Capital Before Credit

Posted on by Joseph Steelman

A recent article in the St. Louis Beacon posed a question to local economists that is being tossed around globally:

Given the current state of the economy and the deficit, is this the time to pull back on stimulus spending and pay more attention to the deficit, or should Washington worry more about the short term and let the long term take care of itself?

The Paul Krugman camp, consisting of those economists wanting to stimulate the
recovery through expansive government spending, are — like the spending they are advocating — lost in their own arguments.
In the article, Steve Fazzari, a professor of economics at Washington University in St. Louis, states, “One person’s spending is someone else’s income.” I absolutely agree. But then, in a quick turn of events, he goes on to say, “When the government cuts spending, it’s cutting income to someone.” This is also true, strictly speaking, but the implications of his first statement are more important.

I used to mow lawns, and if my employer had told me that he would give my payment to my brother after I finished my work so that my brother could do some weeding, I would have immediately walked away and taken my labor elsewhere.

If that same employer had given me $10 the week before I was supposed to mow the lawn, two things might have resulted: (1) With cash already in hand, my attention to detail would have suffered considerably; and, (2) I would not have been in any hurry to finish the job.

Historically speaking, capital evolved before credit, and for most of the real world, that is how personal finance is understood — you largely only spend what you have. The problem that got us into this recession was egregious spending beyond our means. If mortgage lenders hadn’t been so eager to hand out money — apart from the fact that home loans were implicitly backed by the federal government’s approval — this last recession most likely could have been avoided.

Without the possibility of high default rates at the micro level, the financial instruments that impregnated the system with risk may never have been implemented on such a large scale. Now, after the crisis, we see the world’s top economists trying to formulate a plan to fix the system. In practice so far, that has involved injecting liquidity into the economy through massive government spending. The Krugman camp claims this is more responsible than private investment, because the Fed can print more money to increase the flow of capital rather than bearing the risks of default. There’s no need to worry about the deficit now, they say; we can take care of that later.

Yet few are buying the empty promises of the government. And why should they? With an aging population and massive health care overhauls on the way, everyone can see that entitlement spending is about to skyrocket. Higher taxes are almost certain. Increasingly larger numbers of the American people are holding onto their money in an effort to maintain liquidity in anticipation of the expiring tax cuts at the end of the year. Stimulus money is falling into the same trap; it’s not multiplying the way Keynesians had hoped because investors are wary of the uncertain economic conditions that may be brought about by still more government spending and higher taxes.

We cannot extricate ourselves from the hole we are in until we stop digging. Americans need to see the sunlight before they are willing to buy an expensive ladder to climb out.

New Jersey Looks to Privatization as a Means to Trim Budget

Posted on by Vince Smith

New Jersey’s governor is pushing for the privatization of numerous public services as a means to trim the state’s budget. These services include car inspections, state parks, psychiatric hospitals, and turnpike toll booths. Furthermore, preschools would no longer be constructed on the public dime, public employees would be required to pay for their own parking, and the cafeteria, education, and health care programs in prisons would be handled by private vendors.

Some estimates project that the proposal will save New Jersey $210 million annually in taxpayer funds. From the article:

“The question has to be, ‘Why do you continue to operate in a manner that’s more costly and less effective?’ rather than, ‘Why change?’?” said Richard Zimmer, the former Republican congressman who chaired the task force.

By and large, privatization lowers costs and raises quality. Unlike the government, which can continually operate in the red, a private firm must turn a profit to stay in business, a fact that makes private service providers much more accountable to consumers. The unresponsiveness of public service providers is especially evident when spending hours in line at the DMV or post office. A private firm with a similar service record would either have to take steps to become profitable, by increasing service and lowering costs, or face going out of business.

Missourians would benefit if state officials followed New Jersey’s lead by finding ways to privatize services and save taxpayer money. The efficiency gains that privatization bring would provide a means to cut costs without cutting services. Missouri could do well for itself by entrusting responsible private businesses to help carry some of the state’s fiscal load.

High Heat and Low Taxes

Posted on by Joseph Steelman

LeBron James recently announced that he will be moving to Miami. This is great news for Miami, but terrible news for the rest of the cities courting him.

An economic impact study commissioned by the mayor of New York City concluded that the LeBron effect would likely inject $60 million per year into the local economy. Not surprising, given that ticket sales, advertising revenues, and team retail in Cleveland had increased dramatically since James’ rookie year.

Because of the way the free-agent landscape worked out, and overall team salary cap requirements, Miami was not able to offer James a competitive contract, while both New York and Cleveland were. But Miami did possess a wild card that the other suitors couldn’t match: tax-relief. No, not in the form of direct incentives, in the form of a healthier tax climate.

