New Study Documents (Again) the Harmful Effects of Raising Minimum Wages

Posted on by Rik W. Hafer

The results are in, and they are hardly surprising: A new study has found that the increase in Seattle’s minimum wage has had detrimental effects on exactly those groups such market interventions are supposed to help. This result should give pause to other cities that are considering such a pestilential policy path.

Some background: In January 2014 the Mayor of Seattle formed an advisory committee charged with raising the city’s minimum wage. After deliberation, the committee’s plan was forwarded by the Mayor to the Seattle City Council, which approved the proposed changes. The minimum wage thus far has been increased in two phases: from $9.47/hour to as much as $11/hour on April 1, 2015, and from that level to as much as $13/hour on January 1, 2016. Future increases are on tap to eventually increase it to $15/hour.

To evaluate the impact of the minimum wage hike, the city contracted with researchers at the University of Washington’s Evans School of Public Policy & Governance, who used this policy change to test for three effects:

  • Do such wage increases affect the number of low-wage jobs?
  • Do workers in low-wage jobs face cut backs in hours worked?
  • Do workers in low-wage jobs suffer reductions in total earnings?

Using data from across the state, the researchers formed a control or comparison group to which changes in employment conditions in Seattle could be compared. Their control group covered all low-wage jobs—not just jobs in one or two industries (such as the restaurant sector), as is sometimes the case in such studies. So what did they find?

The UW study, which is available here, finds that the first increase, from $9.47 to $11, had relatively minor effects on low-wage job employees. There were small reductions in jobs available, and little change in the total payroll for low-wage jobs.

After the minimum wage was increased to $13/hour, however, things changed for the worse for existing low-wage workers in Seattle. While hourly wages rose slightly, many low-wage employees suffered a sizable reduction (9 percent, on average) in hours worked under the higher minimum wage. The study also found this wage hike reduced overall payroll for low-wage jobs. Following the 2016 increase in the minimum wage, the annual total payroll for low-wage jobs in Seattle declined by over $100 million. This amounts to about a $125 reduction per month for the average low-wage worker.

The loss of earnings among Seattle’s low-wage workers reflects one of the more nefarious (though usually ignored by politicians) aspects of raising minimum wages: Even though hourly wages rise, the decline in hours worked and/or jobs available can lead to a reduction in the total income of those on the lowest rung of the employment ladder. That outcome, which will only get worse as additional increases occur, is just another flaw in what really amounts to a misdirected welfare program.

Kansas City’s Economic Diversion

Posted on by Patrick Tuohey

City leaders are still pointing to Kansas City’s downtown as an economic development success story. Taxpayers lose millions each year in subsidies for corporate headquarters, luxury apartment buildings, entertainment districts, and other projects. But is all of this spending working?

The research, if you care about research, says the spending is wasteful. Previous studies in Saint Louis and Kansas City say the same thing. And studies of other cities like Chicago and Indiana, and of the country as a whole, likewise cast doubt on the value of these development subsidies.

As we have written previously, the H&R Block headquarters building downtown, one of the first in the downtown spending spree of the Mayor Barnes administration, has failed to create jobs. At best, the company merely moved jobs that existed from elsewhere in Kansas City to this new location; no new jobs were created.

Consider one of the poster children for streetcar-created economic development, Centric. The company moved two blocks, but it is somehow considered by the city to have created jobs and economic development. It did not create anything; it merely moved locations.

And here is perhaps the most damning evidence: despite all the spending, the economic growth of Kansas City due to downtown subsidies is a myth. We all know that the Power & Light District is the result of taxpayer subsidies—that is undeniable. Where before downtown was decrepit and abandoned, now it appears new and vibrant. But has any new economic development taken place? Has society or the average Kansas City family grown more prosperous because of these subsidies?

According to the Regulated Industries Division of Kansas City, Missouri, the number of liquor licenses (a gauge of how many restaurants and bars are operating) and employee health cards (a proxy for the number of people employed at bars and in food service) has remained flat since before subsidies were awarded. So while there may be more economic activity in the downtown area, citywide there has been no growth. Our subsidies haven’t created anything—they’ve just diverted activity from elsewhere in the city to downtown.

