Category Archives: Economics

Government intervention may produce unwanted incentives

A Kansas economic development incentive program has the potential to alter hiring practices for reasons not related to applicants’ job qualifications.

An economic development incentive program used in Kansas is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees. According to the Kansas Depart of Commerce, “PEAK is intended to encourage economic development in Kansas by incenting companies to relocate, locate or expand business operations and jobs in Kansas. The Secretary of Commerce has discretion to approve applications of qualified companies and determine the benefit period.” Many states have similar programs.

Flow of tax dollars under normal circumstances, and under PEAK.
Flow of tax dollars under normal circumstances, and under PEAK.
PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

There’s the catch. The more tax exemptions a person claims, the lower their taxes, and the lower their payroll withholding. Since PEAK is based directly on the amount of withholding taxes, if less is withheld from employee paychecks, the company receives fewer incentive dollars. In the example above, the single worker generates incentives payments 108 percent greater than does the married worker with two children.

The question is: Does this provide incentives for companies in the PEAK program to adjust their hiring preferences? Is there an incentive for companies in the PEAK program to hire single workers with no dependents, rather than married workers with children?

In theory, yes, the incentive exists. Whether it produces an effect in practice is probably impossible to tell. It does illustrate some of the perverse incentives that can arise from government intervention in the economy.

If government simply paid cash to companies in a fixed amount per worker, the bias in favor of single workers would not exist. But if government paid cash directly to companies, many people would object. When accomplished through the tax system, however, the transactions are less obvious, but the benefits and costs are just as real.

Either way, cronyism exists, especially because the Secretary of Commerce has discretion in the approval of applications to participate in PEAK.

Tax increment financing (TIF) resources

Resources on tax increment financing (TIF) districts.

Tax Increment Financing: A Tool for Local Economic Development. Richard F. Dye and David F. Merriman. Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

Wichita TIF projects: some background. Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.

The effects of tax increment financing on economic development. Richard F. Dye and David F. Merriman. Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) sequesters property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. We have constructed an extensive data set for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption. In contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth.

Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data. T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)

In the paper, the author clarifies:

“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF dis-tricts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.

Later on, for emphasis:

“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)

The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”

The Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government. Richard Briffault, University of Chicago Law Review, Winter 2010. “Tax increment financing (TIF) is the most widely used local government program for financing economic development in the United States, but the proliferation of TIF is puzzling. TIF was originally created to support urban renewal programs and was narrowly focused on addressing urban blight, yet now it is used in areas that are plainly unblighted. TIF brings in no outside money and provides no new revenue-raising authority. There is little clear evidence that TIF has done much to help the municipalities that use it, and it is also a source of intergovernmental tension and a site of conflict over the scope of public aid to the private sector.

Yet, the expansion of TIF makes sense in light of the basic structure of American local government law. Studying TIF can illuminate central features of our local government system. TIF succeeds — in the sense of its widespread adoption and use — because it, like local government more generally, is highly decentralized; reflects and reinforces the fiscalization of development policy; plays off the fragmentation of local governments and the resulting interlocal struggle for investment; and fits well with the entrepreneurial spirit characteristic of contemporary local economic development policy. A better understanding of TIF contributes to a better understanding of the political economy of American local government.”

Wichita should reject Bowllagio TIF district. Wichita should reject the formation of a harmful tax increment financing (TIF) district.

Wichita TIF: Taxpayer-funded benefits to political players. It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

Tax increment financing (TIF) and economic growth. There is clear and consistent evidence that municipalities that adopt tax increment financing, or TIF, grow more slowly after adoption than those that do not.

Does tax increment financing (TIF) deliver on its promise of jobs? When looking at the entire picture, the effect on employment of tax increment financing, or TIF districts, used for retail development is negative.

Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing. Randal O’Toole, Cato Institute. While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them. Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

TIF is not Free Money. Randal O’Toole. Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners. … Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. Paul F. Byrne. Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

Tax Increment Financing and Missouri: An Overview Of How TIF Impacts Local Jurisdictions. Paul F. Byrne. Tax Increment Financing (TIF) has become a common economic development tool throughout the United States. TIF takes the new taxes that a development generates and directs a portion of them to repay the costs of the project itself. … Supporters of TIF argue that it is a necessary tool for redevelopment in older communities. Detractors contend that it is used to simply subsidize development, and that variances in tax systems allow some governments to implement and benefit from TIF even if its use harms other levels of government. This study provides an overview of the history and basic structure of TIF. It then analyzes the basic tax components of a TIF plan and compares how various aspects, such as tax capture and tax competition, play out in the standard system of TIF. The study then reviews the economic literature on TIF, and ends with a direct application of how TIF operates within Missouri.

The Right Tool for the Job? An analysis of Tax Increment Financing. Heartland Institute. Tax Increment Financing (TIF) is an economic development tool that uses the expected growth (or increment) in property tax revenues from a designated geographic area of a municipality to finance bonds used to pay for goods and services calculated to spur growth in the TIF district. The analysis performed for this study found TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness. We recommend seeking alternatives to TIF and reforms to TIF that make the process more democratic and the distribution of benefits more fair to residents of TIF districts.

Giving Away the Store to Get a Store. Daniel McGraw, Reason. Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela’s can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises. … At a time when local governments’ efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth? David Swenson and Liesl Eathington. We found virtually no statistically meaningful economic, fiscal, and social correlates with this practice in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced — that the overall expected benefits do not exceed the public’s costs.

No More Secret Candy Store: A Grassroots Guide to Investigating Development Subsidies. From Good Jobs First, a comprehensive guide to researching state and local subsidies, economic development agencies, and companies.

Clawbacks illustrate difficulty of economic development

Politicians and government officials like clawbacks in economic development incentive agreements. But do these provisions have any negative aspects?

When business firms receive economic development incentives from government, the incentives may be given conditionally. That is, there may be benchmarks or conditions that the company has agreed to meet. These benchmarks are most commonly in the form of job counts or payroll value, and sometimes capital investment.

But what happens if the company does not meet the benchmarks? Some agreements have clawback provisions that come into play at this time. Sometime the company may be required to repay all or part of the value of incentives that were received. Or, perhaps the company will not be eligible to receive additional incentives that were planned.

Government officials like the idea of clawbacks. It lets them appear to be responsible in the awarding of incentives. Politicians and bureaucrats tell voters that government is looking out for them. If a company accepts incentives and doesn’t create every last job that was promised, by golly, the politicians say, we’re going to get back the taxpayers’ money for them.

Clawbacks can be useful. If a company fraudulently seeks and receives incentives, it’s good there’s a way to retrieve the money. More commonly, however, the clawbacks are to protect taxpayers in case the business plans do not work out as hoped, and the promised jobs are not delivered.

It’s understandable that taxpayers want to see clawbacks in place to protect their investment. We realize that politicians want to appear to be responsible with taxpayer funds. But there are several problems. When a company has not achieved its benchmarks, it is likely because the company is not performing well financially and economically. The company may not have the capacity to make the clawback payments. This recently happened in Wichita with a company that had received a forgivable loan. The company did not meet the required benchmarks, and was not able to repay the loan. The city is allowing them to make their clawback payments over time.

City diverted funds to Walmart projectSometimes government may choose not to enforce clawbacks that have been agreed to. In the case of a Wichita company that had received a property tax abatement but suffered a downtown in its business and was not able to meet the benchmarks, the city’s economic development director told the city council “I don’t think it would be productive at this time to further penalize them — as the market has already penalized them — by putting them back on the tax rolls at this time.” In another Wichita example, the city had a personal guarantee from a real estate developer to cover shortfalls in a tax increment financing district, But instead of holding the developer to the terms of the contract, the city issued a bailout. I estimated the cost to city taxpayers at about $30,000 per year, or $516,000 over the course of the loan.

These examples reveal a problem with clawbacks. Will struggling companies be able to pay the clawback? If a company is struggling financially and hasn’t met the benchmarks, aggressively pursuing clawback payments might be the factor that forces a company to shut down. That means fewer jobs. Would it be better to let the company retain its incentives and continue to operate, even though it hasn’t met the benchmarks? It is presumably providing some good, after all.

