Show-Me Institute Policy Analyst Dave Roland speaks about eminent domain abuse in Missouri to the Saint Louis County Pachyderm Club on Friday, April 17, 2009.
A Pyrrhic Victory for the Free Market
Cape Girardeau will soon have a new $10 million dental and vision cooperative. From an article in the Southeast Missourian:
“The clinic will provide affordable access to top-quality dental and vision care to its members without the limitations and costs associated with traditional insurance,” Dickerson said.
People who join the cooperative become part owners and pay dues to get basic services such as checkups, cleanings and comprehensive exams.
For many reasons, health cooperatives are a great free-market health care solution. There are many positive consequences to increasing the number of health cooperatives in the market, such as improving patient access, lowering costs, and reducing bureaucracy. Because individuals will be spending their own money (not the money of a third-party insurance provider), they will consume health care more deliberately, as they would with a health savings account (HSA). Increasing the number of health care cooperatives in the market would place downward pressure on the cost of routine medical care. Patients would be better off, not only because their health care would cost less, but also because specialty providers could focus their resources on the patients that need more critical care.
To my grave disappointment, however, the project is subsidized by state targeted tax credits. Again from the article:
Gov. Jay Nixon joined Watch Me Smile dental and vision cooperative developer W. Weaver Dickerson at the former First Federal Bank building to announce the project and $2.05 million in state economic development incentives. […]
His company is receiving $1.3 million in Missouri Quality Jobs funding and a $750,000 community development block grant, Nixon said.
If past performance of the Quality Jobs program is predictive of its future, this particular project might not deliver on its projected fiscal impact. According to an April 2010 report on tax credit cost controls from the state auditor’s office, the actual redemptions of the Quality Jobs program exceeded the projected long-term fiscal impact. For fiscal years 2005 to 2009, the fiscal notes projected $124,000,000 in economic impact, but only $10,724,353 was measured — $113,275,647 below the projection. Failing to deliver on promises, in terms of job creation and economic activity, is a problem that’s pervasive in tax credit programs in Missouri and other states.
Because the consumer demand for routine primary health care services is high and constant, I suspect that this project would be successful independent of subsidy. The general welfare in Missouri would benefit from the proliferation of health care cooperatives, but subsidizing their development negates at least some of their benefit.
Municipal Debt: The Next Crisis?
The Wall Street Journal recently highlighted the city of Menasha, Wis., and a failed steam plant project as evidence that municipalities may be the next financial crisis. Although the primary purpose of the article was to warn investors about the risks of holding municipal bond debt, it also serves to illustrate that many municipalities are spending outside of their means. From the article:
The housing crisis was fueled by cash-strapped homeowners who walked away from their mortgages. Some analysts and investors now are worried about the same problem happening with debts of cities and towns. […]
The tangle underscores concern in the municipal-debt world about the longstanding assumption that local governments will do whatever it takes to repay their debts—including raising taxes—because failing to do so would make it more expensive or even impossible to turn to investors for future financing.
Such cases are rare but could increase in number as municipal governments struggle to meet their obligations on projects that have run into trouble. The greatest default risk is in small municipalities with overleveraged projects buffeted by the recession. Those places also might need to access credit markets less in the future than big cities, making it easier to walk away from their debt.
Placing additional taxes on income — such as earnings taxes and additional fees for service (i.e., trash fees) — is not a sustainable, long-term solution to the problem because it doesn’t address the problem of excessive spending. A municipality can increase marginal tax rates on income and it can establish regional sales taxes, but these policies will encourage a marginal number of people to relocate outside of the region and leave the tax base. Additionally, as we have discussed previously, there are diminishing marginal returns and negative consequences to taxing income.
Reforming expenditures at the local level is a more sustainable solution to preventing a muni-debt crisis. For instance, the city of Saint Louis could prevent a debt crisis if it stopped carving out special exemptions in its tax base, abating property held by private parties and nonprofit organizations, holding thousands of parcels of land vacant, and promising pension and benefit plans without funding them.
