$27 Million in Loans, but Who Pays for It?

Posted on by Christine Harbin

Yesterday, the Missouri Watchdog ran an article by Brian Hook about the State Small Business Credit Initiative, which will make $26.9 million in federal funds available for small business loans in Missouri. The article includes some statements by me about the differences in private and public investment. I argue that government does not vet potential investments as carefully as an individual lender does.

Government officials don’t have the ability to identify the highest uses of these funds because those officials are too far removed from the signals that the market provides. And, even if they could identify them, they are too bogged down in bureaucracy to respond quickly.

On the surface, providing loans to small businesses seems like a good thing, but when you look closer, this policy is yet another example of the government picking winners and losers in the marketplace. The governor can implement other strategies that would grow the economy better, such as reducing excessive occupational licensing requirements in Missouri, lowering the overall tax burden, and eliminating the bureaucratic barriers to starting a business.

Additionally, supporters of programs like this one tend to argue that, because federal dollars fund the program, taxpayers in Missouri needn’t worry about the cost. This money doesn’t come out of thin air. There is no such thing as a free government program. Like all other forms of government spending, federal dollars come from the pockets of taxpayers, who can’t spend it themselves in the private sector. Furthermore, as a commenter on the article points out, programs that are funded by the federal government often come with strings attached, and therefore reduce the state’s sovereignty.

The Effects of Municipal Taxation: Roman Empire Edition

Posted on by John Payne

Right now, I’m reading The Rule of Empires by Washington University history professor Timothy Parsons (who was my history advisor when I was an undergraduate there, incidentally). In it, Parsons describes how foolish economic regulations and excessive taxation in the late Roman Empire drove people from the cities:

Emperor Diocletian tried to arrest this inflationary spiral in A.D. 301 with an unenforceable decree fixing wages and basic commodity prices. Faced with significant shortfalls in the western half of the empire, tax collectors concentrated on the cities and towns, where magistrates faced fines and confiscations if they failed to produce sufficient revenues. Not surprisingly, the wealthy and privileged fled to the countryside, where the reach of imperial authority was inherently shorter.

This exodus helped ingrain feudalism in the countryside as the rich bought up large estates. For the record, I don’t think city earnings taxes, no matter how high, will lead to a resurgence of feudalism, but incentives still change the way people behave now just as much as they did 1,700 years ago. If people can avoid a tax — and the rich can avoid them most easily because of how mobile they are — many of them will do so. Although we don’t know precisely the level of taxation in Roman cities, it was almost surely higher than 1 percent. Nonetheless, all else being equal, higher taxes tend to drive people away, whether we are talking about early 4th-century Rome and Londinium (London) or contemporary Kansas City and Saint Louis.

Red Light Camera Tickets Strike the Show-Me Institute

Posted on by David Stokes

A couple of weeks ago, the executive director of the Show-Me Institute, Brenda Talent, received an interesting letter on the mail, courtesy of Kansas City’s photo enforcement division, informing her that she owed $100 for running a red light on Feb. 16. The envelope contained the notice of violation and links to online sources where you can see photos and watch videos of you and your car committing the violation. It also included an affidavit of non-liability, which allows recipients only five choices for indicating why they are not liable for the fine — your car was stolen, for instance — and requiring the submission of a police report. Not surprisingly, a sixth choice — that the notice is simply mistaken — was not included.

Brenda disagreed with the charge that she had run the red light for four reasons:

  1. She tries very hard not to run red lights, and to obey other traffic laws.

  2. Neither she, nor any member of her family, was in Kansas City on Feb. 16.

  3. The car in the video was not her car.

  4. The license plate in the photo was not her plate.

Outside of those four reasons, Kansas City had a really good case. Brenda, as the head of a free-market policy organization with a history of opposing these red light cameras as a money-raising device ineffective policy, was in a unique position to enjoy this letter. For just about every other Missourian, something like this is a major pain. Even if you are wrongly accused, the prospect of losing more time and money may well mean that it’s more worthwhile to make it just go away by paying the fine than to fight it. More offensive to me than the mistaken fine, though, is the assumption of guilt implicit in having a camera decide that you are guilty and need to pay a fine. If I ever had any faith in the fact that a police officer is “supposed” to be “reviewing” these tickets, I’ve lost that faith after seeing that an officer signed off on a ticket for the wrong car with the wrong plate. Brenda admits that the plate looked similar — they confused a “V” with a “Y” — but the car wasn’t all that similar.

