred as the initial claims for unemployment in Delaware continued to steadily drop. What is going on?
The good news is that the more rapid addition of jobs encouraged Delawareans to begin to reenter the labor market. Over the past year, more than 12,000 residents have found jobs or are looking for jobs. This has caused a temporary uptick in the state’s unemployment rate.
On the downside, almost two-thirds of the jobs being added in Delaware are short-term or part time. This includes the thousands of temporary jobs at the new Amazon warehouse and in retail trade and leisure and hospitality. The rapid turnover in such jobs tends to push up the short-run unemployment rate.
During 2015, professional and business job growth will start to ease, as will the rate of hiring in financial services. Retail-trade employment is slowly recovering, but will continue to be constrained by growth in Internet sales. Health care will be slowed by the uneven enactment of Obamacare and unsustainable Medicaid costs. Taxes are rising, as government must pay the dues for the binge spending of the past five years, and this dampens discretionary income. The growth rate in total Delaware employment will ease off to 1.5 percent.
PERSONAL INCOME: The third and weakest measure of Delaware’s economic performance is personal income. From the middle of 2013 through the middle of 2014, total Delaware personal income rose just 3.6 percent, below the 4.1-percent increase across the nation. As shown in the graph, this is a substantial change from before the recession, when the year-over-year growth rate in Delaware personal income nearly hit 8 percent.
The major change has been the drop in earnings and in dividends, interest and rent relative to transfer payments. Compared to 20 years ago, earnings have fallen from 70 percent of total personal income to 64 percent. Dividends, interest and rent have dropped from 20 percent to 16 percent.
Meanwhile, transfer payments-e.g., Social Security, Medicaid, Medicare, SSI, SNAP-have jumped from 10 percent to 20 percent of total personal income. Since the recession, the total number of Delawareans receiving SSI rose 53 percent, and the number receiving food stamps nearly doubled-up 94 percent. Over the longer haul, Delaware’s income per capita has dropped from 12 percent above the national average to slightly above the nation’s.
The outlook for Delaware personal income in 2015 is basically a continuation of 2014. As jobs rebound in the state, the growth rate in Delaware personal income will continue to rise, but at a rate slower than that of the nation.
The fastest-growing component of Delaware personal income will be the net outflow of wages earned in Delaware, going to workers who live out-of-state in order to escape the Delaware public schools. The second-fastest-growing component will continue to be transfer payments, especially as three out of every 10 state residents are moving into retirement.
Due to the average pay in temporary and part-time jobs and net in commuting by professionals, earnings by place of residence will be the slowest-growing component of Delaware personal income.
A transformed Delaware economy in 2015
We have carefully reviewed what might be expected in Delaware’s economy for 2015 under current conditions. Now, let’s consider how the state’s economy might perform if more free-market and competitive policies were enacted.
Caesar Rodney Institute has long argued that Delaware’s economy would break out of its moderately below-average path with the following four 
policy changes:
- Passage of a right-to-work law making union membership voluntary rather than compulsive and forcing unions to compete for membership.
- Public-education reform allowing more parents, especially those with low income, choice.
- Lower electric rates, especially for industry, by eliminating the $500 million subsidy to Bloom and withdrawing the carbon trade tax.
- Reduction of the top personal income tax rate.
In a simple exercise, the table below compares the simple average economic performance of the 12 states that meet these requirements-i.e., a right-to-work law, eighth-grade NAEP math test scores above Delaware, industrial electric rates below Delaware, and a top personal income tax rate below Delaware-to the First State for 2002-12. The free-market states range in size, from Idaho to Texas, and 11 of the 12 states have a Republican governor.
Are these policy changes a pipe dream in Delaware? Actually, no. The tide is running strongly in favor of them. Membership in private-sector unions is down to almost nothing, as the current union business model is no longer viable. A recent survey from the Friedman Foundation of Delaware voters showed that 72 percent favored more charter schools and 70 percent favored school vouchers. Every business in Delaware is being squeezed by high electric rates, and the high Delaware top marginal income tax rate has been driving higher-income households out of the state for the past five years.
Perhaps it is time for the legislators to catch up with the public.
The Caesar Rodney Institute is a research and education organization focused on improving Delaware’s fiscal situation and improving quality of life in the state. Its reports address the state’s education, energy, economic and healthcare policies. It is closely aligned with the State Policy Network, a group of free-market think tanks. Visit www.caesarrodney.org for more details.
For more information on our economic forecast, see what our expert panels have to say.