There’s also the consideration that if clawback provisions are too strict, will companies be discouraged from applying for incentives? A recent loan considered by the Sedgwick County Commission contemplated one or more of four different forms of security: a mortgage, a security agreement, a collateral assignment of life insurance, or a corporate guaranty.

friedman-spending-categories-2013-07The issue of clawbacks is a window into the difficulties of economic development incentives. Officials tell us they are making an investment in the community’s future. But it’s a transaction unlike any investment decision made in the private economy. For one, government officials are not spending and investing their own money (or shareholders’ money) for their own benefit (or shareholders’ benefit). Instead, they’re using someone else’s money, and spending it on still someone else. As Milton Friedman has noted, this is absolutely the worst way to spend money. (Click here for an explanation of the diagram.)

When negotiating clawback provisions, similar considerations apply. The government’s economic development officials are not negotiating over the security of their own investment. To them, it’s someone else’s money. They did not earn or raise it, and ultimately they are not responsible for it. But for the party across the table — the business firm — the transaction concerns their own money, and the motivations and responsibilities are very different.

Research on economic development incentives

As Wichita considers how to grow its economy, its reliance on targeted economic development incentives should be guided by research, not the grandstanding of politicians and bureaucrats.

symbols-going-upwardsHere’s a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view. “Peer-reviewed” means these studies were stripped of identification of authorship and then subjected to critique by other economists, and were able to pass that review.

Ambrosius (1989). National study of development incentives, 1969 — 1985.
Finding: No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective.

Trogan (1999). National study of state economic growth and development programs, 1979 — 1995.
Finding: General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).

Gabe and Kraybill (2002). 366 Ohio firms, 1993 — 1995.
Finding: Small reduction in employment by businesses which received Ohio’s tax incentives.

Fox and Murray (2004). Panel study of impacts of entry by 109 large firms in the 1980s.
Finding: No evidence of large firm impacts on local economy.

Edmiston (2004). Panel study of large firm entrance in Georgia, 1984 — 1998
Finding: Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.

Hicks (2004). Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties).
Finding: No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries.

LaFaive and Hicks (2005). Panel study of Michigan’s MEGA tax incentives, 1995 — 2004.
Finding: Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.

Hicks (2007a). Panel study of California’s EDA grants to Wal-Mart in the 1990s.
Finding: The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall.

Hicks (2007b). Panel study of entry by large retailer (Cabela’s).
Finding: No permanent employment increase across a quasi-experimental panel of all Cabela’s stores from 1998 to 2003.

(Based on Figure 8.1: Empirical Studies of Large Firm Impacts and Tax Incentive Efficacy, in Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, Russell S. Sobel, editor. Available here.)

In discussing this research, the authors of Unleashing Capitalism explained:

Two important empirical questions are at the heart of the debate over targeted tax incentives. The first is whether or not tax incentives actually influence firms’ location choices. The second, and perhaps more important question, is whether, in combination with firms’ location decisions, tax incentives actually lead to improved local economic performance.

We begin by noting that businesses do, in fact, seem to be responsive to state and local economic development incentives. … All of the aforementioned studies, which find business location decisions to be favorably influenced by targeted tax incentives, also conclude that the benefits to the communities that offered them were less than their costs.

References:

Ambrosius, Margery Marzahn. 1989. The Effectiveness of State Economic Development Policies: A Time-Series Analysis. Western Political Quarterly 42:283-300.
Trogen, Paul. Which Economic Development Policies Work: Determinants of State Per Capita Income. 1999. International Journal of Economic Development 1.3: 256-279.
Gabe, Todd M., and David S. Kraybill. 2002. The Effect of State Economic Development Incentives on Employment Growth of Establishments. Journal of Regional Science 42(4): 703-730.
Fox, William F., and Matthew Murray. 2004. Do Economic Effects Justify the Use of Fiscal Incentives? Southern Economic Journal 71(1): 78-92.
Edmiston, Kelly D. 2004. The Net Effects of Large Plant Locations and Expansions on County Employment. Journal of Regional Science 44(2): 289-319.
Hicks, Michael J. 2004. A Quasi-Experimental Estimate of the Impact of Casino Gambling on the Regional Economy. Proceedings of the 93rd Annual Meeting of the National Tax Association.
LeFaivre, Michael and Michael Hicks 2005. MEGA: A Retrospective Assessment. Michigan:Mackinac Center for Public Policy.
Hicks, Michael J. 2007a. The Local Economic Impact of Wal-Mart. New York: Cambria Press.
Hicks, Michael J. 2007b. A Quasi-Experimental Test of Large Retail Stores’ Impacts on Regional Labor Markets: The Case of Cabela’s Retail Outlets. Journal of Regional Analysis and Policy, 37 (2):116-122.

Corporate income tax rates in U.S. do not help our economy

Over the past two decades most large industrial countries have reduced their corporate income tax rates. Two countries, however, stand out from this trend: France and The United States.

In Abolish the Corporate Income Tax economist Laurence J. Kotlikoff writes “I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot.”

Top Marginal Corporate Income Tax Rate in G7 CountriesHigh taxes in America cause companies to invest overseas in order to escape these high American taxes. For example, Apple takes steps to minimize the income tax it pays, as do most companies. In Calculating Apple’s True U.S. Tax Rate law professor Victor Fleischer explains and estimates what rate Apple pays:

The whole point of the Senate hearing was to show how Apple shifts substantial amounts of its economic profits from the United States to Ireland, where they are taxed at a rate close to zero. Those profits are then sheltered in Ireland and untaxed unless Apple decides to bring the cash back to the United States.

These overseas profits create deferred tax liabilities that will not be taxed until the cash is repatriated. But Apple is reluctant to repatriate its overseas cash; it would rather lobby for another tax holiday and bring the cash back tax-free. An added benefit of a tax holiday for Apple is that it would provide a quick jump in reported earnings when the accounting entry for the deferred tax liability is reversed. …

Thus, Apple’s “true U.S. tax rate,” according to my own calculation, was 8.2 percent.

The corporate income tax rate in the United States is 35 percent. So how does Apple pay such a lower rate to the U.S? It locates operations overseas. It earns profits overseas, and pays taxes there.

Using the visualization.
Using the visualization.
If corporate tax rates were lowered, we’d see more economic activity here rather than overseas. That would help workers in America, as they can’t easily move their capital and investments overseas to take advantage of lower tax rates. But the wealthy — like Apple’s shareholders — can do that, and they have.

Using data gathered by Tax Policy Center at Brookings Institution, I’ve prepared an interactive visualization of corporate income tax rate trends over time. Click here to open the visualization in a new window.

Kansas ‘Green Book’ released

Kansas Policy Institute has published a book exploring the relationship between the size of government and economic growth.

Kansas Policy Institute Green Book 2014 coverTo introduce its book of economic statistics for Kansas and the nation, Kansas Policy Institute writes:

U.S. Supreme Court Justice Louis Brandeis saw states as “laboratories of democracy” conducting “experiments” in public policy. Today, more than eight decades after Brandeis coined the phrase, state experimentation with tax policy makes it abundantly clear that tax policy has a direct impact on economic growth. As shown on page 19, each of the eleven states that enacted an income tax since 1960 now has a smaller share of state GDP relative to the other 39 states and each one also has a smaller share of state and local tax revenue. That is a remarkable statistic; those eleven states enacted a new source of tax revenue and they lost revenue share to other states! To the contrary, states with low tax burdens and states without an income tax consistently outshine their higher-burden peers the on the key, tangible measures like private sector job, GDP, and wage growth. What’s more, citizens are taking notice and “voting with their feet” by flocking to low-burden states from higher-burden counterparts. Skeptics try to dismiss this definitive migratory trend by cherry-picking success stories like Texas and Florida and characterizing them as ‘’happy accidents” of favorable geography, climate, and/or resource abundance.

The book is available in pdf form here.

What is the evidence on taxes and growth?

… results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.

From Tax Foundation.

What is the evidence on taxes and growth?

By William McBride

The idea that taxes affect economic growth has become politically contentious and the subject of much debate in the press and among advocacy groups. That is in part because there are competing theories about what drives economic growth. Some subscribe to Keynesian, demand-side factors, others Neo-classical, supply-side factors, while yet others subscribe to some mixture of the two or something entirely unique. The facts, historical and geographical variation in key parameters for example, should shed light on the debate. However, the economy is sufficiently complex that virtually any theory can find some support in the data.