From Brenda’s perspective as a responsible adult, the story has a happy ending. From my perspective as a blogger, it has a terrible ending. Brenda called the customer service line of the red light camera company, and was able to discuss all of the above issues in a call that took about 20 minutes. The customer service representative — Kyle from Tempe — promised that the company would put this ticket into their review category. The Show-Me Institute is in a pretty unique situation, so we might be the only people in Missouri who would hope for the bureaucratic nightmare, so we’d have something even more interesting to write about. Sure enough, though, the evidence was so bad that they rescinded the ticket, so our nightmare did not emerge. Still, it took Brenda about 20 minutes of her time to work out the situation.

(I wonder whether Kyle’s father-in-law set him up in a starter home in suburban Tempe.)

Why Do Food Trucks Park Side by Side?

Posted on by Christine Harbin

When I was in Washington, D.C., recently, I saw two food trucks as soon as I hopped off the Metro and emerged from the station. One sold cupcakes, and another sold cheesy food. Right away, I noticed that the two food trucks were parked side by side. We see this in Saint Louis, too — the cupcake and taco trucks often park next to each other.

What makes food trucks do this? Wouldn’t they want to park far away from each other? From the perspective of economics, parking together makes sense.

Food trucks in Washington, D.C.

When they locate near each other, businesses experience benefits. Economists call this shopping agglomeration. Consider a shopping mall. Stores in a mall offer customers a broad array of products, and they likely have more foot traffic and higher sales than if they stood alone.

When food trucks park next to each other, they show the same kind of shopping agglomeration. The nuance here is that although each is a food store, the food may not be substitutes. They could, however, be viewed as complements. Quite likely, the benefits of locating near a busy Metro stop where there a lot of pedestrians outweigh the disadvantages of locating near a competitor. Plus, it’s likely that food trucks catch the attention of more customers when they are parked next to each other than a lone truck would. Look at the photo of the food trucks above — they certainly stick out from the background.

Brick-and-mortar restaurants typically oppose the existence of food trucks, but I suspect that they can benefit from agglomeration, too. This is because many of these food products are complimentary goods, not substitutes. Notice how these trucks are located outside of a brick-and-mortar restaurant. A person could buy a sandwich from the Cosi, and a cupcake for dessert from the food truck without having to travel very far. Instead of one stealing business from the other, it’s very likely that both businesses are benefiting from their arrangement. Local government officials should keep this in mind when they are considering policies that restrict mobile food vending.

The Minimum Wage Hurts Those It Is Designed to Help

Posted on by John Payne

Two bills currently working their way through the Missouri General Assembly, House Bill 61 and Senate Bill 110, would tie Missouri’s minimum wage to the federal figure (both currently set at $7.25) instead of automatically increasing with inflation, which is what a law passed by Missouri voters in 2006 requires. The bills’ critics claim that the legislature should not overturn the will of the people, but that argument misses the point. The real question is whether establishing any minimum wage at all is good policy, and the economic evidence reveals a clear answer: No.

During the debate surrounding the 2006 minimum wage law, the Show-Me Institute released a study by University of California, Irvine, economist David Neumark showing that minimum wage laws decrease employment among unskilled workers and prevent them from acquiring the skills they need to climb the socioeconomic ladder. When the minimum wage increases, businesses respond by hiring fewer low-wage employees. The employees who keep those jobs are more likely to be teenagers from relatively affluent families than minority workers from poorer households.