Interestingly, Florida does not impose a personal income tax, whereas both Ohio and New York levy personal income taxes of 6 percent and 12.6 percent, respectively, in their highest brackets. On a deal said to be worth around $100 million, that 12.6 percent tax on income wipes out the economic comparative advantage that New York may have had. However, the 6-percent income tax would level the playing field for Miami and Cleveland were it not for Cleveland’s pesky earnings tax. The 2 percent of James’ income that the city of Cleveland could claim was enough to give Miami the fiscal residual it needed to land its new money-making machine.

What can Missouri learn from all this?

Simply put, our current economic development plans may not be able to compete against states with lower taxes. New York may offer James lots of incentives to coax him to the state, but the simple ability to keep the money you’ve earned is a strong incentive in itself.

Snapshots Vs. Trends in School Testing

Posted on by Abhi Sivasailam

Saint Louis’s Paideia Academy, a charter school, is set to close its doors following a recent defeat in a court battle with Missouri’s Board of Education, which rejected the school’s charter application earlier this year. The Post-Dispatch reports that the Board of Education, in rejecting the application, and the Cole County Circuit Judge, in upholding its decision, cited poor management, the lack of a sponsor, and low test scores as reasons to revoke the charter. Although I am not in a position to speak about the quality of management, or about the lack of a sponsor (which certainly seems like a valid reason to revoke a charter), I do, however, object to the “low test score” argument on two grounds.

First, although it is true that Paideia’s test scores rank among the lowest in the state, absolute measures of test scores are not a very meaningful measure of school quality. The production of education is similar to the production of anything else in the economy: Poorer quality inputs, in the form of poorer students from historically disadvantaged ethnic backgrounds, translate to poorer quality outputs, in the form of test scores. It’s not only a mistake, then, to compare Paideia’s students to those of high-performing districts, but also to an arbitrary benchmark determined by the state. Taking a snapshot of test scores is not enough, because a reliance on mere glimpses into time discourages an understanding of the underlying trends at work. The more important measure is the longitudinal one: Are Paideia’s students learning more now than they were before the school existed? Perhaps the answer is no, but it doesn’t look like this question was considered by either the Board of Education or the Cole County Circuit Judge.

Second, I am willing to believe that we may overvalue test score measures of all kinds. One-size-fits-all models don’t work in schools, where abilities and interests vary greatly between student populations. Schools that produce less significant test score gains but more significant “creativity” gains may still be cultivating meaningful human capital.

Dave on Don Marsh This Morning

Posted on by Dave Roland

If you happen to be in the St. Louis area and near a radio (or at a computer pretty much anywhere) today around 11:00 a.m., please consider tuning in to KWMU 90.7 FM, where I’ll be a guest on Don Marsh’s Legal Roundtable. We’re planning to discuss a wide range of topics, including recent U.S. Supreme Court decisions, the ruling in the NorthSide redevelopment case here in St. Louis, and some other fascinating and timely legal issues.

Assessing Legal Prospects for Lawsuit Over Federal Health Care Reform

Posted on by Dave Roland

On July 7, Missouri’s lieutenant governor filed suit against the recently passed federal health care reform. It’s difficult to know exactly what to make of certain aspects of this lawsuit, because it assumes the manner in which the federal health care law will function — and it is not clear that the lawsuit’s assumptions are correct. Even if they are correct, however, there are a few issues that may prevent this lawsuit from proceeding.

The first is the question of standing. Before a court will consider and rule on a legal issue, plaintiffs must establish that there is a current case or controversy between themselves and any defendants. Where the government is the defendant, this usually means that the government must have taken some act that has caused a harm or detriment to the person filing the lawsuit. It is not usually sufficient simply for a law to be on the books; courts usually (although not always) require that there must have been some implementation of the law before they will address its validity. Also, it is important to remember that plaintiffs cannot generally bring claims on behalf of others.

This lawsuit has eight counts. Several of these assert rights properly belonging to the state of Missouri. The lieutenant governor suggests that because a state statute gives his office the responsibility to be an advocate for the state’s elderly citizens, he has authority to seek relief on behalf of the state government. Similarly, the lawsuit claims that the citizen plaintiffs, as taxpayers, have a right to raise these claims on behalf of the state government. It is possible that courts have previously found citizen taxpayers to have standing to sue on behalf of their state government, but I cannot think of any examples and I do think it unlikely. Thus, I don’t think a court is likely to agree to consider counts one, three, and four. And, even if the court did address them, I question the viability of several of the lawsuit’s assertions in these counts.

