Mr. Payne Goes to Jefferson City

Last Wednesday, I traveled to Jefferson City in the hopes of testifying about payday lending before the House Committee on Financial Institutions. That didn’t happen, because the session on payday lending became a purely informational presentation by representatives of the industry, with no outside witnesses testifying. (We still have a couple very interesting projects on the subject that should be forthcoming shortly, however.) Still, this was my first trip to the capitol to see Missouri’s democracy in action (so to speak), and I found it extremely interesting.

No, wait … not interesting. What’s that other word? Oh yeah: tedious. I spent three hours in a hearing room with most of the time taken up by an abstruse discussion of appraiser regulation. The only people in the room who seemed to be actually animated by the subject were the interested appraisers and representatives of appraisal management companies. Most of the representatives seemed to idle the time away browsing the Internet on their laptops and phones. The rest sat there, supporting their heads with their hands and wearing the painfully bored looks of people firmly convinced they are meant for something better in life than this.

Even for all the hearing’s spectacular boredom, however, I did learn a thing or two. First, appraisal regulation is a subject far more complicated than anyone should ever want to know. The big change under discussion that night was the move to a greater reliance on appraisal management companies (AMCs) over the old-fashioned kind of appraisers. This shift has been ongoing for some time but received a big boost when the Home Valuation Code of Conduct (HVCC) essentially became the law of the land. I will spare you most of the further details (if you really must know, I recommend this article) except to say that although it does appear the HVCC is kind of a disaster, the new bill being used to rectify the problems looks like it just benefits the appraisers at the expense of AMCs and consumers.

Now, I fully admit that I am no expert in the field, but when every appraiser testifying for the bill complains that AMCs do less expensive work than appraisers, it sets off my Rent-Seeking Alarm. It sure seems to me that the appraisers are using the problems in the HVCC as a way to limit their competition and raise rates. But I could be wrong. Given the massive complexity of the regulatory code surrounding appraisals, it probably isn’t possible to know how the bill would change the system ex ante, and this presents a massive problem for regulators.

Writing about Democratic members of Congress who did not understand how tax changes in the health care bill would affect large companies, Glenn Reynolds describes this same problem:

The United States Code — containing federal statutory law — is more than 50,000 pages long and comprises 40 volumes. The Code of Federal Regulations, which indexes administrative rules, is 161,117pages long and composes226volumes.

No one on Earth understands them all, and the potential interaction among all the different rules would choke a supercomputer. This means, of course, that when Congress changes the law, it not only can’t be aware of all the real-world complications it’s producing, it can’t even understand the legal and regulatory implications of what it’s doing.

There’s good news and bad news in that. The bad news is obvious: We’re governed not just by people who do screw up constantly, but by people who can’t help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or “better” rules will do any good: Incompetence is built into the system.

The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don’t know what they’re doing.

And that’s assuming the legislators actually take the time to try and understand the legislation. What’s more likely is what I witnessed last Wednesday: disinterested representatives killing time until the end of the session by checking their email and text messages. If a regulation is so complex that the regulators can’t even be bothered to understand it, it is likely to be ineffectual at best and counterproductive at worst. In regulation, less is often more.

Will Payday Loan Regulations Kill the Market?

The Springfield News-Leader today features a good op-ed about current plans for regulating Missouri’s payday loan industry.

Good bit:

The FDIC found that payday loan fees were justified by the costs and risks associated with offering such loans. The FDIC also found competitive products like bounced checks carrying APRs of up to 3,500 percent.That APR calculation – designed to compare competing, long-term forms of credit – is why a 36 percent APR cap, as proposed in current Missouri legislation, would ban short- term loans in the state.

If imposed, a 36 percent rate cap would mean lenders could only charge about $1.38 per $100 borrowed. At such a low rate, lenders simply can’t cover their costs – such as rent, employee salaries and benefits.

As I’ve written before, I’m opposed to payday loan regulation because:

  1. I view payday loan transactions as legitimate, consensual business interactions between relatively rational actors.
  2. The empirical evidence suggests that payday loans constitute a useful service. I look, for example, to Donald Morgan and Michael Strain, who show that increased access to payday loans reduces the volume of bounced checks. I also look to Edward Lawrence and Gregory Elliehausen, who find that payday loans “satisfy a real financial need within a certain segment of the population.” As I cite these authors, I’m fully willing to concede that there is literature out there that disagrees with their claims. The reading list I composed earlier lists some of those papers. In a future blog post, I will attempt a more detailed comparison of the methodologies employed in the different studies.
  3. If payday loans are useful, then limiting or eliminating the payday loan market will drive consumers to underground or black markets. This is not favorable, for reasons that should be self-evident.
  4. I think the most legitimate critique of payday loans is that it disadvantages the politically weak who have, for example, little access to legal recourse. If that’s the case, the better solution would be to reform the political/legal apparatus, rather than the payday loan market. Opponents can argue that this is less feasible, and they would be correct, but if the market is driven underground, then these people would have no legal recourse anyway.

