Is This the Beginning of the End for “Free”?

Posted on by David Stokes

A little-known website, Drudge Report, links to a few stories this morning with the same theme: Businesses in this economy are going to stop giving their products away. First of all, apparently NewsCorp is going to start charging for all of its news in the near future — online, and everything. I have no idea whether this will be good for its profit margin or condemn it to online irrelevancy. (We subscribe to the Wall Street Journal here at work, so I guess it won’t affect us too much.)

Somewhat more interesting is the decision by some coffee shops to force people who sit there all day to actually buy something. I have never had a cup of coffee, so I have not spent too much time in coffee shops. Nonetheless, during the little time I have spent in them, I have always been amazed at the people sitting there using the resources without paying anything (or paying barely anything). When I had my own small business in the ’90s, I tried not to do anything for free. I often gave extremely large discounts in certain situations (mostly for multiple legal papers being served at the same address), but I didn’t ever want to do anything for free. I certainly understand why some coffee shop owners no longer think its cute to have people taking up seats for hours without paying for anything.

This issue hits home because one of our favorite places to go after work here at the Show-Me Institute is C.J. Muggs in Clayton, where they set out excellent free appetizers during happy hour. They more than make back this loss from beer drinkers, but not everyone who works at the institute drinks alcohol. So, I wonder whether Muggs makes any money on the people who go there, buy a soda (they always pay for something), and then eat the free food? I have to guess that they make enough money off the beer drinkers to more than make up for a few people who just get a soda. But, if Muggs were to take away the free food, we would be really screwed.

Interstate Rail Project Would Bring High-Speed Spending

Posted on by Randal O'Toole

On June 17, the Federal Railroad Administration (FRA) asked states for proposals for spending the $8 billion of stimulus money that Congress allocated to high-speed rail. Which raises a question: Would you pay $1,000 so that someone — probably not you — can ride high-speed trains less than 60 miles per year? That’s what the FRA’s high-speed rail plan is going to cost: at least $90 billion, or $1,000 for every federal income taxpayer in the country.

That’s only the beginning. Count on adding $400 for cost overruns. Taxpayers will also have to cover operating losses: Amtrak currently loses $28 to $84 per passenger in most of its short-distance corridors.

The FRA plan also has huge gaps, such as Dallas to Houston, Jacksonville to Orlando, and the entire Rocky Mountains. Once states start building high-speed rail, expect local politicians to demand these gaps be filled at your expense. And don’t be surprised when the government asks for billions more in 30 years to rebuild what will then be a worn-out system.

What would we get for all this money? Unless you live in California or Florida, don’t expect superfast bullet trains. In Missouri and most of the rest of the country, the FRA is merely proposing to boost the top speeds of Amtrak trains from 79 miles per hour to 110 mph. A top speed of 110 mph means average speeds of only 60–70 mph, which is hardly revolutionary. Many American railroads were running trains that fast 70 years ago.

The pro-rail Center for Clean Air Policy predicts that, if the FRA’s system is completely built, it will carry Americans 20.6 billion passenger miles per year in 2025. That sounds like a lot, but, given predicted population growth, it is just 58 miles per person.

Missouri’s portion of the plan will cost at least $875 million, or nearly $150 for every Missouri resident, plus tens of millions more per year in operating subsidies. For that, the average Missourian will take a round trip on the train only once every six years. Most of the rest of your $1,000 will go to California, which wants to you to help pay for a costly bullet train. Even this train will do little to relieve congestion or save energy; mainly, it will just fatten the wallets of rail contractors.

Who will ride these trains? We can get an idea by comparing fares between New York and Washington, D.C. As of this writing, $99 will get you from Washington to New York in two hours and 50 minutes on Amtrak’s high-speed train, while $49 pays for a moderate-speed train ride that takes three hours and 15 minutes. Meanwhile, relatively unsubsidized and energy-efficient buses cost $20 for a four-hour-and-15-minute trip with leather seats and free Wi-Fi. Airfares start at $119 for a one-hour flight.

Who would pay five times the price to save less than 90 minutes? Those wealthy enough to value their time that highly would pay the extra $20 to take the plane. The train’s only advantage is for people going from downtown to downtown. Who works downtown? Bankers, lawyers, government officials, and other high-income people who hardly need subsidized transportation. Not only will you pay $1,000 for someone else to ride the train, but that someone probably earns more than you.

