Incentivizing Unemployment

Posted on by Michael Rathbone

Automation is likely to become more and more prevalent as time goes on, and the fast-food industry is likely to be part of this trend. So it shouldn’t be surprising that McDonald’s is jumping aboard the automation train. If state and local governments mandate higher minimum wages, many more restaurants might be following McDonald’s on the automation express.

McDonald’s’ “Create Your Taste” kiosk allows customers to fully customize their burgers by selecting different buns, cheeses, and toppings without having to interact with a real person. The automation occurring in McDonald’s and other places might be an inevitable feature of the the 21st-century economy, and this has the potential to put many people out of work.

In a purely free market, this is creative destruction. Some jobs are destroyed in the process of delivering increased efficiency. That’s not to diminish the pain of those now out of work; however, it is necessary for the economy to grow. Even though some job losses are inevitable, government should not be expediting the process through regulations. Mandating increased labor costs through a higher minimum wage will encourage employers to use less labor. They instead will substitute other inputs, such as capital, that may have a lower relative cost because of the increase in wages. In other words, if you make labor more expensive, you give employers an incentive to invest in ways to cut down on labor. Forcing employers to pay their lowest-skilled employees more is such an incentive.

Many businesses already have a financial incentive for installing more kiosks like the ones McDonald’s is introducing. According to the Harvard Business Review, “Taco Bell recently announced that orders made via their new digital app are 20% pricier than those taken by human cashiers, largely because people select additional ingredients. Chili’s, after installing self-service tablets, reported a similar increase in dessert orders. Cinemark theater’s new self-service kiosks have ‘had concession spending per person climb for 32 straight quarters.’”

The intention behind raising the minimum wage is presumably to help low-wage workers make more money. However, with this oncoming wave of automation, policymakers might just put these people out of work altogether. Government should encourage work, not mandate that people lose it. 

Bad for Borrowing: Saint Louis Bond Ratings Slip

Posted on by Joseph Miller

Recently, Moody’s, a prominent credit rating group, downgraded Saint Louis’s debt rating.  While the changes are nothing drastic (and the city’s outlook is stable) a lower credit rating may raise the cost of major projects in Saint Louis.

                The recent downgrade saw Saint Louis’s general obligation debt rating fall one notch, from Aa3 to A1. That still leaves the city with a rating denoting an upper-medium investment grade, even if the rating is well below prime. And as some news sources have pointed out, that means Saint Louis’s rating is higher than Chicago’s or Detroit’s. Unfortunately, if we don’t compare Saint Louis to cities exiting or very likely entering bankruptcy, its rating is relatively low, as the chart below demonstrates:

City

2015 General Obligation Debt Rating

Oklahoma City

Aaa

Indianapolis

Aaa

San Francisco

Aa1

Minneapolis

Aa1

Phoenix

Aa1

Seattle

Aa1

Dallas

Aa1

Portland

Aa1

Atlanta

Aa2

Memphis

Aa2

Washington, DC

Aa2

Kansas City

Aa2

Houston

Aa2

Baltimore

Aa2

New York City

Aa2

Nashville

Aa2

Denver

Aa2

Cleveland

A1

Saint Louis

A1

San Diego

A1

Philadelphia

A2

Detriot

A3

Chicago

Baa2
 

               

                A lower bond rating can lead to higher borrowing costs. In the same way that an individual with a low credit score might have to pay higher interest rates on a car loan or a mortgage than someone with a great credit score, a lower rating for a city can mean it has to pay more to borrow. As cities regularly borrow money to make civic improvements, the higher cost of borrowing means residents pay more for large projects like, say, a football stadium. Speaking of stadiums, the rating for nonessential debt (read: convention center and stadium) issued by the Saint Louis Municipal Finance Corporation was also downgraded, to A3. That corporation would responsible for issuing bonds for a new stadium.