This shouldn’t come as a surprise. Imagine a new shopping center is built right near your home. There are a few stores and restaurants you’ve never been to, as well as a few outlets familiar to you. If you shop at this new location, you won’t continue to spend the same amount at the previous locations. The new stores haven’t caused you to spend more, they just cause you to spend differently. Yet the politicians in your neighborhood point to the new buildings as evidence of economic growth.

In the smaller incorporated cities in Johnson County, Kansas, this tactic might actually work at a very local level. A store that was generating sales tax income for Prairie Village could be lured to Shawnee with subsidies. That might be a win for Shawnee, but regionally it’s a wash, if not a total waste of public capital. (Writ large, this is the story with the Kansas-Missouri border war—lots of subsidies spent by both side with no real regional growth.) But in a large metropolitan area like Kansas City, there is no benefit. Citywide, there has been no growth in the number of bars, liquor stores or waiters and bartenders as a result of the Power & Light District. We’ve just diverted the economic activity downtown.

Policymakers are free to argue that diverting economic activity from elsewhere in Kansas City to the downtown area is good policy. That would be a welcome policy debate worthy of consideration. But supporting policies that merely move activity around and then pretending something new has been created is not only disingenuous, it is unsustainable.

Real Incentive Reforms for Saint Louis

Posted on by Graham Renz

Economic development incentives like tax increment financing (TIF) and tax abatement have been grossly misused in Missouri’s two major cities for decades. The City of Saint Louis has, from 2000 to 2014, given away more than 700 million in taxpayer dollars through these corporate welfare programs. Facing mounting public pressure and decades of research indicating these programs have “no real economic development impact,” officials are considering reforms to Saint Louis’s incentive policies. This is very welcome news.

Unfortunately, many of the reforms proposed by officials (which local activist and TIF critic Glenn Burleigh rightly notes are nonbinding) are unlikely to have much effect on the use of incentives or their detrimental effects. Two reforms—the reduction in the percentage of projects’ costs and the shortening of the terms of TIFs and abatements in economically better-off parts of the city—sound like significant steps in the right direction. However, similar reforms enacted in Kansas City last year have proved ineffective.

So, what reforms could genuinely curb incentive abuse? The surest and most effective reform is repeal—the legislature should completely eliminate these misguided programs from state law. California, the state that created TIF, repealed TIF nearly a decade ago.

But, short of repeal, what can be done? Here, and in a series of blogs in the coming weeks, I’ll discuss a cabinet of reforms policymakers should consider to make real progress in reforming incentives. Some policies will be austere, others more mild, but all, I believe, will offer creative and meaningful alternatives to Saint Louis’s misguided incentive policies.

1.      Adopt an Incentive Budget

I live on a budget. You live on a budget. Policymakers in City Hall pass and ‘live’ on a budget. If we can do it, so can economic development agencies, developers, and their investors.

Policymakers could adopt a hard cap regarding how much they award annually through TIF and abatement. Think of this as an “Incentive Budget.” Just as the City budgets a certain amount for a program or service, it would allocate a certain dollar amount for TIF and abatement. The only difference would be that City officials couldn’t go beyond a certain amount—say $50 million annually. (For context, the TIF Commission awarded nearly $51 million in TIF subsidies in a single meeting earlier this year.) Many state tax credit programs have annual or cumulative caps like this.  

This reform has several strengths. For one, it strictly limits how much revenue the city can give away. Policymakers have little political or financial incentive to tell developers “no,” but a strict cap could force them to do so. This could control the bleeding of city revenues and force development officials to think harder about which projects should get the limited number of subsidies available.

Second, it could help the City avoid budget gaps and manage future revenue losses. If policymakers and development officials are kept on a budget, the long-term financial impacts from incentive programs could be accounted for in advance. This would make the lives of folks in the Budget Division much easier, and help schools, libraries, and other jurisdictions deal with future lost revenue. 

Urban planners, policymakers, and development officials may claim that such a reform would restrict their powers unduly, and show the world that Saint Louis is “closed for business.”  (One might argue that the regulatory and tax environments are bigger problems than a scarcity of development subsidies, but those are topics for another day.) We have seen what happens without restrictions on the awarding of TIF, and it isn’t pretty. A hard cap may be the only way, short of repealing TIF and abatement, to stop the abuse. And if some game-changing project comes along that would bust the City’s incentive budget, place the decision-making power in the voters’ hands, like some state representatives have proposed. That way those affected by incentives—ordinary taxpayers receiving fewer and fewer city services—have more say in how they’re used.