Nor is high-speed rail good for the environment. The Department of Energy says that, in intercity travel, automobiles are as energy-efficient as Amtrak, and that boosting Amtrak trains to higher speeds will make them less energy efficient and more polluting than driving.

An expensive rail system used mainly by a wealthy elite is not change we can believe in. Missouri should use its share of rail stimulus funds for safety improvements such as grade crossings, not for new trains that will obligate taxpayers to pay billions of dollars in additional subsidies.

Randal O’Toole is a senior fellow at the Cato Institute, and author of the Show-Me Institute study “Review of Kansas City Transit Plans.”

[Editor’s note: A portion of the sixth paragraph of this op-ed originally read, “the average Missourian will take a round trip on the train only once every 12 years.” The correct figure for Missouri is “once every six years.” We have corrected this in the interest of accuracy, and apologize for the oversight.]

 

Cash for Clunkers Clunks

Posted on by Caitlin Hartsell

Last week, government officials announced that the “Cash for Clunkers” program — which offers subsidies of up to $4,500 when trading in an old car for more environmentally friendly one — had been so successful that the funding allotted for it had run out. This seems to be a fairly typical government story: a seemingly great idea that lacks the necessary funding. The program’s proponents hail it as a way to reduce carbon footprints and to provide a boost for the economy. Both of these claims are exaggerated and, in some ways, entirely untrue.

According to a New York Times article:

Dealers estimated that they sold a quarter-million cars with the rebate money.

And the Transportation Department reported that the average gas mileage of the vehicles being bought was significantly higher than required to qualify for a rebate of $3,500 to $4,500. Of 120,000 rebate applications processed so far, the department said the average gas mileage of cars being bought was 28.3 miles per gallon, for S.U.V.’s, 21.9 miles per gallon, and for trucks, 16.3 miles per gallon.

Are these numbers worth $1 billion in taxpayer subsidy? Probably not. Are they worth the proposed additional funding of $2 billion? Definitely not. These mileage differences are pretty small. The environmental impact is negligible, especially considering that the subsidy leads to a perfectly good car being destroyed and new cars built to replace them. In a CNN article, Harvard economist Jeffrey A. Miron discussed the program’s unintended consequences, pointing out that trading in for more fuel-efficient cars might actually encourage more driving.

The other argument, that the subsidy stimulates the economy by aiding the auto industry, is an example of Frédéric Bastiat’s “broken window” fallacy, which can be explained by a short illustration: A boy broke a baker’s window, and the townspeople said, “Ah, but think of the business the glassmaker will get! It’s good for the economy.” So the baker spent $50 to buy a new pane of glass, which stimulates the glass industry. Had he not done that, though, he would have used that money to buy something else — a new suit from the tailor, perhaps — and he would still have had his window. Real economic growth doesn’t come from an artificial restriction of options, by prompting somebody to spend money on a window rather than on a suit. Similarly, when the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings. Tax cuts are a more effective way to drive economic growth and job creation.

At any rate, encouraging people to trade in a paid-off car to take on debt for a new car is a bad idea, as economic commentator Peter Schiff mentioned in a recent article:

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

This program bears a remarkable resemblance to many ill-fated home subsidy programs, in which people were encouraged to purchase houses they could not afford. Overall, Cash for Clunkers is a wasteful and expensive program that does not need a further subsidy. Missourians would be better served with corporate tax breaks that would help create new jobs instead of artificially aiding the auto industry.

How Do You Eat an Elephant?

Posted on by Sarah Brodsky

One bite at a time!

Little changes can add up. That’s why I enjoyed this Wall Street Journal article about small ways that the federal government has found to save money, adding up to a savings of $102 million. That’s enough to subsidize 68 bicycle races in the state of Missouri.

Critics point out that $100 million is a tiny fraction of the federal budget. They’re right that cutting costs in millions of dollars doesn’t have much effect on the inefficiency of government. It’s not enough — but it is the first step. A government that does nothing about obvious, easily avoidable inefficiencies certainly won’t cut back on the most entrenched programs.

And, although publicizing $100 million in savings with great fanfare may be a shameless PR move, I’d like to see more of this kind of PR from government. Usually, politicians highlight the number of people affected by government programs, or some equally invalid measure of success. Cost-cutting PR is a welcome change.

A savings of $100 million would be more meaningful at the state level. I hope the state of Missouri will follow the federal government’s lead on this and look for ways to save $100 million. If officials need ideas about which expenditures are nonessential, may I nominate the bicycle race?

