The Big Policy Shift: Gauging the Impact

How will changes in taxation, regulation and other areas affect the job market and real estate’s prospects over the next few years? Here’s what to look for.

Economics is not a laboratory science, built upon a framework of controlled and replicable experiments. At its root, it is a social science, a study of human behavior. After nearly fifty years of trying to squeeze economics into the model of mathematically determined physical science—especially through the lenses of rational expectations theory and the efficient market hypothesis–leading economists have been building a bridge that links psychology with observed behavior, while maintaining the rigor of statistical analysis.


While macroeconomics does not afford the luxury of laboratory experiments, from time to time it does engage in what are termed “natural experiments.” These occur when a change in the economic environment, introduced by either a physical event or in policy, induces (or is claimed to induce) a measurable shift in results. When the change is driven by policy, it is often accompanied by the prediction of results, sometimes in the form of political promises. In 2018, we are in the midst of such an experiment. While the results probably won’t be for several years at least, it is not too soon to frame the terms for evaluating the results.

For real estate, economic expansion in the form of job creation is a primary driver of demand. The sluggish growth in employment following the Global Financial Crisis (2007-2009) frustrated many who had hoped that the steep job losses of a decade ago would be mirrored by the kind of robust job creation typical of past cycles. But the slow rate of growth was accompanied by an exceptionally durable recovery, now the second longest in U.S. history. That long cycle has now brought the headline unemployment rate to 3.9 percent as of April 2018.

Beyond the Headline Numbers

Hugh Kelly, PhD., Economist
Hugh Kelly, PhD., Economist

A combination of deregulation and fiscal stimulus, coupled with continuing low interest rates and a strong stock market, was anticipated to boost job generation as Washington policy changes took effect. As a top-line matter, however, there has been no such discernable shift in the trend line. In fact, annual job growth from 2013 to 2016 averaged 2.54 million, and the 2017–2018 growth has been just 2.26 million on average. That translates into a decline in the yearly rate, from 1.8 percent during the second Obama Administration to 1.6 percent since January 2017. Constraints in the labor force, exacerbated by an immigration slowdown, have limited overall job growth.

But beneath the top-line numbers lies a more complex narrative. Goods-producing industries grew 3.7 percent in the twelve months ending April 2018, led by construction jobs (an increase of 358,000, or 5.3 percent) and manufacturing (306,000/2.5 percent). Service-producing jobs are up 1.98 million (1.9 percent), with especially strong growth in trade, transportation, and utilities (528,000/1.9 percent) and professional and business services (569,000/2.8 percent growth).

Within those sectors are some commonly understood changes (133,000 in trucking and deliveries, 6.4 percent), and some that are less well understood; retail store-based jobs were up 2.3 percent, or 71,000 positions, versus e-commerce growth of 6.9 percent, which translated into just 39,000 jobs). While financial jobs have been growing relatively slowly (80,000/1.3 percent), Wall Street has seen 3.7 percent growth, or 34,000 jobs.

Taxes, Jobs and SALT

Hotel employment is up 72,000 (3.7 percent) and eating and drinking places gained 233,000 jobs, for 2.0 percent growth. Health-care jobs increased 337,000 (2.2 percent) but private sector education is down 3.5 percent, shedding 135,000 positions in the past twelve months. Another 290,000 education jobs were lost in the public sector, representing 3.5 percent attrition, as well as a large part of total government job losses of 395,000 (1.7 percent decline).

The Tax Cuts and Jobs Act of 2017 has prompted another set of expectations, namely that changes in the deductibility of state and local taxes (SALT) will advantage those states with low SALT levels, and disadvantage states with a relatively high SALT burden. This is a good time to look at what the benchmarks for future economic change might be.

I have arrayed the most recent twelve-month job changes for the ten highest and ten lowest tax-burden states. In the past year, the low-burden states (led by Texas, Nevada, and Tennessee) have added 462,100 jobs. That works out to a growth rate of 2.0 percent, higher than the 1.6 percent national average.

High-tax states (such as California, New York, and Oregon) have generated more jobs (657,600) than their low-tax counterparts, but because of their larger economies, their 1.3 percent job growth rate lags the national average. Over the next few years, it will be revealing to find out whether tax cuts have the putative effect of accelerating growth overall and widening the gap between low-tax and high-tax locations.

There are more such benchmarks to be examined, and these will be the subject of future columns in this series during 2018.

Hugh F. Kelly, PhD, CRE, is Special Advisor to the Fordham Real Estate Institute at Lincoln Center. He taught for more than 30 years at the NYU Schack Institute of Real Estate. Kelly served as the 2014 national chair of the Counselors of Real Estate. He is the author, most recently, of 24-Hour Cities: Real Investment Performance, Not Just Promises (Routledge, 2016).

You’ll find more on this topic in the June 2018 issue of CPE.