“You Can’t Shrink Your Way Into Prosperity”

Posted on by Christine Harbin

From a recent article in the Wall Street Journal:

[A]ccording to some analysts and students of corporate behavior, […] companies that take a limited and more-targeted approach to layoffs tend to do better in economic recoveries than those that slash employment sharply and across the board.

“You can’t shrink your way into prosperity,” says Wayne Mascio, a business professor at the University of Colorado, Denver.

Although the article focused on downsizing in private companies, I think that the conclusion applies nicely to the public sector, as well. This is particularly relevant to state agencies in Missouri as they cope with their budget problems. Instead of scaling back their operations proportionately, governmental agencies in Missouri should take a targeted approach, by identifying programs that are underperforming and subsequently eliminating or outsourcing them. This would increase the likelihood that the programs would recover and perform better in the future.

When determining which programs, or segments thereof, to cut, a firm or a government agency should also consider non-financial and indirect costs. This is because unintended negative consequences could adversely affect a firm or an agency’s bottom line, as well as its ability to perform core functions. In order to increase its overall growth and prosperity, a firm or agency should focus on the activities for which it has a comparative advantage, and then trade amicably with others that possess a comparative advantage in other activities.

The firm or government agency in question should also consider its opportunity cost for providing a program under review. Outsourcing non-core functions enables concentration on core functions, which can improve efficiency and quality. This way, firms and agencies alike could maximize their up-time and productivity.

More on the Columbia SWAT Raid

Posted on by John Payne

The SWAT raid on Jonathan Whitworth’s Columbia home — which ended with both of his dogs shot, one dead, and Whitworth pleading guilty to a misdemeanor paraphernalia charge — is generating a great deal of interest both in Missouri and nationally. The best national coverage of the story that I’ve seen so far is Andrew Napolitano’s discussion with Columbia Mayor Bob McDavid and local talk radio host Mike Ferguson. I highly encourage you to watch it:

I certainly agree with McDavid that it is inappropriate to use SWAT teams for nonviolent crimes — but, unfortunately, that is not one of the reforms already implemented by the Columbia Police Department. That said, the department is moving in the right direction, even if not quickly enough for my taste. New regulations for SWAT raids include: an order that search warrants be served within a “reasonable” period (usually eight hours) after they are issued; eliminating the power for the SWAT commander or narcotics sergeant to order such a raid, instead requiring a department captain’s order; and, continual surveillance of the area to be searched before the raid to ensure that the intelligence is correct and that, say, the suspect’s young child is not in the home.

I think there are three major policies missing from these reforms. First, there should be a public record of every instance in which a SWAT team is used, and for what purpose. Without such a record, it will be impossible for the public to hold the police department accountable for any departures from the other policies. (I contacted the Columbia Police Department earlier today to ask whether such a record exists, or whether it will be required in the future, but have not heard back from them yet.) Second, there is no change to the department’s policy on using lethal force against animals. They could consider using non-lethal methods of subduing an animal, such as pepper spray. At the very least, though, a more thorough definition of “aggressive” behavior seems warranted. Finally, the use of SWAT-style raids should be legally confined to violent situations. Unless officers can prove that there is a high probability that the suspect is armed and likely to resist, a SWAT raid designed to confuse and terrify is more likely to lead to violence than prevent it.

It is again worth mentioning that events like this are hardly isolated incidents. Just last month, a police officer in Bellefontaine Neighbors in North Saint Louis County shot and killed a dog under the false impression that it was a different dog that had been reported to be vicious and on the loose. The state of Missouri should institute stricter guidelines for both SWAT teams and the use of lethal force (even against domestic animals) in order to avoid tragedies like these in the future.

In Support of Eliminating the Corporate Income Tax

Posted on by Christine Harbin

Last week in the Wall Street Journal, Michael Boskin published an editorial described the negative effects of corporate income taxes on an economy:

Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America’s global competitiveness, and raise future wages. […]

Junking both the corporate and personal income taxes and replacing them with a broad revenue-neutral consumption tax would produce even larger gains.