America Does NOT Need a Public Service Academy

Posted on by Caitlin Hartsell

A classmate of mine at Wash. U., Melissa Goldberg, published an editorial in the Post-Dispatch last week titled “America needs a public service academy.” With just a quick, superficial glance at the proposal, one might think that this is a great idea. Its proponents want to create a school, similar to the military service academies, designed to promote public service skills and train a dedicated  bureaucracy. The article called for Missouri to host this school, citing politicians that have already given their blessing.

There are many things to take issue with, here — firstly, the comparison to military schools. Specialized training for the Air Force, Army, Navy and Coast Guard makes sense because they perform life-or-death tasks that require a specific level of discipline and set of skills. Many technical skills that need to be learned are not necessarily intuitive. Even then, training at these academies is not a prerequisite to being an officer; plenty of people who come from ROTC, or just normal universities and training programs, perform the same duties as the academy alumni.

If people really think a public service academy is necessary (and I don’t), a better plan might be to have a sort of public service ROTC. Goldberg argues that “mounting college debt and an uncertain economy” limit the number of candidates qualified to enter public service jobs. If that is true, perhaps a leadership program at a “regular” university, or experience in various types of campus leadership positions, would provide sufficient training. Another option for current schools to attract students to public service programs might be to offer debt forgiveness after a former graduate has spent a certain amount of time working in a public service profession. Many schools already offer this option for particular professions; most law schools will forgive debts if a lawyer works as a public defender for a certain amount of time (usually 10 years).

A centralized public service academy would be susceptible to the whims of politics and potential indoctrination. The possibility of an ideologically charged program churning groups of bureaucrats with specific politic belief systems (or even, one that accepted only those students who already adhere to such beliefs) should bring any American pause. Even if one argues that the university system already does this, the fact that a wide variety of schools exist to compete with each other tends to limit the scope of any overarching ideological bias. Why must a single public service school be given the official taxpayer stamp of approval?

The best leadership training entails actual experience with leading others, so school with a student body entirely composed of self-described leaders does not readily lend itself to this sort of practical opportunity in the way a “traditional” school might. In order to gain experience as a leader, one needs followers. Even Wash. U., which is the same size as the proposed academy — 5,000 students — has a plethora of leadership opportunities, from clubs to sports to student government. Establishing a dedicated school for public service would be redundant at best; leadership should be in the practicum, not the curriculum. At any rate, creating a permanent and entrenched bureaucracy from an early age is not something Americans should support, let alone fund.

Why waste at least $205 million of public money to create an unnecessary public service academy that would not provide a better experience than a normal university? A public service academy, while potentially well-intentioned, would be a bad idea for America.

Missouri Suffers From the Saint Louis and Kansas City Earnings Taxes

Posted on by Joseph Haslag

The Saint Louis and Kansas City earnings taxes, 1-percent income taxes imposed on those living or working within city limits, have consequences. People have ways of avoiding these taxes, and the single easiest way is through their mobility. Put another way, people choose where to work and what businesses to operate based on a variety of factors, including the taxes in competing political subdivisions. This location decision is particularly pertinent to both Kansas City and Saint Louis, because each one’s metropolitan area straddles a state line. In contrast to metro areas that lie in the center of the state, any tax avoidance in Missouri’s largest cities will have repercussions for the state coffers as well for Kansas’ and Illinois’ benefit. Thus, in addition to the losses in economic efficiency and total productivity that it brings, earnings taxes leave the state and municipal governments with a shrinking tax base and a commensurate decrease in tax revenue, affecting all Missourians.

It is undeniable that the Kansas side of the Kansas City metropolitan statistical area (MSA) and the Illinois side of the Saint Louis MSA are gaining on their Missouri counterparts. The former has made such substantial gains in the last several decades that Kansas City is approaching an even split between the two states in terms of population, retail sales, and total employment. During the last decade, Missouri’s share of total employment within the Kansas City MSA slipped down to 0.57 in 2006, from 0.59 in 1998. Put another way, Missouri would have had another 19,000 people working in our state if the employment ratio had stayed the same. While Missouri is still by far the dominant state in the Saint Louis MSA, Illinois also has gained relative to the Missouri side. The ratio of Missouri employment to total employment in the Saint Louis MSA has fallen during the last decade from 0.85 in 1998 to 0.84 in 2006, reducing Missouri’s employment by 9,500 workers. In both cities, evidence indicates that employment is seeping across state lines, taking with it opportunities for tax collection and revenue accumulation for the state of Missouri.