TaxFor instance, the Congressional Research Service (CRS) has found support for the theory that taxes have no effect on economic growth by looking at the U.S. experience since World War II and the dramatic variation in the statutory top marginal rate on individual income. They find the fastest economic growth occurred in the 1950s when the top rate was more than ninety percent. However, their study ignores the most basic problems with this sort of statistical analysis, including: the variation in the tax base to which the individual income tax applies; the variation in other taxes, particularly the corporate tax; the short-term versus long-term effects of tax policy; and reverse causality, whereby economic growth affects tax rates. These problems are all well known in the academic literature and have been dealt with in various ways, making the CRS study unpublishable in any peer-reviewed academic journal.

So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.

Continue reading at Tax Foundation.

Foundations of a Free Society

Described as “An introduction to the core principles that define a free society,” I highly recommend this short book. It’s written by Eamonn Butler of the Adam Smith Institute and published by Institute of Economic Affairs, a British think tank whose mission is to “improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.” (Being written in British English, a few words are spelled wrongly now and then.)

Eamonn Butler
Eamonn Butler
The book may be purchased or downloaded at no charge at Foundations of a Free Society. Here is the summary of the book, as provided by the author:

  • Freedom creates prosperity. It unleashes human talent, invention and innovation, creating wealth where none existed before. Societies that have embraced freedom have made themselves rich. Those that have not have remained poor.
  • People in a free society do not become rich by exploiting others, as the elites of less-free countries do. They cannot become rich by making others poorer. They become rich only by providing others with what they want and making other people’s lives better.
  • The chief beneficiaries of the economic dynamism of free societies are the poor. Free societies are economically more equal than non-free societies. The poor in the most-free societies enjoy luxuries that were undreamed of just a few years ago, luxuries available only to the ruling elites of non- free countries.
  • International trade gives entrepreneurs new market opportunities and has helped lift more than a billion people out of abject poverty in the last twenty years. Freedom is truly one of the most benign and productive forces in human history.
  • Attempts by governments to equalise wealth or income are counter-productive. They destroy the incentives for hard work and enterprise and discourage people from building up the capital that boosts the productivity of the whole society.
  • A free society is a spontaneous society. It builds up from the actions of individuals, following the rules that promote peaceful cooperation. It is not imposed from above by political authorities.
  • Government has a very limited role in a free society. It exists to prevent harm being done to its citizens by maintaining and enforcing justice. It does not try to impose material equality and it does not prohibit activities just because some people consider them disagreeable or offensive. Leaders cannot plunder citizens for their own benefit, grant favours to their friends, or use their power against their enemies.
  • The government of a free society is constrained by the rule of law. Its laws apply to everyone equally. There must be?due process of law in all cases, with fair trials and no lengthy detention without trial. People accused of offences must be treated as innocent until proved guilty, and individuals must not be harassed by being prosecuted several times for the same offence.
  • Tolerating other people’s ideas and lifestyles benefits society. Truth is not always obvious; it emerges in the battle of ideas. We cannot trust censors to suppress only wrong ideas. They may mistakenly suppress ideas and ways of acting that would greatly benefit society in the future.
  • Communications technology is making it more difficult for authoritarian governments to hide their actions from the rest of the world. As a result, more and more countries are opening up to trade and tourism, and new ideas are spreading. More people see the benefits of economic and social freedom, and are demanding them.

Commercial property taxes in Wichita are high

An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, March 2014″ and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. A pdf version of the table is available here.

A pdf version of this table is available.
A pdf version of this table is available; click here.
In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.

This means that commercial property pays 25 / 11.5 or 2.18 times the property tax rate as residential property. (The study reports a value of 2.263 for Wichita. The difference is likely due to the inclusion on utility property in their calculation.) The U.S. average is 1.716.

Whether higher assessment ratios on commercial property as compared to residential property is good public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.

For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.324 percent, while the national average is 1.508 percent. The results for a $300,000 property were similar.

Wichita commercial property tax rates compared to national average
Wichita commercial property tax rates compared to national average
Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,591 or 2.159 percent of the property value. For Wichita the corresponding values are $3,588 or 2.990 percent, ranking ninth from the top. Wichita property taxes for this scenario are 38.5 percent higher than the national average.

In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.

Labor unions have harmed our standard of living

This Labor Day, as progressives promote their protection and advancement of workers, let’s become aware of the harm that labor unions have caused. George Reisman summarizes:

Far from being responsible for improvements in the standard of living of the average worker, labor unions operate in more or less total ignorance of what actually raises the average worker’s standard of living. In consequence of their ignorance, they are responsible for artificial inequalities in wage rates, for unemployment, and for holding down real wages and the average worker’s standard of living. All of these destructive, antisocial consequences derive from the fact that while individuals increase the money they earn through increasing production and the overall supply of goods and services, thereby reducing prices and raising real wages throughout the economic system, labor unions increase the money paid to their members by exactly the opposite means. They reduce the supply and productivity of labor and so reduce the supply and raise the prices of the goods and services their members help to produce, thereby reducing real wages throughout the economic system.

The full article is Labor Unions Are Anti-Labor.

Employment in the states

There are dueling claims and controversy over employment figures in Kansas and our state’s performance relative to others. I present the actual data in tables and interactive visualizations that you can use to make up your own mind.

(Let’s keep in mind that jobs are not necessarily the best measure of economic growth and prosperity. Russell Roberts relates an anecdote: “The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren’t there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman’s response: ‘Then why not use spoons instead of shovels?'”)

It’s important to note there are two series of employment data provided by the U.S. Bureau of Labor Statistics, which is part of the U.S. Department of Labor. The two series don’t measure exactly the same thing. A document from BLS titled Employment from the BLS household and payroll surveys: summary of recent trends explains in brief: “The Bureau of Labor Statistics (BLS) has two monthly surveys that measure employment levels and trends: the Current Population Survey (CPS), also known as the household survey, and the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey. … These estimates differ because the surveys have distinct definitions of employment and distinct survey and estimation methods.”

Employment in the States, Year-Over-Year Change, Private Industries, Kansas Highlighted
Employment in the States, Year-Over-Year Change, Private Industries, Kansas Highlighted
Importantly, since the CES gets its data from employers, it reports on jobs located in the state where the company is located, not where workers live. Similarly, the CPS reports data based on where people live, not where they work. For areas that straddle state lines — like the Kansas City Metropolitan Area — this is an important factor.

Another BLS document explains in detail the differences between the CPS and CES data. For example: CES: “Designed to measure employment, hours, and earnings with significant industrial and geographic detail” CPS: “Designed to measure employment and unemployment with significant demographic detail.”

Another difference: CES: “Self-employed persons are excluded.” CPS: “Self-employed persons are included.” (See Understanding the employment measures from the CPS and CES survey.)

Employment Levels, Year-Over-Year Change, Kansas Highlighted
Employment Levels, Year-Over-Year Change, Kansas Highlighted
I’ve gathered data from BLS and made it available in two interactive visualizations. One presents CPS data; the other holds CES data. You can compare states, select a range of dates, and choose seasonally-adjusted or not seasonally-adjusted data. I’ve create a set that allows you to easily choose Kansas and our nearby states, since that seems to be relevant to the current discussion. (I included Texas in this set, as we often compare ourselves to that state.) The visualizations show indexed data, meaning that we see the relative change in values from the first date shown. There is also year-over-year changes illustrated.

Here is the visualization for Current Establishment Survey data, and here is visualization for Current Population Survey data.

Quarterly state GDP data released

A new series of GDP data shows government growing faster in Kansas than in most states, with private sector growth near the middle of the states.

From the Bureau of Economic Analysis (part of the U.S. Department of Commerce):

Today, the U.S. Bureau of Economic Analysis released prototype statistics of quarterly gross domestic product (GDP) by state for 2005–2013. These new statistics provide a more complete picture of economic growth across states that can be used with other regional data to gain a better understanding of regional economies as they evolve from quarter to quarter.

The new data provide a fuller description of the accelerations, decelerations, and turning points in economic growth at the state level, including key information about changes in the distribution of industrial infrastructure across states. These prototype statistics are released for evaluation and comment by data users.

I gathered data from this new series of data and present it in an interactive visualization. You may view the data in tabular form, or in charts that show cumulative growth, change from previous quarter, and change from previous year. You may choose to display one or more industries, and one or more states. Click here to use the visualization.