Columbia Could Benefit From Privatizing City’s Water and Electric Utilities
Columbia, like many cities across the country, faces budget shortfalls for the current year and the expected future. City officials and residents have debated various methods that might help to deal with this reality, such as which taxes to increase or which services to cut. Those involved in the discussion should consider that Columbia provides two major services that the private sector is fully capable of managing: water and electric utilities.
There is no standard method for providing utility services in Missouri cities. Springfield, for instance, has a city-owned public utility that provides every utility service. Alternately, almost all of the 1 million residents of Saint Louis County are customers of private utilities for water, gas, and electricity. The private sector also provides the majority of the utility services in Jefferson City.
Despite the structural differences between public and private provision, there is little variance in utility costs between Columbia and Jefferson City. In Missouri’s cost-of-living rankings for the first quarter of 2010, both cities placed far below the national and statewide averages for utility costs. During the summer months, a residential electric customer in Columbia with an average usage of 822 kilowatt-hours would pay $87.19. In Jefferson City, that same usage would cost $87.52. That’s a small difference in the summer, and the rates actually favor customers of Jefferson City’s private utility during winter months.
Studies have demonstrated that private utilities are generally more efficient than municipal utilities. In 2000, economist B. Delworth Gardner of Brigham Young University determined that private water utilities in Utah charged lower rates for water than comparable public utilities, even after accounting for the large advantages in taxation and regulation that public companies have. Economists Daniel Hollas and Stanley Stansell found in a 1994 study that private gas utilities were more economically efficient than public gas utilities.
Going back further, to a 1970 study of electric utilities that included Columbia, University of Missouri economists Richard Wallace and Paul Junk examined the diseconomies of scale faced by many municipal electric utilities. They noted that small public electric utilities were comparatively inefficient and recommended purchasing power from larger suppliers. These recommendations were implemented to some extent, because Columbia Water and Light purchases most of its power today.
It is a reasonable supposition that private utilities would be more efficient in their costs and operations than Columbia’s current municipal utilities. Privatizing the utilities could benefit the city in a number of ways. Most importantly, the city would experience an immediate cash infusion from the sale. Florissant, in Saint Louis County, sold its municipal water utility to Missouri-American Water for $14.5 million in 2002. Officials used that money to finance immediately needed public improvements, and placed $10 million into a reserve fund. Columbia is larger than Florissant, and Columbia’s electric and water utilities could likely be auctioned off for more than $14.5 million each. The substantial sale price could be used to continue funding city services that are slated for cuts, be deposited into a reserve fund, or be put to a variety of other uses that would benefit city residents.
Columbia would also see other fiscal benefits from privatizing the city utilities. The assets of the newly private utilities would become taxable, expanding the Columbia and Boone County tax base. Finally, reducing the number of municipal employees entails scaling back the long-run taxpayer costs associated with government pensions and health care.
Private utilities are just as capable of providing quality services at a low price to the residents of Columbia, and likely more efficient than city departments. Privatization of the Columbia Water and Light Division would bring a needed cash infusion to the city, add substantial assets to the tax rolls, and reduce long-term public employee costs. Cities such as Florissant and others have seen positive results from such privatization efforts, and there is good reason to believe that Columbia taxpayers and residents would also benefit.
David Stokes is a policy analyst for the Show-Me Institute, a Missouri-based think tank.
The Promise and Performance of Charter Schools: Drivers of Educational Improvement in the U.S.?
Caroline Hoxby, Ph.D., the Scott and Donya Bommer Professor of Economics at Stanford University, spoke about "The Promise and Performance of Charter Schools" on May 5, 2009, in a lecture cosponsored by the Show-Me Institute and Saint Louis University's John Cook School of Business. Hoxby is also a senior fellow of the Hoover Institution, the director of the Economics of Education Program at the National Bureau of Economic Research, and Senior Fellow of the Stanford Institute for Economic Policy Research.