How much of this phenomenon can actually be attributed to the city earnings tax? Saint Louis and Kansas City are hardly the only earnings-tax-enforcing cities that are losing economic power from their base state. Cities such as Philadelphia, Pennsylvania, and Cincinnati have also seen losses in employment to neighboring states. In fact, from 1998 to 2006, every MSA that includes counties from two or more states, in which one enforces a city income tax, has seen a decline in the ratio of employment within the area subject to an earnings tax relative to total MSA employment, even while similar multistate MSAs without earning taxes have experienced, on average, a modest increase in that ratio during the same period.

An elimination of the earnings tax could have a real, quantifiable impact on the level of total employment retained by Missouri in its two largest metropolitan areas. According to our calculations, eliminating the earnings tax in Kansas City would increase the ratio of Missouri employment to total employment in that metropolitan area by over one-half of a percent, an increase of approximately 4,700 Missouri jobs. Such an injection of employment into the state of Missouri would represent an annual gain of nearly $134.5 million in total state earnings. This increase in earnings would impact the municipal and state tax coffers as well, infusing over $4 million in additional tax revenue into Missouri state and municipal governments.

Missouri would stand to gain even more from elimination of the Saint Louis earnings tax. Our calculations indicate such a change in tax policy would precipitate an increase of more than 6,500 Missouri jobs in the short run, along with nearly $157 million in additional earnings within the state of Missouri. Local governments within the Missouri side of the Saint Louis MSA stand to gain nearly $5 million dollars in supplemental tax revenue from these additional Missouri jobs alone.

Perhaps an even more salient point is that all of these figures forecast benefits for the state of Missouri and its citizens in the immediate future. If the long-term gains are nearly as substantial as the immediate gains appear to be, eliminating the earnings tax could be a paradigm-shifting change for the Kansas City and Saint Louis MSAs, and for Missouri in general. It could help stem the trend of economic activity shifting outside city limits, fleeing toward suburban and out-of-state destinations, and help preserve Missouri’s fading dominance in those areas.

The earnings tax is, even without the concerns raised here, an economic force that adversely affects the cities that levy it, their metropolitan areas, and the state. It discourages investment and cultivation in the urban core, often the part of a city with the most infrastructure and economic potential, thereby weakening the entire economic structure of a metropolitan area and a state as a whole. When these potential pitfalls are combined with increasingly appealing out-of-state commercial options, the earnings tax becomes a formidable enemy to the economic stability of a state like Missouri. It is time to consider whether the costs of the earnings tax are worthwhile. Would the citizens of Missouri be better served by a balanced playing field that allows Saint Louis and Kansas City to compete with surrounding suburban and out-of-state areas unencumbered by the economic distortions produced by the earnings tax? The economic vitality and fiscal solvency of their state may depend on it.

Joseph Haslag is executive vice president of the Show-Me Institute, a Missouri-based think tank, and a professor in economics at the University of Missouri–Columbia. Alex Schulte is an intern at the Show-Me Institute.

 

Benefits of Eliminating the Income Tax

Posted on by Abhi Sivasailam

The Sunday edition of the Columbia Daily Tribune featured an op-ed written by Dr. Joseph Haslag, Michael Owens, and Caitlin Hartsell of the Show-Me Institute.

The authors are concerned with public policy choices that can accelerate the growth rate of Missouri’s economy; they suggest that eliminating the income tax could be a positive first step.

Taking a broad view of tax structures in various states, the authors find that states with no personal income taxes traditionally grow faster than states that do levy taxes on income. The income tax–free Texas economy, for example, grew twice as fast as Missouri’s between 1995 and 2005:

Our calculations indicate Missouri’s real GDP would increase at a 2 percent annual rate if the state income tax were eliminated, as opposed to Missouri’s historic 1.3 percent growth. While a 0.7 percent increase in the growth rate might not sound like much, its impact would be significant for the next generation of Missourians. Indeed, Missouri’s real GDP gains would total $438.6 billion over this 25-year period, a substantial amount that would translate into more jobs and a higher standard of living.

The authors stress that though replacing revenue from an income tax would be a challenge, it is a worthwhile challenge for Missourians — the gains from reform in the tax system are too promising to be cast aside.

When Missourians evaluate the state’s tax climate, they should consider how Missouri stacks up to peer states. The Tax Foundation reports that Missouri’s 6% income tax is the 21st highest in the nation. This is one list that Missouri should not wish to climb.

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