Growth of Quarterly Gross Domestic Product by State, Government, Kansas highlighted
Growth of Quarterly Gross Domestic Product by State, Government, Kansas highlighted
Growth of Quarterly Gross Domestic Product by State, Private Industries, Kansas highlighted
Growth of Quarterly Gross Domestic Product by State, Private Industries, Kansas highlighted

Charles Koch: How to really turn the economy around

Writing in USA Today, Charles Koch offers insight into why our economy is sluggish, and how to make a positive change.

Charles Koch: How to really turn the economy around

For years, Washington politicians have said that our economy is turning the corner. They said it in 2011, in 2013 and again last week — every time they report a quarter with 4% economic growth. But each time, the economy has turned sluggish again.

Like most Americans, I am deeply concerned about our weak economic recovery and its effects on millions of families. Opportunity, especially for the young and disadvantaged, is declining. High underemployment has become our new norm.

The effects of underemployment are not just economic, they are also social and psychological. Real work is an important part of how we define ourselves. Meaningful work benefits both us and others. Those who lack real jobs often end up depressed, addicted or aggressive.

Today, opportunities for such work are not what they should be. We need a different approach, focused less on politics and more on basic principles.

Continue reading at Charles Koch: How to really turn the economy around.

For Rep. Tiahrt, Cash for Clunkers was a good spending program

When the Obama Administration needed additional funds for the Cash for Clunkers program, Todd Tiahrt was agreeable to funding this wasteful program.

As summarized by the Congressional Research Service: “Makes emergency supplemental appropriations of $2 billion for FY2009 and FY2010 to the National Highway Traffic Safety Administration (NHTSA) of the Department of Transportation (DOT) for the Consumer Assistance to Recycle and Save Program (Cash for Clunkers Program).”

This bill passed the House of Representatives by a vote of 316 to 109. Among House Republicans, the vote was 78 to 95 in favor of passage. Todd Tiahrt was one of the minority of Republicans that voted for Cash for Clunkers.

(When this bill was voted on in the Senate, then-Senator and present Kansas Governor Sam Brownback voted in favor, and Pat Roberts voted against.)

"Cash for Clunkers - Death Row" by 293.xx.xxx.xx - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.
Cash for Clunkers – Death Row” by 293.xx.xxx.xxOwn work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.
You may remember the Cash for Clunkers program from 2009. An initiative of President Barack Obama, it paid subsidies to those who traded in their “clunker” for a new fuel-efficient car. The clunkers were destroyed and recycled. This is an example of a program that seems like a benefit for everyone. Take old fuel-wasting cars off the road and replace them with new cars. Save the environment and stimulate the economy, all at the same time. Some writers advocate programs like this as a way to reduce inequality of incomes.

But the Cash for Clunkers program has been widely and roundly criticized. Did it work as advertised? It all depends on the meaning of the word “work,” I suppose. To evaluate the program, we need to look at the marginal activity that was induced by the program. When we do, we find that the cost of moving the additional cars is astonishingly high.

An Edmunds.com article calculated the cost per car for the clunkers program in a different way than the government, and found this:

Nearly 690,000 vehicles were sold during the Cash for Clunkers program, officially known as the Car Allowance Rebate System (CARS), but Edmunds.com analysts indicate that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway. Analysts divided three billion dollars by 125,000 vehicles to arrive at the average $24,000 per vehicle sold. The average transaction price in August was $26,915 minus an average cash rebate of $1,667.

This is just the latest evidence that the clunkers program didn’t really increase the well-being of our country. Writing at the Foundation for Economic Education, Bruce Yandle doubts the glowing assessment of effectiveness of the program:

The doubt arises for at least three reasons. First, the program was supported politically primarily for its much touted environmental benefits. Carbon emissions would be reduced. But the reduction costs are at least ten times higher than alternate ways of removing carbon. Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth. A crushed clunker with a frozen engine is lost capital. … The cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables. The cost estimate was $237 per ton under best case conditions. The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries. Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it. … Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation. As Tony Liller, vice president for Goodwill, put it: “They’re crushing these cars, and they’re perfectly good. These are cars the poor need to buy.”

It’s very difficult for the government to intervene in the economy and produce a net positive result. Even if it could, the harmful effects of taking one person’s money and giving it to another so they can get a discount on a new car far outweigh the small economic benefit that might be realized.

Economic development incentives, at the margin

visualization-exampleThe evaluation of economic development incentives requires thinking at the margin, not the entirety.

When considering the effect of economic development incentives, cities like Wichita use a cost-benefit analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts, although these jurisdictions have no say over whether the incentive is granted, with a few exceptions. The basic idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a profit, too.

Economic activity generates tax revenue flowing to governmental agencies. When people work, they pay income taxes. When they buy stuff, they pay sales taxes. When they create new property or upgrade existing property, it is taxed.

In the calculation of cost-benefit ratios, when a company receives economic development incentives, government takes credit for the increase in tax revenue. Government often says that without the incentive, the company would not have located in Wichita. Or, it might not have expanded in Wichita. Or these days, it is claimed that incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.

But there are a few problems with the arguments that cities and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. What about all the companies that locate to or expand in Wichita without receiving incentives?

Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive that enabled a huge deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.

The importance of marginal thinking

Here’s an example of the importance of looking at marginal gains rather than the whole enchilada. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.

Wichita City HallThe important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity. For more, see Wichita new home tax rebate program: The analysis.

Tactics that hurt the economy

Wichita could innovate and gain attention by opting out of the harmful practice described in the following article.

How an oft-used economic development tactic may actually be hurting the economy

By J.D. Harrison, Washington Post

If you can’t build your own, steal someone else’s.

That, one economist notes, has become the default strategy for state and city governments in their pursuit of rapidly growing businesses, with many offering increasingly lucrative incentive packages to encourage employers to move to and create jobs in their districts.

However, that’s hardly the most sustainable method to promote the country’s economic growth — and there’s new evidence that it’s not particularly effective at a local level, either.

Continue reading at Washington Post.

Corporate income tax rates in U.S. are self-defeating

Over the past two decades most large industrial countries have reduced their corporate income tax rates. Two countries, however, stand out from this trend: France and The United States.

In Abolish the Corporate Income Tax economist Laurence J. Kotlikoff writes “I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot.”

Top Marginal Corporate Income Tax Rate in G7 CountriesHigh taxes in America cause companies to invest overseas in order to escape these high American taxes. For example, Apple takes steps to minimize the income tax it pays, as do most companies. In Calculating Apple’s True U.S. Tax Rate law professor Victor Fleischer explains and estimates what rate Apple pays:

The whole point of the Senate hearing was to show how Apple shifts substantial amounts of its economic profits from the United States to Ireland, where they are taxed at a rate close to zero. Those profits are then sheltered in Ireland and untaxed unless Apple decides to bring the cash back to the United States.

These overseas profits create deferred tax liabilities that will not be taxed until the cash is repatriated. But Apple is reluctant to repatriate its overseas cash; it would rather lobby for another tax holiday and bring the cash back tax-free. An added benefit of a tax holiday for Apple is that it would provide a quick jump in reported earnings when the accounting entry for the deferred tax liability is reversed. …

Thus, Apple’s “true U.S. tax rate,” according to my own calculation, was 8.2 percent.

The corporate income tax rate in the United States is 35 percent. So how does Apple pay such a lower rate to the U.S? It locates operations overseas. It earns profits overseas, and pays taxes there.

Using the visualization.
Using the visualization.
If corporate tax rates were lowered, we’d see more economic activity here rather than overseas. That would help workers in America, as they can’t easily move their capital and investments overseas to take advantage of lower tax rates. But the wealthy — like Apple’s shareholders — can do that, and they have.

Using data gathered by Tax Policy Center at Brookings Institution, I’ve prepared an interactive visualization of corporate income tax rate trends over time. Click here to open the visualization in a new window.

Let’s create something special and unique

Following, Sedgwick County Commissioner Karl Peterjohn explains something that the county could do to boost economic growth that doesn’t require government intervention, doesn’t need fleets of bureaucrats, reduces cronyism and corruption, increases economic freedom, respects property rights, reduces the power of government to control its subjects, and doesn’t give politicians opportunities to inflate their egos and boost their electoral prospects by being photographed at ground-breaking and ribbon-cutting ceremonies taking credit for spending your money on something you don’t want and which does not work to create jobs and prosperity. For these reasons — especially the latter — this won’t be popular with the political class.