The Gilded Age Comes to the Masses
George Mason University economist Bryan Caplan recently opined about how well we live compared to even the richest Americans at the end of the 19th century:
I just returned from the Biltmore, America’s largest home. Built by George Vanderbilt between 1889 and 1895, the Biltmore is a symbol of how good the rich had it during the Gilded Age. I’m sure that most of the other visitors would answer “very good indeed.”
But how many would actually want to trade places with George? Despite his massive library, organ, and so on, I submit that any modern with a laptop and an internet connection has a vastly better book and music collection than he did. For all his riches, he didn’t have air conditioning; he had to suffer through the North Carolina summers just like the poorest of us. Vanderbilt did travel the world, but without the airplane, he had to do so at a snail’s pace.
Perhaps most shockingly, he suffered “sudden death from complications following an appendectomy” at the age of 51. (Here‘s the original NYT obituary). Whatever your precise story about the cause of rising lifespans, it’s safe to say that George’s Bane wouldn’t be fatal today.
I visited the Biltmore when I was in elementary school and remember being struck by the novelty and opulence of Vanderbilt’s private two-lane bowling alley. Vanderbilt no doubt spent a small fortune to build his alley and employ the servants necessary to run and maintain it, but I use far better equipment to bowl in my weekly league than Vanderbilt could ever imagine. The ball return at my alley is likely faster and more reliable, and the pins are reset far more quickly and exactly by a machine than a low-wage pin setter. Finally, whereas Vanderbilt had to keep score on his own — or pay a servant to do it — I have a friendly robot to count up my pinfall for me and give me advice on my next shot.
In many — if not most — ways, the average American lives a far better life than even the richest mustache-twisting robber barons of the Gilded Age, and it’s all thanks to steady economic growth. If two economies started at the same level and one grew by an extra 2 percent each year, it would be twice the size of its rival in a little more than 35 years. The Nobel Prize–winning economist Robert Lucas once remarked, when contemplating the differences in international economic growth rates, “The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else.” A similar idea is expressed more succinctly by a quote usually (but falsely, in all likelihood) attributed to Albert Einstein: “The most powerful force in the universe is compound interest.”
Rising living standards allow us to live longer, healthier, and, yes, even happier lives. (No, you cannot buy happiness with money, but as best we can measure these things, people on the average seem to get happier as they get wealthier.) Consequently, that means we should make high growth levels a priority in economic policy, and that requires us to keep taxes and government spending low.
Scalp ‘Em, Bucky! On, Wisconsin!
My alma mater, the University of Wisconsin, is going to the Rose Bowl this year. One of the student newspapers, The Badger Herald is upset that individuals are reselling tickets at a premium, and it is publishing a list of their names. From the article:
Wisconsin had 5,800 student tickets to sell. They went up for purchase on uwbadgers.com at 9 p.m. Sunday and were sold out by 9:20 p.m.
The above students had the nerve to put their Rose Bowl tickets up for sale on Facebook Marketplace within two hours of tickets selling out. Face value was $150. Some were trying to get the tickets for more than $400 a pop.
Truly, there is a special place in Hell for people who buy Rose Bowl tickets with the sole intention of profiting from them. It is entirely unfair to those who actually love this football team and were counting on a cheap face value ticket in order to make the trip to Pasadena an economic reality.
I understand more about economics than sports, so in my opinion, we’re simply seeing a correction of the market inefficiency resulting from setting the price of a ticket lower than equilibrium. For an individual whose utility from attending the Rose Bowl game is less than $400, it is rational to resell the tickets at a price that exceeds their face value. Instead of being labeled “the worst people on campus,” the individuals listed in the Badger Herald article should be admired for possessing the insight to forecast a market opportunity.
Contributors to Show-Me Daily have discussed previously how ticket scalping improves efficiencies in the market. Last summer, David Stokes led a team of Show-Me Institute interns and staffers on a free-market field trip that demonstrated how ticket scalping is a type of market transaction that can improve the welfare of both buyers and sellers.