Although Boskin focuses on the federal corporate income tax, his conclusion would also hold true for the state corporate income tax in Missouri. Eliminating the state corporate income tax and replacing it with a broad-based consumption tax would attract more employers, business activity, and migration to the state. This echoes the scholarly work published by the Show-Me Institute, finding that taxes and economic activity are inversely related. When you tax something, you get less of it, after all.

Sixteen states have a lower corporate income tax rate than Missouri’s, which now stands at 6.25 percent. Businesses have a marginal incentive to locate in those states, instead of in Missouri, because they would enjoy a higher after-tax return to capital. As a consequence of realizing that higher return, the firms in these low- or no-tax states would supply more production.

Eliminating the corporate income tax would also be a more efficient and fair way to attract businesses to Missouri than targeted incentive programs, which is the state government’s current practice.

Blindly Picking Winners and Losers

Posted on by Audrey Spalding

Facing declining tax revenues, Gov. Jay Nixon is pushing a proposal to cap the amount that Missouri hands out in tax credits each year. Tax credits, which reduce a recipient’s tax burden dollar for dollar, are transferable and are nearly as good as cash. Missouri awards tax credits for specific categories, such as redevelopment, housing, business recruitment, and agriculture. Businesses and individuals don’t receive tax credits automatically; they have to apply for them.

So far, the arguments for and against capping tax credits has circled around the issue of whether tax credits encourage economic development, job growth, and other activities that are in the best interest of the state. Proponents argue that tax credits are beneficial: The state gets more than what it pays out (because of the so-called economic multiplier), they say, and so capping tax credits would hurt the state as a whole. Those who oppose targeted tax credits argue that the loss of revenue given away by the state to a few recipients — but collected from the rest of the state’s taxpayers — far outweighs any benefit accrued from the activities that such credits encourage. Furthermore, as Show-Me Institute Research Analyst Christine Harbin has written, when state legislators create targeted tax credits, they are favoring one industry over another, frequently because of political pressure.

Yet another argument against state tax credits is the fact that state governments have demonstrated that they are often incapable of a substantive review of tax credit applications. As a negative consequence of this lack of oversight, these programs invite fraudulent activity. In Iowa, three film production companies have been charged with inflating the values claimed on tax credit applications, and the director running the state’s film tax credit program was fired because of the lack of oversight. From the Quad-City Times:

The invoices also included various sizes of step ladders that ranged from $900 each up to $1,125, and a 24-foot extension ladder reported to have been rented for $1,350.

There are many additional examples of fraudulent activity resulting from a lack of oversight. In March, the state of Michigan awarded a $9 million business tax credit to a convicted embezzler who promised to create 765 jobs in Flint. He did this all while living rent-free at a friend’s mobile home. Earlier this year in Louisiana, a man was charged with selling nearly $2 million in Louisiana film tax credits to members of the New Orleans Saints. He never filed for them.

I suspect that Missouri’s Department of Economic Development may also occasionally miss tax credit application discrepancies. Based on a cursory review of the recently approved application for $19 million in Distressed Areas Land Assemblage (DALA) tax credits submitted by a Saint Louis–area development company, NorthSide Regeneration, LLC, it appears that the company overstated its costs for at least five properties (third column of DALA tax credit application PDF documents contain the property’s reported purchase price):

Address DALA tax credit claim amount Certificate of value amount
1836-1842 N. 22nd St. $147,200 $128,000
1916, 1918, and 1920 Wright St. $172,500 (total) $140,000
2301, 2305, 2313, and 2317 Howard St. $105,000 (total) $87,500
3059, and 3065-71 Martin Luther King Dr. $241,500 (total) $210,000
1700 25th St. $174,800 $152,000

These problems are inherent in a bureaucratic program tasked with awarding benefits, and operating with limited information. The paperwork accompanying a tax credit application is usually substantial, and even if the agency charged with administering a state’s tax credit program does due diligence, the information available can be limited to what the tax credit applicant supplies.

