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!

Rein in Tax Credits, Widen the Tax Base

Posted on by Christine Harbin

According to an AP article dated yesterday:

Education officials from across Missouri joined Gov. Jay Nixon’s call to rein in tax credits, asserting Wednesday that escalating incentives are diverting money from financially strapped schools and colleges. […]

Nixon, a Democrat who last year backed an expansion of state tax credits for businesses, now says tax incentives have grown so greatly that they are threatening other essential government functions. About $585 million of tax credits were redeemed last year — up 86 percent over the past decade, he said.

I realize that education officials are self-interested, but I agree with their assertion here that Missouri’s tax credit programs are funded at the expense of other programs. When tax revenue is spent on subsidizing select businesses and industries, taxpayers cannot spend that money elsewhere, such as on education; they face an opportunity cost that at least equals the amount of the tax credit.

Additionally, the state shouldn’t carve out sections of its tax base to reduce tax burdens for a select few, because those who remain in the tax base have to pick up the difference. By having a broad tax base, Missouri can assess a tax rate that’s lower and more equal for all taxpayers. This low-tax environment would attract new businesses and individuals to Missouri better than any selective tax credit program could. This would result in a steady stream of more reliable tax revenues, so government in Missouri would not have to struggle to pay for itself.

On Education Consolidation

Posted on by John Payne

The Missouri Senate has given initial approval for a proposal by Gov. Jay Nixon to consolidate the Department of Elementary and Secondary Education (DESE) and the Department of Higher Education. Approaching the issue purely as a matter of spending, this looks like an obvious move. With one department, some of the redundant agencies and services can be rolled into one capable of doing the same work for less money. However, the effect that such a change would have on educational outcomes is far more ambiguous.

Once they are a single department, the management styles of the old departments will influence each other. No doubt the influence will flow in both directions, but ultimately either higher education will end up looking more like elementary and secondary education, even if only on the margin, or vice versa. I hope it will be the latter, because higher education gives far more autonomy to individual schools, instructors, and ultimately students, which I believe is one of the reasons that — for all its problems — the American higher education system remains highly touted.

That said, I fear DESE’s influence will win out. It is the far larger department, with a 2010 appropriation of more than $5.4 billion compared to Higher Education’s $1.3 billion. This will probably mean far more micromanagement of college curricula and a greater emphasis on pedagogy compared to content. That’s simply how DESE officials think; they create a statewide standard to make classes nice and formulaic. If this plan is implemented, I fully expect that within a decade there will be state-mandated standards for common courses (e.g., western civilization, macroeconomics, chemistry, etc.) similar to the Class Level Expectations (CLEs) in high school classes. Missouri will have a “seamless” education system, as one legislator describes it, but at the expense of the independence of our public universities.

Missouri’s Green Tax Rebates a Wasteful Use of State Funds

Posted on by Christine Harbin

On April 19, Missouri began a weeklong program of providing $5.6 million in rebates and eliminating the state sales tax on Energy Star appliances. This is a wasteful use of state funds that also entails significant unintended consequences.

Instead of creating new economic activity, programs that offer rebates on specific products like appliances and cars merely distort the market. Such transactions would occur anyway, in the future, independent of a rebate in the present, because consumers naturally upgrade to new machines as their older models begin to wear down or break. Additionally, the promise of increased energy savings is already a significant incentive.

The intended environmental impact of such rebate programs is negated by the way they are usually constructed. The subsidy creates an incentive to destroy operational appliances and build new machines to replace them. This destroys wealth in the Missouri economy, because the resources used to create these new appliances could have been used elsewhere. Acquiring a more fuel-efficient new appliance could also encourage the purchaser to wash dishes and laundry more frequently than before, which means that the overall decrease in energy usage may be much smaller than anticipated — or could even increase. If usage does drop as a result of sanctioned purchases, however, the reduction in overall Missouri energy usage will still be minimal at best unless every Missouri resident purchases a new appliance during the week that rebates are offered.

As a negative unintended consequence of the program, Missouri will lose a significant amount of tax revenue, independent of and in addition to the $5.6 million rebate. First, the state loses sales tax revenue from new appliance purchases. Then, if households do use less energy, the state will lose out on utility tax revenue in the future.

Programs like Missouri’s green tax holiday illustrate the parable of the broken window by economist Frédéric Bastiat. When the government spends money on rebates, it cannot devote this money to other programs that could otherwise benefit, or return it to taxpayers who would spend it in any number of other ways. When the government uses taxpayer money to stimulate one part of the economy, it comes at the expense of those other sectors in the economy.