I’ve gathered data from the property tax study that Peterjohn mentions and presented data specific to Wichita at Wichita property taxes compared. A version of this commentary appeared in the Wichtia Eagle.

Let’s create something special and unique

By Karl Peterjohn

This community as well as our country is still in an economic crisis. Our community needs a boost, or a comparative growth advantage. Creating a one (1) cent city sales tax in Wichita won’t create economic growth.

In fact, raising taxes would put our community on the same path trail blazed by many other communities across our country. That is the path to fiscal perdition: Detroit.

Sedgwick County Courthouse 2014-03-23This community can create a special and unique comparative advantage by eliminating one of the major disadvantages that this state in general, and Wichita and Sedgwick County face: high property taxes. The high property tax problem for Wichita was once again identified in a national study by the Lincoln Institute on Land Policy and the Minnesota Center for Fiscal Excellence’s, “50 State Property Tax Comparison Study,” issued in March. In this study it identified the fact that Wichita’s property tax on commercial property was 38% above the national average.

High taxes mean less economic growth. This is particularly true for property taxes.

The unique and special approach this community needs is instead of raising the sales tax to expand city spending, the focus should be on eliminating the county’s property tax. Currently the county imposes a 29.3 mill property tax county wide. This mill levy could be eliminated with about a 1.5 cent increase in the sales tax on a revenue neutral basis.

This type of property tax competitiveness would be beneficial on several levels. First, it would provide a unique selling proposition to help attract business to this county and Wichita.

Eliminating the county property tax would provide benefits to all property taxpayers and not just a select few getting special subsidies contained within the city’s sales tax hike plan. Eliminating the county’s property taxes would reduce most county taxpayers’ property tax bills by roughly 25 percent.

Let’s move away from the subsidy model whose odious examples include the failed Solyndra national subsidy boondoggle.

Instead of dangling subsides, which everyone else in the eco-devo game is doing, let’s try a unique incentive: Sedgwick County just eliminated its property tax! We should try this because it can work.

In 1995 Kansas eliminated its state unemployment tax because the fund had developed a large cash balance. This five year tax moratorium created a unique economic advantage for Kansas business. Within a couple of years, the Kansas economy enjoyed a substantial surge in economic growth. Kansas became a leader enjoying some of the fastest economic growth between 1997 to 1999. Eventually, the unemployment fund’s cash balance shrank. By 1999 the unemployment tax was restored. This unique tax advantage was eliminated.

As a county commissioner I am focused on creating a special advantage for everyone in Sedgwick County. Eliminating the county’s property tax is an idea whose time has come.

Government employee costs in the states

The states vary widely in levels of state government and local government employees and payroll costs, calculated on a per-person basis. Kansas ranks high in these costs, nationally and among nearby states.

Two states have annual payroll costs of over $4,000, calculated by taking the total payroll cost and dividing by population. Many states operate on little more than half that. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis. (This does not include federal government employees.)

When looking at a selection of nearby states, we see that only Nebraska has higher payroll costs for state and local government employees, when calculated on a per-person basis using the state’s population.

This data is from the U.S. Census Bureau for 2012, the most recent year available. Using Tableau Public, I created an interactive visualization. I show the full-time equivalent employees divided by the population for each state. Also, the annual payroll divided by population. (The Census Bureau supplies payroll data for only one month, the month of March, so I multiply by 12 to produce an approximation of annual payroll cost.)

Using the visualization: Sorting and selecting.
Using the visualization: Sorting and selecting.
There are two series of data, “Local government” and “State government.” The first series refers to the number of local government employees in each state, such as city and county employees. The second series refers to the number of state government employees in each state. Check boxes allow you to include either or both series in the chart.

By clicking on column headers or footers (“State,” “Annual payroll per person,” Full-time equivalent employees per person”) you can sort by these values.

Click here to open the visualization in a new window. Data is from United States Census Bureau, Government Employment & Payroll, released March 2014.

Krugman on solutions to health care

Following are excerpts from New York Times columns by economist and Nobel Laureate Paul Krugman. You may tweet your reaction to him at @NYTimeskrugman.

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system’s success provides a helpful corrective to anti-government ideology. For the government doesn’t just pay the bills in this system — it runs the hospitals and clinics.

No, I’m not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate. (Health Care Confidential, January 27, 2006)

“You see, we actually have a real live case of impressive cost control in health care: the VA system.” (Medicare and the VA, May 27, 2009)

What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform.

Many people still have an image of veterans’ health care based on the terrible state of the system two decades ago. Under the Clinton administration, however, the V.H.A. was overhauled, and achieved a remarkable combination of rising quality and successful cost control. Multiple surveys have found the V.H.A. providing better care than most Americans receive, even as the agency has held cost increases well below those facing Medicare and private insurers. Furthermore, the V.H.A. has led the way in cost-saving innovation, especially the use of electronic medical records.

What’s behind this success? Crucially, the V.H.A. is an integrated system, which provides health care as well as paying for it. So it’s free from the perverse incentives created when doctors and hospitals profit from expensive tests and procedures, whether or not those procedures actually make medical sense. And because V.H.A. patients are in it for the long term, the agency has a stronger incentive to invest in prevention than private insurers, many of whose customers move on after a few years. (Vouchers for Veterans, November 13, 2011)

What is the record of economic development incentives?

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well.

Money GrabberJudging the effectiveness of economic development incentives requires looking for the unseen effects as well as what is easily seen. It’s easy to see the groundbreaking and ribbon cutting ceremonies that commemorate government intervention — politicians and bureaucrats are drawn to them, and will spend taxpayer funds to make sure you’re aware. It’s more difficult to see that the harm that government intervention causes.

That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. A few quotes from the study, with emphasis added:

Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

Following is the full paper, or click here.

End the wind production tax credit

wind-power-turbine-closeupU.S. Representative Mike Pompeo, a Republican who represents the Kansas fourth district, and U.S. Senator Lamar Alexander in 2012 contributed the following article on the harm of the wind power production tax credit (PTC). The NorthBridge Group report referenced in the article is available at Negative electricity prices and the production tax credit. While the PTC is a federal issue, the Kansas Legislature could do taxpayers in Kansas and across the country a favor by ending the mandate to produce more of this taxpayer-subsidized power.

Puff, the Magic Drag on the Economy
Time to let the pernicious production tax credit for wind power blow away

By Lamar Alexander And Mike Pompeo

As Congress works to reduce spending and avert a debt crisis, lawmakers will have to decide which government projects are truly national priorities, and which are wasteful. A prime example of the latter is the production tax credit for wind power. It is set to expire on Dec. 31 — but may be extended yet again, for the seventh time.

This special provision in the tax code was first enacted in 1992 as a temporary subsidy to enable a struggling industry to become competitive. Today the provision provides a credit against taxes of $22 per megawatt hour of wind energy generated.

From 2009 to 2013, federal revenues lost to wind-power developers are estimated to be $14 billion — $6 billion from the production tax credit, plus $8 billion courtesy of an alternative-energy subsidy in the stimulus package — according to the Joint Committee on Taxation and the Treasury Department. If Congress were to extend the production tax credit, it would mean an additional $12 billion cost to taxpayers over the next 10 years.

There are many reasons to let this giveaway expire, including wind energy’s inherent unreliability and its inability to stand on its own two feet after 20 years. But one of the most compelling reasons is provided in a study released Sept. 14 by the NorthBridge Group, an energy consultancy. The study discusses a government-created economic distortion called “negative pricing.”

This is how it works. Coal- and nuclear-fired plants provide a reliable supply of electricity when the demand is high, as on a hot summer day. They generate at lower levels when the demand is low, such as at night.

But wind producers collect a tax credit for every kilowatt hour they generate, whether utilities need the electricity or not. If the wind is blowing, they keep cranking the windmills.

Why? The NorthBridge Group’s report (“Negative Electricity Prices and the Production Tax Credit”) finds that government largess is so great that wind producers can actually pay the electrical grid to take their power when demand is low and still turn a profit by collecting the credit — and they are increasingly doing so. The wind pretax subsidy is actually higher than the average price for electricity in many of the wholesale markets tracked by the Energy Information Administration.

This practice drives the price of electricity down in the short run. Wind-energy supporters say that’s a good thing. But it is hazardous to the economy’s health in the long run.