It may be correct that the federal government has no proper authority to require the state government to adopt certain programs (count one), no authority to compel the state government to make a payment to the federal Department of the Treasury (count three), and no authority to force the state government to increase state taxes in violation of the Missouri Constitution (count four) — but it is not particularly clear that the federal health care law would actually do any of these things. As I have pointed out, the lawsuit assumes that the law will be implemented in a particular way, but we cannot be sure that its assumptions are accurate. This has an enormous bearing on the validity of these claims.

Count two deals with the compensation provided to state officials, so it is at least arguable that the lieutenant governor could have standing to assert the claims of that count. The substance of the claim, however, is dubious. It seems highly unlikely that the federal government is not permitted to impose certain limitations on how the state of Missouri is permitted to compensate its employees. For example, would the state argue that it is not required to pay minimum wage or to comply with anti-discrimination laws? The principles of state sovereignty expressed in count two are, I believe, well made, but they do not necessarily demand a conclusion that the targeted provision of the federal health care law is unconstitutional.

Counts five and six address the individual insurance mandate, which does not even go into effect until 2014. I think the legal arguments in these counts are well-founded, but the claims are premature and will continue to be so until the mandate is actually implemented.

Count seven may actually have some legs. It addresses the provision of special treatment for citizens of certain states, which was incorporated into the health care law in order to secure the votes of certain congressional representatives. The count points out that these exemptions, or “grandfather” provisions, require that the law be applied differently to similarly situated citizens based on nothing other than their geography. That’s a powerful claim, assuming that the law will be implemented in the way that the lawsuit envisions. Those aspects of the statute go into force on Jan. 1, 2011, so it’s possible that the court will be willing to address them.

Count eight attacks the infamous “panels” that are expected to be established to evaluate the appropriate levels of treatment for various health care situations. The lawsuit assumes that these panels will have the power to forbid doctors to provide services to citizens willing to pay for them. If that assumption is correct, this count may have life — if and when the panels are ever constituted and actually issue the anticipated prohibitions. I do not, however, think that a court is likely to assess this claim until those things have taken place.

So, taken as a whole, I think it likely that the court will ultimately dismiss at least half of the claims raised in this lawsuit (and probably three quarters of them) as lacking either standing or ripeness. It is possible that the court will address the merits of counts two and seven. It is difficult to predict how the court will come out on count two, although I think it unlikely that the court will find a constitutional violation. If, however, the federal statute implements the provision targeted by count seven in the manner that the lawsuit anticipates, I think there is a very strong chance that it will be struck down as unconstitutional.

Dave Roland is a policy analyst at the Show-Me Institute, a Missouri-based think tank.

 

Concentrated Benefits, Diffused Costs

Posted on by Christine Harbin

The Kansas City Star has some disappointing news:

A special legislative session offering incentives to Missouri’s automobile industry was transformed Tuesday into a tax-break boon for elderly homeowners, airplane makers and more.

The Missouri House passed legislation extending tax breaks to senior citizens, computerized data centers and manufacturers in a broadly defined transportation sector encompassing everything from bicycles to rockets and food-vendor carts to floating offshore oil platforms.

My colleagues and I have have been arguing voraciously against other companies that seek handouts from the Missouri state government. Other states are discovering that tax credits fail to deliver the results that they promise, and I have heard no convincing reason to believe that targeted tax credit programs will work any differently in Missouri.

From the perspectives of economics and fairness, these programs defeat their ostensible intended purposes: encouraging employment and helping states compete. In subsidy programs, the state government redistributes wealth to special interest groups in the form of concentrated benefits (e.g., sugar substitute manufacturers, data centers, ethanol producers, car manufacturers) and it diffuses the costs of these benefits to all those who remain unsubsidized in the marketplace.

Whenever the government subsidizes an activity, it comes at the expense of other activities. This is because time, money, and resources are scarce and finite. As a result of its decision to subsidize an activity, the state government incites individuals and businesses in Missouri to divert resources from other productive uses and invest them in activities for which they have a higher opportunity cost than others. By subsidizing these activities, the state gives up marginal levels of productivity. Missourians would be better off if each market participant specialized in the activities that they do well and profitably without the need of a subsidy, and left the production of other things — such as vehicles — to those who posess a comparative advantage in producing it. By focusing on profitable non-subsidized economic activity and then engaging in trade with others, overall levels of productivity and consumption will increase.

There are two systems within the unrestricted market that are better than tax incentive programs at promoting productive economic development: the price system and the profit-loss system.

The price system is a better means of achieving an efficient allocation of goods and services than targeted incentive packages. Prices coordinate individual action efficiently by communicating relative scarcities and preferences, but government officials knock the price system out of this equilibrium whenever they decide to subsidize or restrict an economic activity. This results in a misallocation of resources, and produces a market bubble that will eventually burst, as the subsidy ends. (Will Missouri host the first sugar substitute bubble? I hope not!)

