Missouri Again Leads the Way on Occupational Licensing (In a Good Way)

Posted on by David Stokes

Combest this morning linked to a story in the Post-Dispatch about the decision by the Missouri Supreme Court to adopt a national standardized bar exam that will, in the future, make it easier for Missouri lawyers to practice in other states and vice versa. I think this is a great move, and I hope that a number of states follow it. Changes like this — which improve the ability of people to practice their chosen job where and how they would like — really have no downside.

The law is one field for which I support some level of licensure. In my opinion, though, that licensure should begin and end with the bar exam. If you can pass the bar exam without attending law school, I see no reason why you should not be allowed to ply your trade. I can’t imagine there would be any reputable firms, nor many clients, that would want to hire someone with that kind of limited background. Yes, I think people who want to be lawyers should go to law school, but that would be a perfectly reasonable decision for competitive legal markets, rather than a rationale for intervention by state laws.

(Also, the thought of someone just becoming a lawyer out of the blue could make for a whimsical “fish-out-of-water” story about a urban lawyer definding his cousin in a rural community. The possibilities are endless. …)

So Much Misinformation in This Editorial … So Little Time!

Posted on by Christine Harbin

On the subject of Illinois’ film production incentives program, the editorial board at the Chicago Tribune poses the question:

What’s not to like?

On the contrary, what’s not to dislike? Film production incentive programs are undesirable policy for states, including Illinois and Missouri, and they have many unintended negative consequences. I have written extensively about film production incentive programs before. In this post, I’d like to highlight specific statements from the editorial and explain why they are incorrect in an economic sense.

Expect this flurry of activity to continue.

The estimated economic and fiscal impact of these programs is debatable. Film tax credits do not result in permanent economic activity because the purchases are single-time expenses and they do not create permanent jobs. The Tax Foundation recently released a study that concluded these programs fail to incite economic growth. In fact, the programs restrict growth because they force taxpayers to support an entire industry.

The tax credit is something lawmakers got just right — in size, scope and sustainability.

Tax credit programs in Missouri are anything but “just right” in size, scope and sustainability, because they are growing at a much faster rate than the state’s revenues. This is why the Missouri state auditor’s report on tax credits recommends that government officials set both expiration dates and annual and cumulative limits for all tax credits programs, including those for film productions. The state of Missouri has awarded nearly $13 million in film tax credits since 2000, and this money comes at the expense of basic government functions, such as education.

“It creates jobs without breaking the bank.”

This is fundamentally false. First, as Henry Hazlitt explains in Economics in One Lesson, this kind of spending destroys jobs in the private sector. As a positive consequence of eliminating the program, there will more workers available to do other kinds of work. Second, for reasons I described earlier, this program is very expensive!

“And it has the potential to make Chicago not only a destination for big Hollywood productions, but also a center of independent film activity.”

States like Missouri and Illinois do not have a comparative advantage in filmmaking, so most film productions are more efficient and cost-effective when undertaken in states that have this comparative advantage. Spending public funds to bring film productions to Missouri means that extra resources are expended to make films, which also means that those resources are no longer available for use in other industries. If Chicago, Kansas City, or Saint Louis were truly suited to be a center for the film industry, it would happen in an unregulated market, independent of government assistance.

Furthermore, it seems to me that practically every state aspires to be a center for the film industry. First, by definition, they can’t all be the center. Second, from the perspective of a government agency, why is filmmaking preferable to any other activity? The free market — not the government — should decide which economic activities occur in an area.

“[T]he value of Chicago’s film infrastructure overcomes bigger tax credits from neighboring states. […] And a plethora of talented stage actors call Chicago home. In other words, you have a place that provides everything a filmmaker might need.

The availability of desirable resources is already a significant incentive to locate in an area. If a state boasts resources that are attractive to filmmakers, then it should not need to use tax credits to encourage firms to locate within its borders.

States like Missouri and Illinois do not have an absence of supply of film production; I disagree that this is the issue, however. Instead, what these states experience is an absence of demand for filmmaking. Unless other factors change over time, there is not enough demand in Missouri for the film industry to exist here without a considerable level of government assistance.

Painting a Rosy Picture

Posted on by John Payne

Missouri Auditor Susan Montee has found that fiscal notes relating to tax credit programs severely understate their costs. From the Columbia Daily Tribune:

The audit found fault with the legislature’s “fiscal note” system that estimates projected program costs.