My main concern now is the third. Those who seek to regulate payday loans toe a narrow line between tempering the market and hobbling it. Unfortunately, it looks as though the proposed reforms are poised to do the latter.

Nothing Worse Than Changing a Right Answer

I play in a fair amount of trivia night competitions — not as many as I used to before having children, but enough. Political history and sports history are my specialties. The team I generally play on just about always wins: eight out of 10 in the Boys Hope Girls Hope night (one of the biggest trivia events in St. Louis); five for five in the Soulard trivia night, which is coming up again in two weeks; three out of the past four Variety Club trivia nights (I think); dominated the past two MAC trivia nights; back in the ’90s, I played on the team that twice won the Mary Queen of Peace sports trivia nights, which is a really big event. So, even though I am not the top member of my own team (that honor goes to Bill, Tom, or Tara), I know trivia. And there is nothing worse in trivia than having the correct answer written down and then changing it to an incorrect answer. That is the stuff that stays with you for days — longer, if it costs you the win. So, why am I telling you this? Because that is exactly what I did in a recent op-ed.

I originally wrote that the Kansas City TIF commission consisted of 11 members, which was correct. That is the number I used when I spoke to the Kansas City Pachyderm Club last month about TIF. However, as we were getting ready to publish my op-ed on the subject, I came across minutes of the KC TIF commission that made it appear it had 12 members. (Go to items 4,5,6,7, and 8 of the report and start counting members in the various roll calls; they have different members depending on where the project is.) My major mistake was either failing to write down the info, or incorrectly filing it, when I was first told that the commission had 11 members. So, I could not find the info, assumed I screwed up, and went with the number that appeared the TIF minutes suggested in the original published draft of my op-ed about TIF in Kansas City. I didn’t realize that a consultant to the commission had been included in some of those roll calls, leading to my miscount. If I had read further, I would have found roll calls with numbers other than 12.

It really is not a big deal, and the fact that the KC TIF commission has a ratio of six KC members to only five members from other bodies (instead of six to six, the corrected figure) actually makes my point stronger, not weaker. But “An error doesn’t become a mistake until you refuse to correct it,” as John F. Kennedy once famously quoted Orlando Battista. So, I have corrected the piece online and over at the Missouri Record, which graciously ran the article for us in the first place. And I admit my mistake here, as well, for the whole world to see — and probably not care about at all …

I try to really get into the minutiae of government here for the Show-Me Institute. Because local governments are so different in Missouri than in other states, covering local governments entails risks. You can’t just be an expert on local government in general, you have to become an expert in every individual system. That is hard, and takes a great deal of work. But there is no excuse for making a mistake like that, and I pledge to work hard not to do it again.

Show-Me Institute’s New Web Tool Brings Economic Data to Your Fingertips

Today, the Show-Me Institute launched a new online tool that enables users to research economic aggregates, fiscal policy measures, and demographics across states and time. It’s called IDEAS: Interactive Database for Economic Analysis and Synthesis, and it incorporates the work of Laffer Associates.

Using the web tool, users can create their own charts and tables, and have access to a large comprehensive dataset. The data, formatted in a user-friendly way, includes:

  • Individual state tax burden profiles
  • A tool that allows the comparison of specific tax rates on items ranging from property to income to the glass of wine you may buy after hours.
  • A 50-state ranking tool that allows you to customize your comparison, based on the category being taxed or year (starting from 1977). In other words, compare taxes based on location, type, or time.

I encourage our readers to play with the site, and I hope that they find this information as valuable as I do.

New Results on the Earnings Tax – For a Different Question

In a recent Kansas City Star commentary, Saint Louis University economics professors Lisa Gladson and Jack Strauss criticized my Show-Me Institute study of the earnings tax, They claim that there is no statistically significant relationship between earnings taxes and the growth of metropolitan statistical areas (MSAs). They also imply that I made such a claim in my study. In fact, I made no such claim and these authors are mischaracterizing my study. The purpose of this note is to set the record straight on my research. I will here demonstrate that my findings are perfectly consistent with theirs.

Let me briefly review my empirical evidence. I looked at more than 100 MSAs in the United States. The dependent variable I studied was the ratio of aggregate income reported by the U.S. Census for each primary city in that MSA to the aggregate income for the entire MSA. Basically, I measured the size of the city economy relative to the suburban economy. I then estimated a regression in which the city-to-MSA income ratio was the dependent variable and the earnings tax rate was the independent variable. The result was a significant negative correlation; in other words, cities with higher earnings tax rates tend to have smaller economies relative to their suburbs than cities with lower earnings tax rates. This result held both when using the 1990 Census as the data source and the 2000 Census as the data source.