                The primary reason for Saint Louis’s weak credit rating is the city’s “weak socioeconomic profile,” which is admittedly difficult for city leaders to fix. However, there are ways city hall could work to increase the city’s bond rating. According to Moody’s, the city is too reliant on the earnings tax. In addition, the city could boost its rating by making an effort to reduce total debt. Unfortunately, with the city prepared to go even further into the red to build a billionaire a new football stadium, it may be a while before Saint Louis can brag about its credit rating to people who don’t live Chicago. 

SMI Responds to PSRS on Teacher Pension Fund Risk

Posted on by James V. Shuls

One of the core purposes of the Show-Me Institute is to promote transparency at all levels of government. We think this is critically important for Missouri’s public employee pension systems, and in recent years we have committed substantial time and effort to exploring the issues confronting these systems. 

Most recently, Michael Rathbone and I pointed out that Missouri’s teacher pension systems have shifted to riskier assets. From this study, we concluded that lawmakers “should be aware that these pension plan returns are based on increasingly risky assets and acknowledge that fact when planning for the future.” In particular, we suggested that the plans should forecast assets based on various expected rates of return.

On August 7, PSRS Executive Director M. Steve Yoakum issued a three-page response to the paper. Mr. Yoakum claims that our study “provides a limited and somewhat biased view of PSRS/PEERS and the Systems investment strategy,” but in the rest of his response he acknowledges several of the points we made.

Mr. Yoakum acknowledges the shift away from fixed-income investments and toward higher-risk investments, and goes on to justify this shift by citing lower returns on the former and greater opportunities “in other areas of the investment universe.” This is essentially the point we were making: equities and alternative investments have historically delivered higher returns than fixed-income investments, but they also carry greater risk.

Our paper states that current teacher and school district contributions do not cover the existing obligations, meaning that pension plans must rely on investment returns in order to meet their obligations to members. Mr. Yoakum’s response: “Only if we exclude income from investments is this true.” It is difficult to describe this as anything but a restatement of our point.

We stated, and Mr. Yoakum’s response acknowledges, that public employee pension systems have moved toward riskier assets than they held in the past. Much of Mr. Yoakum’s response is devoted to explaining this change—which is important— but the point of our paper was not to question the reasons behind the shift. Our goals were instead to document this trend and to endorse the recommendations of the Pew report that we cited repeatedly in our own study, namely that “Government sponsors can demand better reporting of future expected costs and the associated downside risks, and then use this information to make decisions about ways to deal with poor outcomes, should they occur.”

We remain committed to these recommendations, and we stand behind every word in our study. 

Course Access in Rural Texas

Posted on by Brittany Wagner

Earlier this month, I wrote about an emerging trend in school choice policy: course access  programs, which allow students to direct a portion of their per-pupil funding toward courses outside of their school offered by approved providers. For example, students in Michigan may choose two online courses per term, and tuition is drawn from the student’s per-pupil expenditure. Michigan Virtual School offers courses in art history, advanced math and science, and foreign languages. Courses like these are typically difficult to staff in rural and remote school districts, where teacher recruitment is a challenge.

In Missouri, 88 percent of school districts are classified as rural, and in 2014 almost 15 percent of Missouri school districts enrolled a student population of 150 or less. A course access program has the potential to provide diverse curriculum options for students in these districts, as well as an opportunity for local school districts to earn revenue through student enrollment outside district boundaries.

Guthrie Common School District in Texas provides an example of the possibilities offered by course access programs. In 2013, the district enrolled 91 students. Like many small, rural school districts, Guthrie faced staffing challenges. According to a recent report, the district could not afford to hire a foreign language instructor, posing a problem for students wanting to attend the University of Texas, which has a foreign language admission requirement.

To solve this program, Guthrie leveraged the state’s course access program and partnered with Rosetta Stone to create state curriculum–aligned Spanish courses. Now, students from Guthrie who want to get into the University of Texas have a chance. 