The tax holiday is undesirable on a fundamental level, as well. It reinforces the flawed idea that individuals should look to the government for approval of which products and services to buy and how to behave. By eliminating state sales taxes on only those appliances that have the Energy Star designation — the Environmental Protection Agency’s stamp of approval — the government favors certain products and behaviors over others. When seeking direction on their buying behavior, consumers would be better off if they consulted third-party sources, such as Consumer Reports, that aren’t as swayed by special interests.

The green sales tax holiday is a wasteful and inefficient program, and Missourians would be better off if the $5.6 million in rebates were either spent in a useful way or returned to taxpayers.

Christine Harbin is a research analyst with the Show-Me Institute, a Missouri-based think tank.

 

I Leap Head First Into Cosmetology School Licensing, and Come Out With a Fabulous Haircut

Posted on by David Stokes

Yesterday, I was invited to attend an informal meeting in Jefferson City between members and staff of the state’s Board of Cosmetology and Barber Examiners, several owners of cosmetology and barber colleges, and lobbyists for the state association of cosmetology schools. I was invited by John and Nancy Tirre, who own Current Trends Academy in St. Peters. They are the only people in attendance that I’ll name, out of an abundance of caution. The Tirres were concerned about the provisions in House Bill 2194, which would have further regulated an already heavily regulated industry: cosmetology and barber colleges. (Here is the bill summary.) There is no nice way for me to put this; the proposals in this bill are awful, and fundamentally anti-competitive and anti–free market. If you don’t agree with me, you probably feel that the government has a perfectly good reason to dictate via legislation that every new cosmetology school in Missouri must have at least nine instructors on staff before they can enroll even one student.

At the beginning of the meeting, the lobbyist for the cosmetology school association (of which the Tirres are members) told everyone that the bulk of HB 2194 will be pulled from consideration. This is excellent news. Next, he said that a new proposal would replace the deleted language with a simple two-year moratorium on any new cosmetology and barber schools opening in Missouri. This, of course, is an equally horrible idea.

After that, the meeting got down to business. One of the moratorium’s supporters, who owns three cosmetology schools in rural Missouri, stated that the primary problem the industry is dealing with is a lack of qualified instructors in colleges. He said that the moratorium — and the language that had been removed from the bill — are all just ways of dealing with that problem, and that the moratorium is designed so the industry can collectively propose solutions.

Many of you reading this will probably react exactly as I did, which is to say that if you don’t have enough instructors, then private colleges should offer a higher salary for instructors and the problem will solve itself — resulting in whatever equilibrium instructor allocation tends to be more efficient. The most basic economics tells you that shortages are best dealt with by increasing price. If you need more instructors at barber colleges, then offer to pay them more.

However — and this is where I wanted to tear my hair out, as I patiently sat there listening — it honestly took a half-hour of shortage discussion before anyone mentioned salaries. They went through the numbers of licensed instructors in Missouri in detail. There are 343 current instructors in Missouri. There are 279 people with active instructor licenses who do not teach. Finally, there are 364 people with inactive licenses who could very quickly and easily reactivate their licenses. So, there is a pool of 643 people who are trained to do this work but not doing it. Clearly, some of them would choose to again teach at cosmetology school is the salary offered were high enough. It should be noted that, in a related and worthy effort to increase the supply of instructors, the licensing qualifications for instructors were substantially pared down a few years ago. I am all for that, but if that strategy did not work by itself, another solution like raising salaries is a logical next step.

If the first half of the meeting might have been unsettling, the second half was inspiring. The arguments of those who favored the moratorium were strongly opposed by several of the other people in attendance. One member of the state board of cosmetology, who owns a school and would benefit from the moratorium, called it “selfish” and said that the industry had no right to stop someone who was trying to “fulfill a dream” by opening their own business. Another board member said similar things, and made it clear that she would oppose the proposal. The Tirres, too — who, as school owners, could also benefit from a moratorium — opposed it on principle. In the end, those present agreed not to move forward with proposing the moratorium, and it appears that all of the anti-competitive ideas in the bill are dead for now — hopefully, dead for a long time.