In the article, I argued that this empirical finding was entirely consistent with sophisticated models of business and household locations within local economies. My analysis was grounded in a widely cited paper by Haughwout and Inman (2001). In it, they analyzed a model economy in which people living in a city took the tax structure as given and made consequent location decisions. When dealing with aggregate economic data, even at the city level, economists do not have a laboratory to run their experiments. Facts are extracted from the data — these are the economists’ observations — and economic theory is employed to account for these facts. Other models exist, but the Haughwout and Inman model can account for the many empirical regularities observed in city growth around the country.

Professor Strauss took an alternative approach and asked a different question. He estimated a regression in which the dependent variable is the growth rate of income in an MSA. The growth rate was computed for the period 1969 through 2007. His regression uses at least two independent variables. One is a dummy variable set equal to one for an MSA in which the primary city has an earnings tax, and set equal to zero otherwise. The other independent variable is the income level for the MSA in 1969, the so-called initial income level. The basis for Prof Strauss’ inquiry was the notion of economic convergence. If the coefficient on the initial income level is negative and statistically significant, the evidence indicates that cities with higher initial income levels tend to grow slower than cities with lower initial income levels. The convergence hypothesis follows, because the evidence suggests that cities starting off poor tend to catch up to the initially richer cities. The convergence hypothesis has been applied to cross-country datasets, and is useful for explaining why Japan and Korea — and, more recently, China — grow so fast. The return to capital is higher in these poor countries, and provides an opportunity for them to catch up to those already-rich countries. The convergence hypothesis cannot explain why Sub-Saharan Africa remains so poor. For our purposes, it is not obvious why convergence should apply to MSAs, but I will blog about this lesson more fully in the future.

In Prof. Strauss’ results, the coefficient on the earnings tax dummy is not significantly different from zero after one includes the MSA’s initial income level as an explanatory variable. He concludes that the earnings tax does not explain economic growth. He interprets these findings as indicating that cities across the United States are catching up and not affected by earnings taxes. I would proffer a slightly different interpretation. Metro areas that started off with lower incomes in 1969 are, on average, catching up to cities that started off with higher incomes. His unit of measurement is the MSA, not the city. This is kind of interesting. At first pass, convergence can characterize MSAs across the United States. The more difficult part is why rural areas are not catching up. If convergence can be attributed to low capital in the low-income metro areas, then it seems that rural areas — ones with low capital accumulation — would catch up to high-income urban areas. For me, the nagging problem about the convergence hypothesis is that Rocheport should start looking like Columbia in terms of capital. But Rocheport’s economy does not look like the Columbia economy. Agglomeration, or increasing returns, probably has something to do with this. As I said, I will save this digression for a future blog.

I do not dispute Strauss’s findings; however, he did mischaracterize my research. He asked a different question than I did. I contend that my question is more relevant for the question of earnings taxes. People can avoid the earnings tax by eschewing the political jurisdiction in which the tax is implemented. Insofar as the suburban area is not a perfect substitute for the city area, economic efficiency is lost and the earnings tax is distorting people’s behavior.

Consider the following situation for illustrative purposes. Suppose there are two cities. In City A, the metro area’s income increased at a 1-percent annual rate between 1969 and 2007. However, all the businesses moved out of a city and into the suburbs in 2000. In City B, the metro area’s income increased at a 1-percent annual rate between 1969 and 2007. In both City A and City B, Prof. Strauss’ measure of income growth would be 1 percent. If I further told you that City A had a 1-percent earnings tax and City B had no earnings tax, then according to Prof. Strauss’ unit of measure — the growth rate of income in the MSA — would indicate no statistical relationship between the earnings tax dummy and the growth rate of MSA income.

In contrast, I estimate the regression for city income to MSA income in 2000 and find a negative relationship between the earnings tax rate and the city-to-MSA income. The purpose of this illustration is to point out that his results do not contradict mine. His findings do not render my interpretation of the evidence as faulty. He asked a different question and got a different answer. Thus, a reasonable person could walk away believing both results are accurately depicted. Because we have different units of measurement for the city economy, we are clearly asking (and answering) different questions.

My results were mischaracterized in the Kansas City Star’s recent op-ed by Prof. Strauss. My goal is to properly characterize both sets of results. I am sure that more “teachable” moments will be forthcoming. Let’s proceed with skepticism before we accept any economic interpretation of the results.