Temporarily lower energy prices driven by wind-power’s negative pricing will cripple clean-coal and nuclear-power companies. But running coal and nuclear out of business is not good for the U.S. economy. There is no way a country like this one — which uses 20% to 25% of all the electricity in the world — can operate with generators that turn only when the wind blows.

The Obama administration and other advocates of wind power argue that the subsidy provided by the tax credit allows the wind industry to sustain American jobs. But they are jobs that exist only because of the subsidy. Keeping a weak technology alive that can’t make it on its own won’t create nearly as many jobs as the private sector could create if it had the kind of low-cost, reliable, clean electricity that wind power simply can’t generate.

While the cost of renewable energy has declined over the years, it is still far more expensive than conventional sources. And even the administration’s secretary of energy, Steven Chu, calls wind “a mature technology,” which should mean it is sufficiently advanced to compete in a free market without government subsidies. If wind power cannot compete on its own after 20 years without costly special privileges, it never will.

The Reagan legacy on spending

As time passes, it may be possible for widespread critical evaluation of Ronald Reagan, both the good things he did, and the bad. Nick Gillespie of Reason reports some facts about the Reagan record and on Senator Rand Paul’s speaking accurately about it, concluding: “Take on Reagan’s legacy and you’re playing with fire. Especially if you’re right about Reagan’s terrible record on spending, which Rand Paul absolutely is.”

After trimming some programs early in his presidency, Reagan came around to pushing massive increases on just about everything, including education (a newly formed federal department he promised to kill upon taking office), Medicare (which he had denounced as “socialized medicine” in the early 1960s), and Social Security (before championing massive hikes in payroll taxes in his second term, he had once called for making Social Security voluntary).

In many ways, Reagan’s late-life embrace of old-age entitlements may have been his worst spending legacy. Created to address very different times and a very different workforce, Social Security and Medicare were in dire straits by the 1980s and had Reagan tried, he might have been able to replace these fundamentally unsustainable and unfair transfer programs into more effective and lower-cost safety net programs. Instead he called saving Social Security and Medicare—a feat accomplished through massive increases in FICA rates—”the highest priority of my administration.” By the end of his presidency, the combined employee-employer rate was 15 percent, up from 9.35 percent in 1981 (and more income was subjected to Social Security tax to boot).

As I argued the other day at The Daily Beast, Reagan is the “Godfather of Groupon Government,” of huge and ongoing discounts to current taxpayers. Just as Groupon makes purchases more attractive by offering major price breaks, Groupon Goverment makes government goods and services more attractive by charging taxpayers much less than the retail price.

The full story is Rand Paul Is Right: Carter Was Thriftier Than Reagan.

Maine economic development incentive programs questioned

The State of Maine has examined its economic development incentive programs and found them to be a bad deal for taxpayers. The document that the following editorial is based on is Comprehensive Evaluation Of Maine’s Economic Development Incentive Programs. The editorial’s takeaway, which is embarassing to Kansas, follows:

In addition, nationwide research suggests that state incentives play a relatively minor role in attracting investment. Instead, many companies see negotiations for state incentives as a way to maximize profits for shareholders after other, more important criteria has been weighed and a location selected.

Often these negotiations pit location against location to get the best deal. In one such illustrative instance, The New York Times notes in a piece about corporate incentives, AMC Entertainment was lured by a $36 million incentive package to move just a few miles, from Missouri to Kansas.

In that case, and others like it, no new jobs are created and no new economic activity is generated. The company simply gets another tax break, paid for by taxpayers in Kansas at the same time the state is making cuts to its education budget.

Read more at OUR OPINION: Are business incentives worth cost to taxpayers? State needs a way to determine whether we are getting a good return on investments.

Kauffman paper on local business incentive programs

Do Local Business Incentive Programs Really Create Jobs? Better Data Needed to Know for Sure, Says New Kauffman Paper

Kansas City, Mo. (PRWEB) April 17, 2014

Financial incentives are a key strategy for nearly every U.S. city and state to attract firms, and jobs, to their area. But while incentives can be credited with attracting firms to one region or another, how can we be sure they are generating the promised returns in terms of job creation?

The paper “Evaluating Firm-Specific Location Incentives: An Application to the Kansas PEAK Program,” released today by the Ewing Marion Kauffman Foundation introduces a proposed evaluation method and applies it to Promoting Employment Across Kansas (PEAK), one of that state’s primary incentive programs.

In the paper, researcher Nathan Jensen, associate professor of political science at Washington University in St. Louis, identifies a need for more comprehensive data to determine the effectiveness of incentive programs in creating jobs. Currently, states and cities provide limited data about companies receiving incentives, and many don’t keep information about firms that apply for incentives but don’t receive them.

“The data most often used to evaluate incentive programs tells only one part of one side of the story,” Jensen said. “To understand how much job creation can be directly attributed to incentives, and how much would have happened anyway, we need to pursue more granular data that provides better context.”

The proposed evaluation model, as applied to the PEAK program, uses National Establishment Time Series (NETS) data to capture employment and sales data for PEAK and non-PEAK firms in Kansas. To accurately assess results, the identified PEAK firms are compared to a control group of five “nearest neighbors,” firms similar in structure and sector to the PEAK firms.

Jensen cautioned that better access to more detailed data is necessary to make conclusive evaluations, but said the model highlights the need to reform the collection, management and sharing of data about incentive programs and recipients.

“Greater transparency and public sharing of data will allow much more sophisticated analysis of these programs’ value,” said Dane Stangler, Kauffman Foundation vice president of Research and Policy. “Understanding what types of incentives work, and how well they work, will help our cities and states make smart investments in programs that create jobs and drive economic growth.”

About the Kauffman Foundation

The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that aims to foster economic independence by advancing educational achievement and entrepreneurial success. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo., and has approximately $2 billion in assets. For more information, visit www.kauffman.org, and follow the Foundation on www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.

Competition in markets

children-arm-wrestling-beach-176645_1280Competition must surely be one of the most misunderstood concepts. As applied to economics, government, and markets, the benefits of competition are not understood and valued.

Usually when people think of competition they think of words like hostile, cut-throat, or dog-eat-dog. They may reference the phrase “survival of the fittest,” making analogies to the law of the jungle. There, competition is brutal. The winners kill and eat the losers. Or, they may refer to games or sporting events, where a competition is created specifically to produce a winner and a loser.

But as David Boaz of the Cato Institute explains in his essay Competition and Cooperation, it’s different in markets. There, as Boaz explains, people compete in order to cooperate with others, not defeat them:

The competitive process allows for constant testing, experimenting, and adapting in response to changing situations. It keeps businesses constantly on their toes to serve consumers. Both analytically and empirically, we can see that competitive systems produce better results than centralized or monopoly systems. That’s why, in books, newspaper articles, and television appearances, advocates of free markets stress the importance of the competitive marketplace and oppose restrictions on competition.

We often see people plead for cooperation, as being preferred over competition: “Can’t we all get along?” But Boaz says this: “What needs to be made clear is that those who say that human beings ‘are made for cooperation, not competition’ fail to recognize that the market is cooperation. Indeed, as discussed below, it is people competing to cooperate.”

Boaz says that cooperation is so essential to human flourishing that we don’t just want to talk about it; we want to create social institutions that make it possible. That is what property rights, limited government, and the rule of law are all about.

If we didn’t have well-defined property rights and rule of law, we would be continually fighting — competing, that is — over property and who owns it. Boaz says “It is our agreement on property rights that allows us to undertake the complex social tasks of cooperation and coordination by which we achieve our purposes.”

Cooperation and coordination in markets is what has allowed us to progress beyond the simple societies where each person has only what he himself produces, or what he can trade for with those in his immediate surroundings. Maybe it would be wonderful if this cooperation and coordination could be accomplished through benevolence, that is, by people doing good simply for good’s sake. Sort of like “From each according to his abilities, to each according to his needs.” During the last century we saw how political systems based on that philosophy worked out.

Human nature isn’t always benevolent. People are self-interested. They want more for themselves. In economies where property rights are respected and protected, the only legitimate way to get more stuff for yourself is by trading with others. You figure out what other people want, you produce it, and give it to them in exchange for what you want. And if you can figure out what people really want, that is, what they’re willing to trade a lot of their stuff in order to obtain, you can prosper. And since the trading is voluntary, both parties to the trade are better off.