The discussion contained plenty of areas of positive agreement. I heard a number of great proposals on ways that the schools could work together to improve teacher recruitment, change their teaching methods to reach students who are a “new type of learner,” and more. There was discussion about the absurdity of parts of the current regulatory system, such as how a school can get in trouble if one of its instructors goes home sick, and a random state inspection comes later that same day to find the school temporarily short of the required 25-1 student-teacher ratio. It’s beyond me why tax documents would not suffice to demonstrate the correct number of instructors. (And I’m not overlooking the fact that a mandated 25-1 ratio is a dumb requirement in the first place, but they all seemed to think it is not a big deal.)

I did say my piece at the end of the meeting. I left feeling happy to have watched members of the board kill bad legislation. I readily admit that I don’t think cosmetology and barber practitioners and schools should be licensed at all, but it is worth my time and effort to help prevent bad rules from becoming even worse rules. It was great to see defenders of competition win out, at least for now.

Anyone reading this who was present at the meeting should feel free to use our comment section to claim credit for the above paraphrased quotes, expand on my opinions, or tell me how I am stupid.

Lesson From the Election: Examine Claims on Both Sides of Tax Issues

Posted on by Rik W. Hafer

This article first appeared in the St. Louis Beacon.

In the recent election, a surprising number of tax issues were passed by the voters. Perhaps the most discussed of these was Proposition A. Passage of Prop A raises sales taxes by a fraction of a dollar. Much of those new funds are earmarked to restore many public transportation services that were shut down because of budget shortfalls.

Reaction to the outcome was predictable. Tea Party sympathizers viewed the results with outrage, though they couldn’t seem to muster enough votes to defeat the proposition. Supporters claimed victory for the people, especially those who rely on subsidized public transportation for work or school. Both positions have some validity.

Public services like mass transit simply are not cost effective. If they were, a private firm would probably be offering the services. But that does not mean that they offer no public benefit. Numerous studies show that, for the poor, the disabled and the young public, transportation is a vital service for gainful employment. If there are few job opportunities in the inner city, how do those people get to the jobs in the county? At entry-level wages, making a 50-mile round trip by cab is prohibitively expensive.

The dialogue about Prop A revealed efforts at misinformation. One anti–Prop A pundit argued that if passage helps one family get to work but, because of the higher tax, five families are unable to meet their monthly mortgage payment, then on net it is harmful. That would be true if based on fact. While making a good sound bite, I seriously doubt that there is evidence to support such hyperbole.

Such exaggeration is not unique to this one tax issue. The ongoing debate over the Saint Louis city earnings tax is another example of an issue where misdirection should not guide policy.

Two analyses are being publicized in the swelling debate over the earnings tax. Several years ago, the Show-Me Institute published a study examining whether an earnings tax affects economic growth. The question asked was very specific: Does an earnings tax like that of Saint Louis city drive businesses to the surrounding area? In other words, does the tax diminish the economic growth of Saint Louis city relative to its neighboring cities and counties?

The analysis, conducted by Joseph Haslag, a professor of economics at the University of Missouri–Columbia, found that the answer is yes. His statistical analysis of more than 100 similar municipalities showed that having an earnings tax is likely to push businesses out of the taxed area into nearby untaxed municipalities. This finding helps explain the slow growth of Saint Louis city relative to the county.

But this conclusion was recently dismissed in a study conducted by Jack Strauss, director of the Simon Center for Regional Forecasting at Saint Louis University. Writing in the Kansas City Star, Strauss and his coauthor argue that earnings taxes have no negative effect on economic growth. Does this mean that cities like Saint Louis could increase the tax without limit and not face negative repercussions? That is absurd, but it is consistent with Strauss’ finding.

There is another, more subtle, reason to suspect the applicability of the Saint Louis University study as a foundation for tax policy by cities like Saint Louis. Strauss’ investigation essentially tests whether an earnings tax by a city located within a metropolitan area impacts the aggregate growth of the entire region. In other words, does the earnings tax in Saint Louis city affect the economic growth of the 15-county metropolitan area?

That is not the question addressed in the Show-Me Institute study.

Basic economic theory predicts that if the city significantly raised its earnings tax, businesses would likely move to nearby cities or counties within the metro area. If this is true, Saint Louis city loses economically — Haslag’s finding. But this scenario also explains Strauss’ findings: The economic impact of the city’s tax increase simply washes out across the region.

Simply put, Strauss’ study focuses on the wrong geographical area. Even so, his analysis will provide those who favor the city’s earnings tax with false support.

If the policy discussion is how to improve Saint Louis city’s future economic condition, let’s first get the facts straight. As we witnessed in the debate over Prop A, unfortunately facts lose to exaggeration when the topic is taxes.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

 

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