The graph below illustrates the market for tickets to the Rose Bowl game. The face value of a ticket, P0, equals $150 and the equilibrium price, Pe, is higher than this level. From the article, it appears that the equilibrium price is currently approximately $400. At P0, the quantity of tickets demanded, Qd, exceeds the quantity supplied, Qs (i.e., there is a shortage). When individuals are prohibited from reselling a ticket at a price higher than its face value (i.e., when the price ceiling is enforced), dead-weight loss results.
Market for Rose Bowl Tickets
In the presence of scarcity (and tickets to the Rose Bowl are indeed scarce), the price system works to allocate goods and services. Prices coordinate individual action efficiently by communicating relative scarcities and preferences, and individuals signal their relative levels of demand through their willingness to pay. In order to buy a ticket, a person either gives up disposable income, or he reduces his consumption of some other good. When the price system is allowed to work unrestricted, the tickets will more likely end up with the people who have the greatest willingness to pay.
Critics of scalping say that these $400 prices prevent current students who have low incomes from buying a ticket because they tend to lack disposable income. However, tickets to this particular game are already scarce, and capping the price does nothing to alleviate this. This is illustrated in the graph above; when the price ceiling is enforced below the equilibrium price, then the quantity of tickets demanded exceeds the quantity supplied. In other words, even if an administrative entity prevented reselling the tickets at a price higher than P0, some individuals who have willingness to buy will still miss out on purchasing a ticket. For example, if the tickets were restricted to current students, then then fewer alums who have the means to pay $400 for a ticket will be able to buy one. Furthermore, banning scalping would harm low-income students more than it would help them, because scalping is a potential means for them to generate income.
Critics also say that the event is better off when the student section is packed with loud, rowdy fans. Because the secondary market drives up prices, fewer students may be able to attend, resulting in a crowd that’s more reserved. A rowdy student section certainly has some positive externalities, but these are impossible to measure.
Students at the University of Wisconsin routinely resell tickets at a premium for home games at Camp Randal. During my time as a student, I bought and sold Badger football tickets on several occasions. Why are tickets to the Rose Bowl game any different? Tickets to games against big rivals, like Ohio State or Northwestern, can sell for more than $150 each. This is simply a result of the law of demand. For certain football games (e.g., bowl games), just like any other product, the demand curve shifts to the right and results in a price increase.
The Coase theorem says that transactions will lead to an efficient outcome in situtations in which trade in an externality is possible, transaction costs are zero, and property rights are clearly defined (here, to students). It says that those who will be able to put the tickets to the most highly valued use will end up owning them. Because non-students are buying tickets on the secondary market in this scenario, it’s apparent that this group is not restricted to current students.
‘Little Pink House’ Author Jeff Benedict Tells Story of Kelo Eminent Domain Case in Kansas City
Jeff Benedict, author of “Little Pink House: A True Story of Defiance and Courage,” speaks at a Sept. 15 event cosponsored by the Show-Me Institute and the Kansas City Public Library, to tell the story of Susette Kelo’s infamous eminent domain case. Hear how Kelo’s heroic fight to save her New London, Conn., home turned into the landmark Supreme Court case that outraged homeowners and sparked a legislative backlash across the nation. Kicking off the event is R. Crosby Kemper III, executive director of the Kansas City Public Library and chairman of the board of directors for the Show-Me Institute.
Exciting News for “Nucular” Power in Missouri
Why is “nuclear” so commonly mispronouced in this country? I have no idea, but hopefully Missourians will have an expanded opportunity to say the word as AmerenUE reignites (probably not the best word choice) its efforts to construct the second stage of the Calloway Nuclear Plant.
Here is what I wrote about the nuclear power efforts two years ago. Here is a quick Post-Dispatch summary of the just-released bill. My initial response to the proposal is very positive, but I’ll readily admit that I need to do more research on this exact proposal. The plan for multiple Missouri utilities to invest in the plant — and charge their customers for the costs — is fine with me. Because of the way the power grid system is structured, more people than just AmerenUE customers (and shareholders) will benefit from expanded nuclear power in Missouri.