In Adam Smith’s lasting imagery over two centuries ago: “By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Figuring out what others place high value on and providing it to them — and doing that better than someone else — is what competition in markets is about. As Boaz said, it is “people competing to cooperate.” When you generate success in this way, rather than by stealing from others, we all benefit. We experience what Boaz and others call the “civil society.” We cooperate with others to get what we want, instead of beating them over the head and stealing from them. Our desire for more stuff, coupled with property rights and rule of law, means that we compete to make others’ lives better, so that in turn our own lives can be better.

Who knows best what people should have? Each person knows best for themselves, of course. People place different values on things, but it each person who knows best what he values, and how much he values it.

That’s the way voluntary markets work. But government and politics works differently. Here’s what Milton Friedman had to say on this topic: “[The political system] tends to give undue political power to small groups that have highly concentrated interests; to give greater weight to obvious, direct and immediate effects of government action than to possibly more important but concealed, indirect and delayed effects; to set in motion a process that sacrifices the general interest to serve special interests rather than the other way around. There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith’s invisible hand.”

So the benefits of market competition and cooperation are turned around and perverted in government and politics. There are many examples of this. Currently in Kansas we have a vivid example unfolding. The Blob — that’s the public school establishment — doesn’t want to allow competition, at least not competition using taxpayer funds in the form of charter schools, vouchers, or tax credit scholarships. It doesn’t want existing teachers to face competition from professionals who haven’t spent years earning a teaching degree and obtained a license.

Instead of the values of civil society, where people compete to cooperate with others in order to accomplish their goals, our public schools operate under a different system. Politicians and courts will tell us how much to spend on schools, and will pass laws to seize payment from people. Bureaucrats will tell us what schools will teach, and how they will teach it. If parents don’t like what government provides, they’re free to send their children somewhere else. But they still must pay for a product they’ve determined they have no use for.

The benefit of market competition, that is, the “constant testing, experimenting, and adapting” that Boaz writes about, is missing from government-run schools. Instead, the centralized monopoly of public schools plods along. We place all our eggs in the No Child Left Behind basket. That law is now considered by nearly everyone as a failure. So we attempt to impose another centralized, monopolistic system: the Common Core Standards.

Instead of peacefully and happily competing to cooperate in the education of Kansas schoolchildren, there is vitriol. Extreme vitriol, I would say. No one seems happy with the system. Great effort is spent fighting — jungle competition, we might say, rather than cooperating. And for some crazy reason, we use this system for many other things, too.

For more on this topic, see Competition and Cooperation: Two sides of the same coin by Steven Horwitz.

Rich States, Poor States for 2014 released

In the 2014 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and fell in the forward-looking forecast.

Rich States, Poor States is produced by American Legislative Exchange Council. The authors are economist Dr. Arthur B. Laffer, former Wall Street Journal senior economics writer (now Heritage Foundation Chief Economist) Stephen Moore, and Jonathan Williams, director of the ALEC Center for State Fiscal Reform.

Rich States, Poor States computes two measures for each state. The first is the Economic Performance Ranking, described as “a backward-looking measure based on a state’s performance on three important variables: State Gross Domestic Product, Absolute Domestic Migration, and Non-Farm Payroll Employment — all of which are highly influenced by state policy.” The process looks at the past ten years.

Looking forward, there is the Economic Outlook Ranking, “a forecast based on a state’s current standing in 15 state policy variables. Each of these factors is influenced directly by state lawmakers through the legislative process. Generally speaking, states that spend less — especially on income transfer programs, and states that tax less — particularly on productive activities such as working or investing — experience higher growth rates than states that tax and spend more.”

For economic performance this year, Kansas is thirty-second. That’s up three spots from last year.

In this year’s compilation for economic outlook, Kansas ranks fifteenth. That’s down four spots from last year.

Kansas compared to other states

Economic Outlook Ranking for Kansas and selected states.
Economic Outlook Ranking for Kansas and selected states.
A nearby chart shows the Economic Outlook Ranking for Kansas and some nearby states, shown as a trend over time. The jump of Kansas in 2013 is evident, as is the fall of Missouri.

Why Kansas fell

Kansas fell four spots in the Economic Outlook Ranking from 2013 t0 2014. To investigate why, I gathered data for Kansas from 2013 and present it along with the 2014 values. There are three areas that may account for the difference, One value, “Top Marginal Corporate Income Tax Rate,” did not change from 2013 to 2014, remaining at 7.00%. But the ranking for Kansas fell from 24 to 26, meaning that other states improved in this measure.

Economic Outlook Ranking components for Kansas, 2013 and 2014 compared.
Economic Outlook Ranking components for Kansas, 2013 and 2014 compared.

For “Personal Income Tax Progressivity (change in tax liability per $1,000 of Income)” Kansas fell two positions in rank.

In “Sales Tax Burden” Kansas also fell two spots in rank. The burden is calculated proportional to personal income. The most recent data for these measures is for 2011, so this does not include the sales tax rate change that took place on July 1, 2013.

Kansas improved three rank positions for “Debt Service as a Share of Tax Revenue.” This data is from 2011.

Important conclusions

According to the authors of the report, there are three main conclusions to be drawn from this research:

States with lower taxes and fiscally responsible policies experience far more economic growth, job creation, and domestic in-migration than their high-tax, big government counterparts.

States are looking to become more competitive and embrace the policies that have been proven to lead to economic prosperity. Last year, 17 states substantially cut taxes, with Indiana, North Carolina, and Michigan leading the charge to vastly improve their overall economic outlooks.

California, Illinois, and New York — once economic powerhouses — continue their long slides into deeper economic malaise. While levels of economic output for these states remain high, rates of economic growth are falling behind states like Texas, North Carolina, and Utah.

How valuable is the ranking?

Correlation of ALEC-Laffer state policy ranks and state economic performance
Correlation of ALEC-Laffer state policy ranks and state economic performance
After the 2012 rankings were computed. ALEC looked retrospectively at rankings compared to actual performance. The nearby chart shows the correlation of ALEC-Laffer state policy ranks and state economic performance. In its discussion, ALEC concluded:

There is a distinctly positive relationship between the Rich States, Poor States’ economic outlook rankings and current and subsequent state economic health.

The formal correlation is not perfect (i.e., it is not equal to 100 percent) because there are other factors that affect a state’s economic prospects. All economists would concede this obvious point. However, the ALEC-Laffer rankings alone have a 25 to 40 percent correlation with state performance rankings. This is a very high percentage for a single variable considering the multiplicity of idiosyncratic factors that affect growth in each state — resource endowments, access to transportation, ports and other marketplaces, etc.

State financial data, an interactive presentation

Photograph by the U.S. Census Bureau, Public Information Office (PIO).
Photograph by the U.S. Census Bureau, Public Information Office (PIO).
The United States Census Bureau collects data from the states about their finances. I’ve gathered selected financial statistics and made them available in an interactive visualization.

Because states vary so widely in population, I’ve presented the data as per-person figures. That presents its own challenges. For example, each state has only one governor, no matter how large or small its population. Therefore, the cost of having a governor can be spread among a very large number of people in California, but across a much smaller number of people in Wyoming.

Using the visualization: Sorting and selecting.
Using the visualization: Sorting and selecting.
In the visualization you may chose which states to display. Also, by clicking on row titles you can sort the states by the values in that row. This lets you see which states collect a lot of tax, or do a lot of spending.

Use the visualization below, or click here to open it in a new window, which may work best. Data is from United States Census Bureau, 2012 Annual Survey of State Government Finances.

State and local government employment levels vary

workers-gearsThe states vary widely in levels of state government and local government employees, calculated on a per-person basis.

Two states have annual payroll costs per person of over $4,000, while many states operate on little more than half that. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis. (This does not include federal government employees working in Kansas.)

I gathered data from the U.S. Census Bureau for 2012, the most recent year available. Using Tableau Public, I created an interactive visualization. I show the full-time equivalent employees divided by the population for each state. Also, the annual payroll divided by population. (The Census Bureau supplies payroll data for only one month, the month of March, so I multiply by 12 to produce an approximation of annual payroll cost.)

Using the visualization: Sorting and selecting.
Using the visualization: Sorting and selecting.
There are two series of data, “Local government” and “State government.” The first series refers to the number of local government employees in each state, such as city and county employees. The second series refers to the number of state government employees in each state. Check boxes allow you to include either or both series in the chart.