Allowing the profit and loss system to allocate resources efficiently in a free market is better way to encourage economic development. However, when the government intervenes in the market through targeted subsidies, the “loss” signal is muted as a consequence because producers are at least somewhat insulated from risk. As an additional consequence, producers have less of an incentive to respond to consumer demand, which mutes the incentive for producers to target their operations efficiently. For example, as a result of agricultural subsidies and tariffs, much of the sugar that we consume in the United States is made from beets instead of from sugar cane. This is a less efficient process of making sugar, and consumers pay a higher price for it.

Government should focus on providing the basic institutions that foster reliable market exchange (e.g., enforcing contracts, backing currency, etc.), instead of favoring losers in the marketplace in the name of economic development.

Developer Should Bear Risk of Failure

Posted on by Dave Roland

I was pleased to see that the Post-Dispatch ran a letter to the editor today that I wrote in response to its recent editorial calling for St. Louis officials to renew efforts to subsidize the NorthSide redevelopment plan. This is the text of the letter:

Developer Should Bear Risk of Failure

In responding to Judge Robert Dierker’s ruling that St. Louis officials lacked authority to offer hundreds of millions of dollars to subsidize the NorthSide redevelopment plan, the editorial board, in the editorial “Celebrating Decline” (July 12), implies that the plan can proceed only if the city provides the anticipated subsidies. The developer’s own estimates indicate a belief that he will realize a profit of at least $251 million even without those subsidies.

Nothing in the ruling prevents the developer from pursuing his quixotic vision or from enjoying any profits that might result from its success; rather, it requires that, like all other entrepreneurs, the developer must personally bear the risks of failure instead of pushing them onto the taxpaying public.

Dave Roland — St. Louis

Policy Analyst, Show-Me Institute

More on MoDOT and Local Control of Roads

Posted on by David Stokes

Just yesterday, I wrote about the loathsome move by the itsy-bitsy, teeny-weeny city of Charlack to install speed cameras on I-170 in St. Louis County. We’ve had a discussion in the comment section of that entry about the closely related issue of what happens when the owner of a road (in this case, the state of Missouri) and the city it goes through (in this case, Charlack) disagree on a policy, such as a speed limit or cameras.

As if on cue, today’s Post-Dispatch has a story about a disagreement between St. Charles County and MoDOT regarding bicycle restrictions on state roads within St. Charles. One councilman, Joe Brazil (I have had the pleasure of meeting him, and we have praised him here in the past for his stances against annexation and TIF abuse), wants to ban bicyclists from certain state roads in the county. MoDOT is opposed. My purpose here is not to discuss this specific issue, but rather the process. Nonetheless, I don’t support banning bicyclists from any roads other than interstate highways, and I have to point out one comment in favor of the proposal to ban bikes by someone who, understandably, has a personal interest in the matter:

Among supporters was Stephen East of Cottleville, whose 16-year-old daughter was seriously injured in a 2003 accident on DD when the vehicle she was driving topped a hill and encountered a bicyclist in her lane. East said she swerved, ran off the road, hit a tree and was thrown from the car.

“Public safety trumps personal rights,” East said.

No, sir, it doesn’t. And it is exactly this far-too-common belief that our safety is more important than our rights that is causing us to lose our rights to safety zealots via death by a thousand cuts. I give you helmet laws, seat belt laws, closed swimming pools, and the fact that organizations can no longer just have a bake sale or parish pot luck because health regulations forbid food cooked at a home from being sold or given away elsewhere. Because, you know, that’s “dangerous.”

But I digress. MoDOT says St. Charles can’t enforce the ordinance because the Highway Commission won’t approve it. MoDOT says it simply won’t post the signs telling people about the law — making it invalid under state law, which specifies that traffic rules must be properly posted for people to see. So, if St. Charles passes the ban and MoDOT won’t allow the county to enforce it, there will be some sort of court challenge. That might be the only way to answer the question of who has final say about roads — the governmental jurisdiction that owns it or the governmental jurisdiction it passes through.

In my opinion, the final say on traffic laws should belong to the jurisdiction that builds, maintains, and “owns” the road, if for no other reason than consistency. Hopefully, this will be further clarified soon, and hopefully in a way that does not allow cities like Charlack to do whatever they please on state or county roads.

I’d be delighted to see a statewide ban on things such as red light cameras and speed cameras on all roads. As the laws are currently written, though, I don’t think there is any doubt that cities can do whatever they want on city roads. (Thanks to Combest for the link.)

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