“Fiscal notes associated with legislation establishing or modifying tax credit programs do not accurately project the financial impact on the state’s general revenue fund collections,” the audit said. “For 15 tax credit programs reviewed, the actual redemptions exceeded the projected long-term fiscal impact by a net amount over $1.1 billion for the five years ended June 30, 2009.”

Fiscal notes sometimes failed to accurately predict how many people and businesses would participate in the programs, the audit said. Sometimes agencies administering the credits would make changes that increased costs.

In 1997, the legislature enacted a tax credit for historic preservation, a program that offers subsidies to people refurbishing old buildings. The estimate of the program’s cost at that time was $14.3 million per year. When the legislature modified the program a year later, the fiscal note projected an “unknown” cost.

“Based upon our methodology, the projected fiscal impact was $14.3 million annually and $71.5 million over the 5-year period, while redemptions totaled over $637 million,” the audit said. “Recent tax credit program audits have shown agencies consistently overstate the economic benefit of tax credit programs.”

Of course, this is no surprise. On top of the difficulties inherent in projecting a program’s impact into the future, politicians always overhype a program’s benefits and undersell its costs. They will even use all manner of political influence and accounting chicanery to manipulate the projections produced by independent scoring agencies. Even at the federal level, where the highly respected and nonpartisan Congressional Budget Office does its level best to accurately project a bill’s costs and benefits, members of Congress frequently game the process by requiring the CBO to score unrealistic versions of bills. The most obvious recent example of this subterfuge is the last CBO scoring of the recently passed health care bill, which, in order to achieve the illusion of deficit neutrality, includes 10 years of taxes and only six years of spending — as well as cuts to Medicare that we all know will never come. Just remember that no matter how bad a government program sounds when a politician proposes it, the reality is almost certainly worse.

Link via John Combest.

Do Energy-Efficient Appliances Encourage Individuals to Consume More Energy?

Posted on by Christine Harbin

A blogger, commenting on my recent editorial about the wasteful nature of Missouri’s green tax rebate program, recently expressed skepticism that promoting the purchase of energy-efficient appliances may also encourage individuals to consume more energy.

In the second part of his post, he links to an article on Slate that cites a study analyzing electricity consumption patterns in the wake of government policy intended to “nudge” consumers into using less energy. First and foremost, this study is not relevant to my argument. In the case of Missouri’s green rebate program, which is what I discussed in my commentary, individuals receive a cash rebate when they buy energy-efficient appliances. The study cited in the Slate article looks at a case in which the electricity company simply sent its customers a home energy report that included charts and a list of tips on how to improve energy efficiency. The program considered by this study included neither a financial incentive, nor an upgraded appliance. The only conclusion that I would feel comfortable making from the study is that pamphlets do little to influence individual behavior. The study suffers from additional shortcomings, as well. For example, I disagree that a change of 1 percent or 3 percent is significant. This variation could be attributable to multiple other variables, such as a change in the price of energy or a seasonal change in the weather. The study also did not prove that the customers it identified as “liberals” reduced their energy consumption as a result of the home energy reports. Again, this reduction could have stemmed from any variety of other factors. Furthermore, because the percentage change and the sample size are both so small, a completely different result could conceivably be selected from the raw data.

According to a report published by Peter Huber and Mark Mills at the Manhattan Institute, the claim that we can meet future energy demand through conservation and efficiency is a myth. They provide evidence that, despite dramatic gains in energy-efficiency, aggregate energy consumption has increased over history:

The American economy has experienced massive efficiency gains: for each unit of energy, we produce more than twice as much GDP today than we did in 1950. Yet during that period of time, our national total energy consumption has tripled. Paradoxically, when it comes to energy, the more we save, the more we consume. […]

“Efficiency fails to curb demand because it lets more people do more, and do it faster—and more/more/faster invariably swamps all the efficiency gains,” Peter Huber and Mark Mills state in The Bottomless Well. Or, as Huber characterized this “efficiency paradox” in a 2001 Forbes column: “More efficient jet engines … cheaper tickets … more passengers … more jets in the air.” The same holds true for cars, lightbulbs, power plants, and everything else that uses energy.

Furthermore, an economic moral hazard problem is often associated with buying green products. Energy-efficient appliances make doing dishes and laundry cheaper, which subsequently encourages individuals to use these appliances more frequently than they had before. Increases in energy efficiency mean that there is a decreased need for the existing energy supply, which leads to a reduction in the cost of energy, consequently shifting the demand curve for energy to the right. Similarly, there is evidence that owning a fuel-efficient car encourages people to drive more. A person could become less inclined to turn off light bulbs when they are more efficient, just as a person could be more inclined to run his washing machine or his dishwasher when it is not full.