But that’s not the end of the story. Because of the flexibility built into the program, Guthrie was allowed to enroll students from other districts. Guthrie Virtual School now enrolls 850 students, and offers programs in multiple subject areas. Students from around the state can access these courses from their own brick-and-mortar schools.

A small, rural school district in Missouri in Guthrie’s situation would have few choices: either merge with another district, or continue to beat the drum for more education spending.

Guthrie did neither.

Districts like Guthrie show that with a little creativity, students in rural and remote school districts can have access to the course opportunities their urban and suburban counterparts already enjoy, but policy must set the stage for innovation to take place.

Employee Freedom Week

Posted on by John Wright

It’s employee freedom week. That means groups around the nation are educating employees about freedoms they have to opt out of union membership. Unfortunately for Missouri public-sector union employees, these freedoms are limited.

For most Missouri public employees, unionization is a one-way trip. Once employees elect to have a union represent thier interests in negotiations with management, no further elections are scheduled, no term limits are imposed, and the union stays in power indefinitely. Workers are usually stuck with the results of that original election, even if their representative fails to provide the services it promised. New employees will be forced to accept a representative for whom they never voted.

Recently, some have questioned whether employees should be subject to this one man, one vote, one time system. Why not hold elections at regular intervals?

Regular union elections would give public employees the right to vote for a union for a fixed term. When that term ended, the union could choose to run for re-election. Other unions might also offer their services and run against the incumbent union.

Proponents of regular elections argue that competition among unions will breed innovation and accountability. At the very least, regular elections help keep the actions of unions in line with the interests of voters. With union elections, workers could choose to keep their union, elect a new union, or forego a unionized workplace altogether. Workers would no longer be bound to a union that was put into power years before they were hired. In addition, worries of unaccountable unions squandering dues on things that don’t benefit workers would be greatly reduced. If members didn’t like the way their union was run, the next election would offer the opportunity to make a change.

The power to choose who speaks for you is a fundamental freedom. Regular union elections preserve this freedom for employees, and I can’t think of a better time to promote union elections than during national employee freedom week. 

More Analysis on Minimum Wage Claims

Posted on by Patrick Tuohey

On Thursday the City Council of Kansas City will consider placing on the ballot an initiative petition calling for an increase in the minimum wage to $15 per hour. Kansas City has been wrestling with this issue for months, perhaps because city leaders appear to have used the matter for political gain rather than for serious policy consideration. For example, regardless of the merits, there is debate as to whether the City Council even has the legal authority to increase the minimum wage.

I testified on the minimum wage in May; a video of the testimony is available here. Afterward, then-councilwoman Cindy Circo asked about a chart presented previously in testimony that appeared to show that worker productivity has been rising since the 1970s while wages had not. For anyone following the minimum wage issue, that claim was a familiar one. Here is a version of the chart that has been circulating most recently:

There has been criticism from the right and the left concerning this chart and what it claims to show. The Heritage Foundation weighed in with data that actually compare the productivity of hourly workers with the compensation of hourly workers. The increases over time line up nicely.

If the voters of Kansas City have an opportunity to vote on an increase to the minimum wage, they deserve an honest policy discussion about the costs and impacts of a wage hike, who will really benefit, and how it will affect the services on which they rely. 

The Video Kansas City Doesn’t Want You to See

Posted on by Patrick Tuohey

On July 22, Professor Heywood Sanders spoke at the Kansas City library about the research in his book, Convention Center Follies. This is the same Sanders that VisitKC head Ronnie Burt and developer Mike Burke did not want to debate. One Star opinion writer even criticized the library for having a one-sided presentation on the matter (never mind that the library has speakers on policy matters all the time).

The library put Sanders's talk on YouTube. Sanders's talk starts at about 19:10 and runs for about 30 minutes, not including questions and answers. Please consider taking the time to watch the talk. Sanders presents valuable and substantive information and does so entertainingly.

 

 

 

 

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