An incentive budget is just one of many reforms that officials could explore. Others—about which I’ll be writing soon—include:

  • Eliminating TIF and abatement for projects that already receive other state/local incentives: Prevent a single project from receiving every incentive on the books.
  • Tying incentives to land uses: Ensure that incentives go to projects with real public benefits.
  • Form a City-County incentive pact: Stop the race to the bottom. 

Who Are the Villains in the Teacher Pension Story?

Posted on by Michael Q. McShane

In the two-bit morality play that is pension reform in Missouri, my colleagues and I are frequently cast as the villains.

Whether it is the Missouri Retired Teachers Association, MNEA-retired, or the director of The Public School Retirement System, breathless commentary argues over and over that we have some desire to destroy teachers’ pensions. 

I don’t take this personally. As Jay-Z says in classic song December 4th, “This is the life I chose, not the life that chose me.” But teachers in Missouri probably should. The stability of their retirement depends on it.

And that brings us to a recent article written by Chad Aldeman and Kelly Robson of Bellwether Education Partners. The refrain is one that should be familiar to readers of this blog. Many, many teachers are net losers in current pension systems.

The Missouri-specific numbers show that only 58% of Missouri teachers will “vest” in the pension system.  Only 38% will “break even” in the system, meaning that 62% will pay more into the system than they will get out of it.

These are not my numbers. These are not Show-Me Institute numbers. These are numbers collected and analyzed by a third-party organization and published in a reputable journal house at arguably the most prestigious university in our nation.

Combine this with the fact that poorer districts subsidize pensions in wealthier districts, pension funds are taking on riskier and riskier investments to chase higher returns, pension plans have huge unfunded liabilities, and that reformed pension systems can be beneficial to teachers (more evidence here) and then ask yourself: Who are the villains again?

At some point cheap theatrics and ad hominem arguments aren’t going to cut the mustard anymore, and someone will have to answer to the facts: More than 40 percent of teachers fail to vest in the system (losing everything that the state has contributed), and more than two-thirds are net losers in the system. 

State ESSA Plan Offers Opportunity for Course Access

Posted on by Michael Q. McShane

Earlier this month the Department of Elementary and Secondary Education released a draft of its plan to comply with the federal Every Student Succeeds Act. This document outlines several key areas of state policy, particularly how the state will spend the federal dollars it receives and how it will hold schools that receive those dollars accountable.

I haven’t had a chance to fully dig into the document, but at the 30,000-foot level it seems reasonable to me. The state doesn’t appear to be doing anything overly ambitious (it is only slated to intervene in the law’s minimum 5 percent of lowest-performing schools, it doesn’t appear to be using any new or fancy non–test score indicators to try to hold schools accountable) which ultimately might be the most prudent path forward. It looks like the state is going to take a hard look at the lowest-performing schools and try and leave the rest alone. Seems wise.

One area where there is an opportunity, and where I wish the plan was a bit more direct, is under Title IV. Eagle-eyed readers of this blog would remember that I wrote about flexibility that the state has under this provision in the law to provide some innovative direct services to underserved students.

On page 50 of the plan (emphasis mine):

“To overcome the lack of course availability, MO-DESE intends to improve access to advanced coursework for all students, but particularly for minorities and economically disadvantaged students and for those whose rural or small school settings reduce their access. MO-DESE may also subsidize fees for AP and IB courses. Furthermore, where advanced coursework, including advanced mathematics and science are locally unavailable, MO-DESE will subsidize course fees for the Missouri Virtual Instruction Program.”

DESE’s plan is laudable, and we’re singing from the same hymnbook when it comes to recognizing that far too many students in the state lack access to higher-level coursework, but I’d like to see more than one sentence in a 94-page document laying out how to solve the problem.  What students would be eligible? Would this be a formal “course access” program or just paying for courses ad hoc if and when funds are available? The state can spend up to 3%; will they spend that whole amount? Some fraction?

This document appears to be a step in the right direction. With some clarification, the state can take a bold step to fix the persistent problem of course availability in underserved areas.