Privatization Moves Forward in the St. Louis Area

Posted on by David Stokes

Here are two examples of government privatization moving forward in the St. Louis area: First, Festus is selling its municipal airport. Now, this won’t have anywhere near the effect of the private, commercial airport in Branson, but it is nonetheless a good example of a local government shredding itself of a role that the private sector can perform just as well (and probably better).

Second, the city of St. Louis is bidding out the operation of its animal shelter. The well-known nonprofit organization Stray Rescue will apparently get the contract. Kansas City privatized the operation of its animal shelter last year, and the accounts I have read about it indicate that the shelter is operating smoothly under private management.

As governments at every level deal with serious budget issues, it’s important that the private sector be allowed to play a role previously played by the public sector, as a major part of the changes that state and local government need to make.

Squaring the Circle on Parents as Teachers

Posted on by David Stokes

As our regular readers know, we blog a lot about the Parents as Teachers (PAT) program here. It tends to generate a substantial number of comments, which is awesome. Sarah Brodsky has done most of the posting on this subject, but I will take a stab at it here — and I post this as someone who has been a defender of the program and its benefits previously (in comments, not my own blog posts).

Today’s Post-Dispatch has an article about the latest round of budget cuts in Jeff City. This round of cuts will apparently hit the PAT program hard. The national director of the organization, which is based in Missouri, is taking the cuts personally and hitting back hard:

“I have passed beyond astonishment at the governor’s actions to anger at this disparate attack on Parents as Teachers,” Stepleton said from the organization’s national headquarters in Maryland Heights.

I might understand her anger, but I have to come to the defense of the governor and legislature here. PAT is a worthy program, and by that I mean that I feel it serves its mission more effectively than many other social programs. My family uses it, and we pay for it through our property taxes. If we were asked to pay for it via both property taxes and additional fees, I readily admit we would not use it. But there is no reason PAT should not feel the cutbacks to the same degree as other programs — or, in certain cases like the Highway Patrol, more than other programs. There is nothing so important about PAT, compared to may other programs, that should make it immune to cutbacks when they are required. And I again remind you that I say this as someone who likes, uses, and supports the PAT program overall.

The governor has difficult choices to make, and he deserves credit for facing up to the task and making the hard decisions. The General Assembly also deserves great credit for working with him on many (not all, but many) of these choices, and refusing to raise taxes in these tough budget times. Raising taxes is the easy way out, not the hard way.

Other proposed cuts are positively exciting, such as reducing, even just temporarily, aid to Missouri’s insipid ethanol industry:

The state will delay paying $3.2 million in subsidies owed to biodiesel plants. Next year, they’ll get about 75 percent of what they’re owed, with the rest being deferred to future years.

Here’s hoping that they make the biodiesel cuts permanent, then cut it even further.

Free Markets and the NFL Draft

Posted on by Dave Roland

Tonight, the Saint Louis Rams and the Kansas City Chiefs will announce their picks for the first round of the National Football League (NFL) college draft. That will decide which college football players will be forced to negotiate with them, if the players wish to join the NFL employee pool.

You see, unlike most industries, where workers are free to solicit offers from a range of potential employers before choosing the one most to their liking, NFL teams have a collusive agreement: Only one NFL team at a time may negotiate with the best of the rookie class. This relieves teams of the need to bid against each other for these young players, meaning that the players are stripped of most of their bargaining power when negotiating their initial contracts. However, the practice has also resulted in unanticipated negative consequences for teams. Thus, the limitations that the current NFL drafting system imposes on teams and rookie players distorts the laws of supply and demand, resulting in an inefficient allocation of resources.

If you will, join me in a thought experiment. Several teams this year would like to add a promising young quarterback to their roster. Right now, the Rams are in the best position to do so because they hold the first pick in the draft — and they are widely expected to select Sam Bradford, a Heisman Trophy-winning quarterback out of the University of Oklahoma. If another team (such as the Cleveland Browns, Oakland Raiders, or the Buffalo Bills) wants to be sure it has a chance to secure Bradford’s services, their only option is to negotiate a trade in which the Rams would give up the number one draft slot in exchange for players and/or draft choices offered by the other team.