In essence, a higher minimum wage destroys jobs for the most vulnerable workers in the labor market and redistributes a portion (but not all) of the lost wages to workers who frequently live in families that make more than four times the poverty level. Neumark’s thorough review of the literature demonstrated that a 10-percent increase in the minimum wage (about 70 cents, at present) caused teenage employment to drop by 1 to 2 percent and increased poverty by three quarters of a percent. It is a peculiar type of anti-poverty program that throws poor people out of work.

A 1994 study by economists David Card and Alan Kreuger purported to show an increase in employment in New Jersey’s fast food industry after the passage of a higher minimum wage. However, Card and Kreuger relied on telephone surveys for their employment information. Subsequent studies using payroll documents from the restaurants themselves showed that employment fell after the minimum wage was increased, just as standard economic theory predicts.

Business owners generally do not employ people or give employees raises out of the goodness of their hearts — nor could they, without bankrupting their enterprises. If the government forces a business to pay workers more than the owner believes their labor is worth, those workers will soon be out of a job. Wages do not rise because of government mandates, they rise as workers acquire more skills and create more goods and services at lower costs. We can boost wages across the board with improvements like better education or greater investment in technology, but simply waving the wand of government and expecting low wages to rise magically is no solution at all.

John Payne is a research assistant at the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.

Op-Ed by David Stokes About the St. Louis Earnings Tax in the Post-Dispatch Yesterday

Posted on by David Stokes

Yesterday, the St. Louis Post-Dispatch published an op-ed that I wrote about the upcoming vote on the earnings tax in St. Louis. Check it out.

On the opposite side, the Sierra Club held a rally yesterday in support of the earnings tax. It is not surprising to see people focus on the one or two issues that are important to them rather than trying to see the big picture and the long-term benefits (and costs) of a major change. People of all political persuasions do it regularly. But, if I may (and given that this is our blog, I think that I may) I’d like to respond briefly to the points raised in this sentence:

Chapter Director John Hickey said the Sierra Club believes recycling programs, parks upkeep, and energy-efficient building upgrades will be among the first services to be cut should the city lose the roughly $140 million a year from the 1 percent income tax.

My response:

  1. Recycling, and trash in general, is at the top of the list of government functions that should be funded entirely by user fees, not general revenue. The city is already moving in this direction. Beyond that, trash services are a ripe opportunity for privatization.

  2. Parks already have a dedicated sales tax in the city, a dedicated property tax for museums and the zoo in the city and county, and a dedicated property tax for recreation purposes in the city. These could well need to be raised to offset portions of the earnings tax elimination. Of all the things to worry about funding without an earnings tax, parks — with plenty of other dedicated revenue sources — should be very low on that list. If the city privatized the water division, for example, the substantial property it owns in the county (one treatment plant and one reservoir) would move onto the tax rolls, generating revenue that would further benefit the zoo-museum district.

  3. Energy-efficient building upgrades make sense with or without the earnings tax, if they pay for themselves over the long run.

Cranky Yellow Quaffs Bitter Bureaucracy

Posted on by Josh Smith

Ever seen the movie Brazil? When the main character wants his A/C fixed, the opaque and monolithic government forces him to jump through one bureaucratic hoop after another, and he’s not sure that his simple problem will ever get fixed. Then a vigilante HVAC repairman named Harry Tuttle swoops in and fixes the problem in a few seconds.

I thought of this movie when I read a blog post that tells the very personal story of an inspiring small business owner. Without government grants, tax credits, or artificial incentives of any kind, David “Cranky Dave” Wolk saved his money and built up, ex nihilo, his own business — a gathering place and venue for artists and their creations. Like the vigilante HVAC man, Cranky Dave filled a niche for artists and the community and apparently did at least well enough to keep the doors open. Now things are getting difficult for him as Saint Louis city chases after his unpaid earnings tax bill (when he says he had no earnings) and simultaneously cites him for not having a separate trash bin for his business (he says he was using the one for his residence, which is in the same building and that he upcycles much of the trash produced by his business, incorporating it into art and craft projects).