The tax credit fraud cases that do make the news are egregious. I am sure there are instances of companies padding their reported costs on tax credit applications that the state and general public have missed. Instead of using public dollars to attempt to pick winners and losers, while running the risk that the state may not have all the available information even to weed out tax credit fraud and application discrepancies, the state should let consumers and investors decide which businesses, developments, and films succeed.

Should Jackson County Amend Its Charter?

Posted on by David Stokes

Today’s Kansas City Star has a good summary of charter amendments being proposed in Jackson County. Charter counties like Jackson — there are only four of them in Missouri — go through this charter review process once each decade. I was pleasantly underwhelmed by the proposals, because I don’t think Jackson County’s government needs major charter changes.

It appears that they won’t be considering any changes to the partial at-large voting on their county council, which is unique among Missouri’s charter counties. There has been a good deal of work done on the question of at-large versus district representation. Public choice economics has provided some evidence that at-large voting leads to lower spending levels. The theory is simple enough: Officials elected at large have less of an incentive to engage in district-specific spending (think congressional “pork” writ local), because all of their constituents both benefit from and pay for all of the same things. My “Government in Missouri” study for the Show-Me Institute addresses this idea in detail on pages 25 and 26, and provides endnote citations to major public choice studies on the subject, for anyone who is interested enough to do further research. (This is usually the part of my government talks where people start to fall asleep.) When I compared the suburbs in St. Louis County that have at-large voting to those with the more common district voting found in city elections, I found limited evidence that the at-large cities spent less. I say “limited” because the differences were not huge, and the sample size was very small — but it’s all in the study.

The portion of the charter proposals that will generate a good deal of attention is the pay raise for local legislators. The charter committee report recommends:

  • Set new pay levels for elected county officials, including boosting current legislators’ salaries by more than 10 percent to $28,916 annually. Legislators also would be guaranteed raises based on the local consumer price index.

I see nothing wrong with raising salaries to $28 K per year for nine council officials serving in a county of 650,000 people. There is nothing out of line with that. I do, however, disagree with the proposal to raise it automatically each year, according to the consumer price index. Raising your pay is one of the tough votes that elected officials have to make. Usually, moderate raises that are implemented rarely enough will be supported by the public, as I expect this one will be. However, it should still require a vote, rather than being turned over to a commission or a computer.

Not Against Children With Autism ? Against Mandates

Posted on by Caitlin Hartsell

As the legislative session comes to a close this week, a number of bills have supporters who are eager to see them passed. Two of those bills, H.B. 1311 and H.B. 1341, would succeed in raising the cost of health insurance for all Missourians by requiring state-regulated private health insurance companies — those covering small- and medium-sized businesses — to cover up to $55,000 annually in screenings and therapy for children with autism spectrum disorders. I explained in a previous post why mandates raise the cost of health insurance for everyone, pricing some people out of the insurance market. As of this afternoon, these bills will be advancing to conference and will be subject to one final vote.

This morning, I received an email message from a group that supports the autism bill urging its supporters to contact the House speaker, who they believed had been preventing the bill from reaching conference for a final vote. The email mentions that the speaker’s family is involved with the Ozark Center for Autism in Joplin, and questions how he can support causes that help autism spectrum people, yet also oppose the bill.

There is a disconnect in that logic. Opposing the insurance mandate does not indicate a lack of caring about autistic children and their families. Instead, it may follow from a recognition that government mandates necessarily increase health insurance costs for everyone. This hurts the families and children who suffer from conditions that are not state-protected. It also hurts individuals who can no longer afford their insurance premiums because increased premium costs have priced some marginal number of them out of the market. Opposing the bill demonstrates an understanding that the proposed legislation has effects other than the immediately foreseeable subsidy for autistic children, but also the unseen effects for individuals who have not been granted the protection of a similar state mandate.

This example clearly demarcates the differing approaches taken by competing political ideologies. The Ozark Center for Autism is a private charity that specializes in providing the applied behavior analysis therapy that the mandate seeks to cover. Supporting this group is an active measure to help autism-spectrum children without creating a government mandate. Supporting the activities of a private charity does not increase the costs of health insurance for other individuals.