More Good News for Aviation in Missouri

Thanks to former intern (and current staff member) extraordinaire Audrey Spalding for finding this piece on aviation in Columbia. It seems that Delta Airlines is having enough success serving the Columbia market that it is foregoing a tax subsidy for which it is eligible. I am fascinated by the airline industry and its status as the quintessential oligopoly. (Please don’t take my link to the Consumer Federation report as an indicator that I am in total agreement; it is just an interesting viewpoint.) I also love the line from Up In The Air where George Clooney discusses the historic significance of Lambert Airport. But I digress. … 

It is exciting that the private commercial airport in Branson is expanding its operations; it is also exciting that at least some airline service in mid-Missouri can be operated at a profit without government support. Here is to hoping for much more of both!

If You Build a Good Business Environment, They Will Come

The Missouri Department of Economic Development has requested $343,697,083 for the 2011 fiscal year, which is equivalent to the combined total of requests from the Departments of Agriculture, Conservation, and Labor and Industrial Relations.

Some line items in the Department of Economic Development’s budget:

Expenditure FY 09 FY 10 Governor recommends ’11
Marketing $3,344,842 $4,414,229 $4,399,229
Sales $1,355,887 $1,535,333 $1,519,337
Finance $977,815 $1,194,556 $1,194,556

The stated purpose of this department is:

The Business and Community Services Division consists of the Missouri Economic Research and Information Center (MERIC), Marketing, Sales, Finance, and Compliance Teams. The division promotes Missouri as a great place to do business and helps create an environment that will stimulate jobs and new private investment. Other services include various programs aimed at investing in Missouri’s communities to allow for future sustainable growth and to increase opportunities for new local and state revenues.

The keys to Missouri’s recovery from the current economic recession are: 1) job creation and new capital investment through the retention and expansion of existing Missouri companies and the recruitment of new job opportunities; 2) the development of a skilled, motivated, and productive workforce; 3) support for the development of innovative and high tech next generation industries; and 4) leveraging state and federal funds for community development.

This department’s function is in line with suggestions floated in a St. Louis Post-Dispatch article series last week, titled “Can St. Louis compete? Time to act is now.” The first two points in the last article of the series were about attracting young, educated people to live in Saint Louis. It focused both on those who come here for school and those who have left to go to school elsewhere. The article suggested a publicity tour of sorts that would herald Saint Louis’ good characteristics to other cities, and might entice people to live here.

Attracting educated young people does not take a publicity campaign. Young people will come to Saint Louis — and stay here — if there are jobs. Jobs will come to Saint Louis if the area provides a good business environment, with low taxes and amenable employment structures. Show-Me Institute scholars have suggested policies that would make create a more business-friendly economic climate, like eliminating the earnings taxes in Saint Louis and Kansas City, or eliminating the income tax statewide. Respectively, eliminating those taxes would entail a 1- or 6-percent raise to employees — income that can then be spent on goods and services. Lowering tax rates in general (rather than targeting lower rates through the use of distortionary tax credits) would help attract businesses and jobs, and subsequently young educated people. (One additional benefit of lower tax rates is that it would not be necessary to fund million-dollar publicity programs.)

The publicity campaign has it backwards, attempting to bring young people to Saint Louis in order to attract more business. Bring the business and jobs to Saint Louis, and young people will want to stay.

News Article About Abuse of Unpaid Internships a Good Reason to Plug Our Paid Internships!

An interesting New York Times article carried in today’s Post-Dispatch discusses the growing issue (those who advocate greater government involvement in the economy would say “problem”) of unpaid internships. Basically, some people are accusing companies of hiring recent graduates for an internship and essentially employing them as unpaid laborers. The point is entirely moot for the Show-Me Institute, though, because, according to the article, nonprofits can have as many unpaid internships as we want. But that is also moot, because we have paid internships! And, given that we are now located in the city, interns even get to pay the earnings tax on on their internship salary!

Seriously, I used to be a Show-Me Institute intern, and this is a fun place to experience. I hope you’ll consider applying if an internship is something you are considering. Former and current interns, please blast away in the comments section! I am looking your way, Phil, Jacob, Calvin, Nick, Dan, Patrick, Steve, Clovis, Charis, Caitlin, Alyssa, Kristen, Audrey, Abhi, Maurice, Kathleen, Matt, and more.

P.S.: “I get the car!”

Exercising the Right to Keep and Bear Arms

According to the Second Amendment:

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

Last weekend, I took the basic class required by Missouri law to qualify for a concealed carry endorsement. The experience was really enjoyable and informative, and I encourage others to take the class, even if they do not intend on concealing a weapon. I learned about handgun safety, laws relating to firearms, marksmanship techniques, and many other topics.

The following is a photo of me taking the live fire test with the certified instructor. All I have left to do is visit a series of local government offices, and then I will hopefully have the permit.

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