As if this one-two punch of local government interventions on his business weren’t enough, the Riverfront Times reports that he is also being pursued for back taxes at the state level. Cranky Dave wants to make things right with the law, but he didn’t even know that the things he’s being cited for were problems. Will Cranky Dave be devoured by government paperwork like Harry Tuttle literally was at the end of Brazil? Is there room for honest, hardworking small businessmen in the city of Saint Louis?

Of course, Cranky Dave’s blog tells his side of the story, and perhaps the people he’s dealing with at city hall would tell another. The RFT found in their inquiries nothing remarkably different from the picture that Cranky Dave painted. Be sure to check out their blog post for more details.

What makes a business work? What grows an economy? These are not easy questions, although lawmakers and thoughtful people have struggled for easy answers almost as far back as historical records go. One thing that most can agree on is that healthy businesses grow the economy and serve the community. Most can also agree that it takes dedication and drive on the part of an entrepreneur to make their business reach and stay in the black.

Cranky Dave’s struggle is only one example, but it’s representative of an important principle. Bold, entrepreneurial individuals and hardworking community folks are what put products in the hands of customers and serve the people around them. The more that lawmakers do to get in the way, even with simple-sounding things like “you need a separate, commercial trash bin,” the more strain it places on fragile new businesses. To encourage local community and business growth, this is one time that a hands-off government attitude would clearly benefit not only Cranky Dave or the folks who are helping to keep Cranky Yellow alive, but anyone else with a dream and the will to make it happen. We’re pretty far from the world depicted in the film Brazil, but it still wouldn’t hurt to make things easier on the very people who are trying to make a difference.

A Second Chance

Posted on by Audrey Spalding

Anthony Barber wants to open a barbecue restaurant in north Saint Louis. But last summer, the city rejected his bid to buy the vacant building where he planned to put it. Now, after a yearlong investigation by Show-Me Institute Policy Analyst Audrey Spalding, the city has said that it will reconsider his application. Here's Anthony’s story.

Privatized Animal Shelter in Kansas City Having Issues

Posted on by David Stokes

Kansas City is searching for a new operator of its animal shelter after canceling the contract with the vet who took it private about two years ago. The Star has the details, and Toellner Tells it and Tony’s Kansas City have the analysis.

I have cited this animal shelter as an example of successful privatization, so I’ve read these reports carefully. Toellner has a rundown of the great success the shelter has had, both in terms of saving animals’ lives and cutting costs (emphasis added):

Two years ago, the City Council decided to privatize the animal shelter and put the duties of running the shelter into the hands of a private group. Not only did the move save the city an estimated $175,000 a year in expenses and the hope was that it would help create more positive outcomes for the animals. And the results have proven that hope to be true.

In 2007 the city shelter, under the city’s management, killed 6,769 dogs and cats. In 2008 the city killed 4,912.

In 2009, with nearly a year of managing the shelter under their belts, the folks with VMC killed 3,101 dogs and cats — a 37% decrease in killing. The number dropped again in 2010, to 2,722 dogs and cats.

Despite these demonstrable successes, there are concerns with the leadership of the shelter. The city is now looking for another operator, although it seems from all of these articles that whoever is selected will still run it as a private entity. There have been many back-and-forth accusations and denials, and you can get those details from the above links. I have no idea whether the current manager of the private shelter has made the mistakes in care that the linked articles suggested, such as faulty recordkeeping and some (unproven) examples of animal mistreatment.

I have suspicions from reading these articles that there is a core group of animal rights activists involved who will never be satisfied until they get a no-kill shelter, either publicly or privately operated — no matter how well it is run.

If the shelter truly needs better leadership, so be it. I certainly hope that the current vet is not being forced out because of political pressures, but I have no idea what is happening behind the scenes. I’ll leave it to Toellner again to sum up how the past two years have worked out:

The great news is that so far, I’ve not heard any talk from city hall about the city taking over the contract. Privatization has clearly shown itself to be a superior option to city control — both in terms of total budget, and in animal lives saved.

I will continue to use this example as one of privatization’s success stories. Can it be made even better with a different manager? Perhaps, and I plan to continue to follow this issue.

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