Government mandates, on the other hand, raise health care costs for the rest of the population — even when those mandates are targeted to disabilities or disorders that we particularly hope will be supported. It would be prohibitively expensive to mandate coverage of every potential health problem, but increased competition in health insurance markets would allow families to choose the coverage that best suits them. Individuals who feel strongly about helping those who are afflicted with a certain condition can donate to a private charity that provides services to assist those who can’t afford treatments on their own. Involving the government is not the only solution to such problems, nor the most effective one.

Ethics Reform and Constitutional Principles

Posted on by Dave Roland

One of the hot topics in Missouri policy debate over the past several days has been Senate Bill 844, the legislature’s current attempt at ethics reform. Patrick Tuohey over at the Missouri Record just published a column I wrote assessing the constitutional questions raised by the bill that passed the House of Representatives last week. You’ll have to read the column to get the details, but suffice it to say that the bill merits some of the criticism that various media outlets have leveled against it.

Illinois Legislature Voting on Increasing Tax Collections in Missouri

Posted on by David Stokes

Illinois is voting tonight on whether to raise their cigarette tax by a full $1. If this passes — and I don’t care either way, as a non-smoker who doesn’t live in Illinois — there can be no doubt it will be good for tobacco tax collections in Missouri. Nobody can doubt that at least a small portion of Illinois residents will shift their tobacco purchases to Missouri and other nearby states, leading to more business and higher tax collections here, but without any increase in Missouri smokers’ costs.

I would guess that most Illinois residents who can easily purchase smokes or gas in Missouri — such as the many St. Clair and Madison County residents who work in downtown St. Louis — already do so. The current tax difference on cigarettes is large enough to distort economic decisions. If the Illinois legislature increases it by another $1, the marginal changes might not be as large as one would expect, but they will certainly exist, and to Missouri’s benefit.

A Minor Point About Minimum Wage

Posted on by Josh Smith

The first job I ever got paid for was probably mowing lawns in the ’90s when I was a teen. Earning $10 per lawn sometimes didn’t seem worth it while pushing the mower in the sweltering heat — but I had a friend named Jonathon who, with a ton of initiative and some help from his dad, started a small operation where he mowed several lawns every weekend all summer long to begin saving for college.

The first job for which I ever received a paycheck was developing photos at Walgreens, right around the time I turned 18. I made $6 per hour, and developed lots of photos and stocked lots of sodas and milk during my time there. I never felt entitled to any more money than the people I worked for back then felt inclined to pay me, and I now understand the economic rationale for my relatively low pay back then: I wasn’t very productive.

Compared to Jonathon, or even to the photo clerks who had been there longer than me, it was obvious that I couldn’t do what they did in the same period of time. Jonathon mowed several lawns every week because he made it a point to develop relationships with customers that would last all summer, and touched base with them to make sure they were getting the service they wanted. More senior Walgreens clerks were better at juggling many tasks and completing all the little tasks that needed doing, often because they had both experience and initiative.

By and large, people earn in proportion to what they produce. The Post-Dispatch ran a very well-written op-ed today by 17-year-old Miles Larson, which seems to lack this insight (link via John Combest). Larson argues from an assumption that, given the opportunity, businesses will pay their employees as little as possible. This is true in a sense, but ignores the fact that businesses employ people at all because they produce something valuable. If the value of their production is much higher than the wage they are paid, it creates an incentive for competing businesses to offer to pay them more, and steal them away as an employee. Usually employers are smart enough not to let that happen — not least of which is because they don’t want to have to train a replacement. Most of the time, they just pay employees what they are worth.

There’s a reason that so many teenagers earn minimum wage: They are simply less productive than older, more experienced workers. As one study from the Show-Me Institute pointed out, most workers who earn minimum wage are young and still in school, while older workers — even poor ones — tend to earn well above minimum wage.

Younger workers earn less because they are less productive, not because employers are predatory. Minimum wage is not a refuge for the poor and underprivileged, it is a barrier preventing people whose labor is worth less than $7.25 per hour from selling their time to employers, leading to greater unemployment among the very demographic that minimum wage laws are ostensibly designed to protect.

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