Why would the Browns, Raiders, or Bills make this trade? Because they place a certain value on obtaining Bradford as a player. The problem is, even though Bradford’s particular skills and attributes are the reason he is so highly valued, he will not personally get to realize the return on the value he offers. As I point out below, Bradford’s rookie contract will have roughly the same parameters, regardless of which team selects him. But a team that trades up to get him would, by doing so, demonstrate its willingness to pay not only the size of that rookie contract, but all the additional costs that they would be sinking into the trade. And the recipient of the additional largess would not be the individual creating the value, but rather the Rams, whose only contribution to the transaction was being a particularly awful team last season. This arrangement is clearly not fair to Bradford.

But even if the Rams valued Bradford most highly, it is extremely unlikely that he could maximize the value that should result from demand for his services. As the draft system currently exists, there is an informal pay scale imposed on teams and players that depends on the slot in which a player is drafted, rather than the value that the team believes it will realize as a result of employing the player. The pay scale is determined both by a set, limited amount of “rookie pool money” and the contracts signed by the previous year’s set of rookie players. Very rarely can either teams or players deviate from this pay scale, although it is not uncommon for them to try.

Last year’s draft provides an excellent example. Matthew Stafford, the first player selected in 2009, signed a contract guaranteeing him more than $41 million. The Rams drafted second and ultimately agreed to pay Jason Smith $33 million. Kansas City chose third and guaranteed Tyson Jackson $31 million. These transactions demonstrate how the pay scale usually works. But interesting things then happened with four of the next six players selected. The Seattle Seahawks, picking fourth, chose Aaron Curry, a player many regarded as being the best in the draft and a potential number one pick. The Seahawks ultimately ended up guaranteeing Curry $34 million — more money than either the second or third players selected. In the meantime, the Oakland Raiders used the seventh pick in the draft to select the first wide receiver taken last year, Darrius Heyward-Bey. This was a highly unusual pick for two reasons: First, most experts figured Heyward-Bey to be only the third- or fourth-best receiver available. Second, the Raiders guaranteed him $23.5 million — significantly more money than would normally be expected for the seventh selection in that draft. Heyward-Bey’s contract had a direct effect on contract negotiations for two other rookie players. The Cincinnati Bengals selected Andre Smith with the sixth selection, and, after Heyward-Bey signed, Smith demanded to be paid more money than the player selected after him. Meanwhile, the San Francisco 49ers had used the 10th overall selection to take Michael Crabtree, who was almost unanimously considered to be the best wide receiver in the draft. Despite being selected three spots lower than Heyward-Bey (and, despite Heyward-Bey’s unusually large contract), Crabtree demanded to be paid as though he were the first receiver selected.

Both Andre Smith and Michael Crabtree ended up refusing to report to their teams (the only kind of real leverage afforded to rookie players) in order to get the kinds of deals they wanted; neither was ultimately successful. Smith missed several weeks of training camp before settling for $21 million guaranteed — which, accounting for the fact that he signed a four-year contract rather than the five-year deal more commonly given to high draft picks, is about what would have been expected given the slot in which he was selected. Crabtree, on the other hand, refused to join the team until well into the season, eventually signing for a guaranteed $17 million — slightly less than was given to the player selected ninth, and slightly more than was given to the player selected 11th. In both cases, the negotiations that resulted from the NFL draft and its resulting “slotting” system cost both the players and the teams weeks of distraction and invaluable time with which to prepare for the upcoming season.

A much more efficient system would have the teams bidding against one another. The most-desperate team would likely secure the player most likely to meet their needs because they would be willing to sacrifice more than any other team to sign that player. A slightly less-desperate team would be able to sign the next-best prospect, and so on, until teams were no longer willing to pay the amount a player demanded. Thus, players would realize the full market value resulting from the demand for their services, and teams would be able to maximize their utility by focusing on the players they most wanted to employ, rather than just those who happened to remain on the draft board. Freed from the restrictive confines of the “slotting system,” teams and players should be able to come to mutually agreeable contracts well before training camp begins, eliminating the hassles and lost opportunities that result when teams and players are limited in their freedom to negotiate with other prospective partners.

The law of supply and demand maximizes efficiency in free markets — and the NFL could help to maximize its own efficiency by abandoning its current, anti-competitive labor model in favor of a model more closely resembling a free market.

Tune In!

Posted on by Christine Harbin

Later today, I will be a guest on Mike Ferguson’s talk show on 93.9 “The Eagle” in Columbia, talking about how Missouri’s green tax rebate program is wasteful and how its intended environmental impact is negated by the way the program is constructed.

The show lasts from 4:00 to 6:00 p.m., and I’m scheduled to speak at 4:30. The show is also available online, so if you are around a radio or an Internet connection, you should listen in!

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