If You’re Paying, I’ll Have an Ice Rink

Posted on by Graham Renz

It’s far too easy to spend other people’s money. If you’ve ever had a credit card or your identity stolen, you know this far too well.

Stanford economist Russ Roberts summarized the phenomenon thusly: “If you’re paying, I’ll have top sirloin.”

But in Chesterfield, it’s more like: “If you’re paying, I’ll have an ice rink.”

News of the Hardee’s Iceplex closure in Chesterfield was quickly followed by calls to find a new home for the Chesterfield Hockey Association. Quicker than a winger can flank the defense, a proposal for a new, $22.6 million facility came forward. The only catch? Taxpayers would have to cough up $7 million.

Those funds could come from a special taxing district, better known as a transportation development district (TDD), which levies an extra sales tax in the Chesterfield Valley retail area. If voters in the district—which encompasses less than a single percent of Chesterfield households—approve the tax, shoppers in the valley will help buy and improve land for a narrow special interest, adding yet another chapter to what’s become Missouri’s never-ending-story of public-cost/private-benefit development.

The problems with this deal are obvious and myriad.

For one, there’s the issue of “investing” in an ice facility when one just went out of business. The developer’s own market analyses show there is a glut of ice facilities in the region, which has “resulted in creating a ‘buyer’s market’.” If an ice rink isn’t a good use of private resources, what reason is there to think it’s a good use of the public’s resources?

Second, despite tax dollars being used to buy and improve land for the developer, there will be no public ownership of the facility. In fact, there isn’t even an agreement in place to let the public use the facility! If the facility changes hands or goes under, the city could end up owning the associated parking lot, but the last time I checked, there was no dearth of parking in the valley. 

Then there’s the white elephant just up the road: the $45 million complex proposed by the Blues for Creve Coeur Lake Park. The duly-subsidized complex will undoubtedly compete with the Chesterfield facility, but—incredibly—proponents claim their project is insulated from economic pressures.

And the (unreported) cherry on top? Last month it was announced that a private investment group acquired a new facility for the Chesterfield Hockey Association to use as an ice rink. So even though the group has a new “home,” they still want you to build them an ice palace.

All in all, this project makes little economic sense. So why is it moving forward? Because Missouri’s loose TDD laws sanction (or rather, encourage) special interests to tax the pubic for private gain. And when you’re spending other people’s money, you’ll “invest” in just about anything.

TDD reform is long overdue. Until things change, I suggest we update Roberts’ adage so it reads: “If taxpayers are paying, I’ll have whatever I darn please.”

Breaking News: Trinity Lutheran Wins!

Posted on by Michael Q. McShane

This morning, the United State Supreme Court ruled 7-2 in favor of a Columbia preschool that was denied a state grant to purchase scrap tires for their playground. (For background on the case, check out this SMI paper).

The Court reaffirmed the position that “denying a generally available benefit solely on account of religious identity imposes a penalty on the free exercise of religion.” In order to justify that penalty, the state has to clear a very high bar in proving that imposing that penalty serves a compelling state interest.

Missouri did not clear that bar. As Chief Justice Roberts argues in the opinion of the court, “the Department offers nothing more than Missouri’s policy preference for skating as far as possible from religious establishment concerns.” That is not enough, the court ruled, with Chief Justice Roberts punctuating his opinion by stating, “the exclusion of Trinity Lutheran from a public benefit for which it is otherwise qualified, solely because it is a church, is odious to our Constitution . . . and cannot stand.”

This is an important victory for civil society and for religious institutions that feed the hungry, house the homeless, educate the young, and provide healthcare to the sick. However, this case does not settle the issue once and for all.

The Chief Justice’s opinion contains a footnote around which we can imagine the next round of lawsuits will hinge. In footnote 3, the Chief Justice writes “This case involves express discrimination based on religious identity with respect to playground resurfacing. We do not address religious uses of funding or other forms of discrimination.”

So what does this mean for school vouchers, for example? We don’t know. In concurring opinions, Justices Thomas and Gorsuch argue that this ruling should extend to cases beyond identity into how funds are used, but that appears to be left for another day. This is not the last we will hear about religious organizations participating in public programs, but it is a shot in the arm for the argument that they have a right to do so.

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