By clicking on column headers or footers (“State,” “Annual payroll per person,” Full-time equivalent employees per person”) you can sort by these values.

Use the visualization below, or click here to open it in a new window, which may work best. Data is from United States Census Bureau, Government Employment & Payroll, data released March 2014.

In Wichita, pushing back at union protests

carpenters-union-logoA Wichita automobile dealer is pushing back at a labor union that’s accusing the dealer of unfair labor practices.

The dealership has details on its blog at Shame on Subaru of Wichita? The Facts Behind the Shakedown. The union has an issue with a company hired by the company that Subaru of Wichita hired to do construction work:

To the Carpenters union, a rat is someone who pays market wages rather than union demands.
To the Carpenters union, a rat is someone who pays market wages rather than union demands.

A rat is a contractor that does not pay all of its employees area standard wages, including either providing or making payments for health care benefits.

Shame on Subaru of Wichita for contributing to the erosion of area standards for carpenter craft workers. Hi-Tech Interiors, Inc. is performing work for general contractor Key Construction, Inc. on the new Subaru of Wichita project located at 11610 E. Kellogg Dr., Wichita, KS. Hi-Tech Interiors, Inc. does not meet area labor standards for all their carpenter craft workers, including fully paying for family health benefits.

In its story, the Wichita Eagle reported “‘We don’t do comments or anything like that,’ says Carpenters representative Chad Mabin. Instead, he refers to a union flyer with a drawing of a rat that appears to be eating an American flag.”

Just in case anyone is interested, Mabin, the union representative who doesn’t do comments, was paid $159,995 in 2012, composed of gross salary of $127,536 and allowances of $32,459. That’s according to UnionFacts.com, based on data from the Office of Labor-Management Standards, part of the United States Department of Labor.

Alternative measures of unemployment

visualization-example

Besides the official unemployment rate that is the topic of news each month, the Bureau of Labor Statistics (part of the U.S. Department of Labor) tracks and publishes five other series. These are called alternative measures of labor underutilization.

BLS defines the six measures as follows, along with the seasonally adjusted value for February 2014:

  • U-1, persons unemployed 15 weeks or longer, as a percent of the civilian labor force, 3.5%
  • U-2, job losers and persons who completed temporary jobs, as a percent of the civilian labor force, 3.5%
  • U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate), 6.7%
  • U-4, total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers, 7.2%
  • U-5, total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers, 8.1%
  • U-6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers, 12.6%

As the above definitions indicate, U-3 is the “official” or most often mentioned unemployment rate. Those who fit the profile of U-4, U-5, or U-6 are called “discouraged workers.” In particular, those in category U-6 are called “involuntary part-time workers.” The rate for this category, 12.6 percent, is 1.88 times the level of U-3, the official unemployment rate.

Alternative measures of unemployment in the United States, from Bureau of Labor Statistics
Alternative measures of unemployment in the United States, from Bureau of Labor Statistics

Special interests defend wind subsidies at taxpayer cost

man-digging-coinsThe spurious arguments made in support of the wind production tax credit shows just how difficult it is to replace cronyism with economic freedom. From October, 2012.

We often see criticism of politicians for sensing “which way the wind blows,” that is, shifting their policies to pander to the prevailing interests of important special interest groups. The associated negative connotation is that politicians do this without regard to whether these policies are wise and beneficial for everyone.

So when a Member of Congress takes a position that is literally going against the wind in the home district and state, we ought to take notice. Someone has some strong convictions.

This is the case with U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties.)

The issue is the production tax credit (PTC) paid to wind power companies. For each kilowatt-hour of electricity produced, the United States government pays 2.2 cents. Wind power advocates contend the PTC is necessary for wind to compete with other forms of electricity generation. Without the PTC, it is said that no new wind farms would be built.

Kansas wind turbinesThe PTC is an important issue in Kansas not only because of the many wind farms located there, but also because of wind power equipment manufacturers that have located in Kansas. An example is Siemens. That company, lured by millions in local incentives, built a plant in Hutchinson. Employment was around 400. But now the PTC is set to expire on December 31, and it’s uncertain whether Congress will extend the program. As a result, Siemens has laid off employees. Soon only 152 will be at work in Hutchinson, and similar reductions in employment have happened at other Siemens wind power equipment plants.

Rep. Pompeo is opposed to all tax credits for energy production, and has authored legislation to eliminate them. As the wind PTC is the largest energy tax credit program, Pompeo and others have written extensively of the market distortions and resultant economic harm caused by the PTC. A recent example is Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away, which appeared in the Wall Street Journal.

The special interests that benefit from the PTC are striking back. An example comes from Dave Kerr, who as former president of the Hutchinson/Reno County Chamber of Commerce played a role in luring Siemens to Hutchinson. Kerr’s recent op-ed in the Hutchinson News is notable not only for its several attempts to deflect attention away from the true nature of the PTC, but for its personal attacks on Pompeo.

There’s no doubt that the Hutchinson economy was dealt a setback with the announcement of layoffs at the Siemens plant that manufactures wind power equipment. Considered in a vacuum, these jobs were good for Hutchinson. But we shouldn’t make our nation’s policy in a vacuum, that is, bowing to the needs of special interest groups — sensing “which way the wind blows.” When considering everything and everyone, the PTC paid to producers of power generated from wind is a bad policy. We ought to respect Pompeo for taking a principled stand on this issue, instead of pandering to the folks back home.

Kerr is right about one claim made in his op-ed: The PTC for wind power is not quite like the Solyndra debacle. Solyndra received a loan from the Federal Financing Bank, part of the Treasury Department. Had Solyndra been successful as a company, it would likely have paid back the government loan. This is not to say that these loans are a good thing, but there was the possibility that the money would have been repaid.

But with the PTC, taxpayers spend with nothing to show in return except for expensive electricity. And spend taxpayers do.

Kerr, in an attempt to distinguish the PTC from wasteful government spending programs, writes the PTC is “actually an income tax credit.” The use of the adverb “actually” is supposed to alert readers that they’re about to be told the truth. But truth is not forthcoming from Kerr — there’s no difference. Tax credits are government spending. They have the same economic effect as “regular” government spending. To the company that receives them, they can be used — just like cash — to pay their tax bill. Or, the company can sell them to others for cash, although usually at a discounted value.

From government’s perspective, tax credits reduce revenue by the amount of credits issued. Instead of receiving tax payments in cash, government receives payments in the form of tax credits — which are slips of paper it created at no cost and which have no value to government. Created, by the way, outside the usual appropriations process. That’s the beauty of tax credits for big-government spenders: Once the program is created, money is spent without the burden of passing legislation.

If we needed any more evidence that PTC payments are just like cash grants: As part of Obama’s ARRA stimulus bill, for tax years 2009 and 2010, there was in effect a temporary option to take the federal PTC as a cash grant. The paper PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States explains.

Astonishingly, the wind PTC is so valuable that wind power companies actually pay customers to take their electricity. It’s called “negative pricing,” as explained in Negative Electricity Prices and the Production Tax Credit:

As a matter of both economics and public policy, no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet, the federal Production Tax Credit (“PTC”) for wind generation is doing just that with increasing frequency in electricity markets across the United States. In some “wind-rich” regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the “negative price” payment, because they receive a $22/MWH federal production tax credit for every MWH generated.

In western Texas since 2008, wind power generators paid the electrical grid to take their electricity ten percent of the hours of each day.

Once we recognize that tax credits are the same as government spending, we can see the error in Kerr’s argument that if the PTC is ended, it is the same as “a tax increase on utilities, which, because they are regulated, will pass on to consumers.” Well, government passes along the cost of the PTC to taxpayers, illustrating that there really is no free lunch.

Kerr attacks Pompeo for failing to “crusade” against two subsidies that some oil companies receive: Intangible Drilling Costs and the Percentage Depletion Allowance. These programs are deductions, not credits. They do provide an economic benefit to the oil companies that can use them (“big oil” can’t use percentage depletion at all), but not to the extent that tax credits do.

Regarding these deductions, last year Pompeo introduced H. Res 267, titled “Expressing the sense of the House of Representatives that the United States should end all subsidies aimed at specific energy technologies or fuels.”

In the resolution, Pompeo recognized the difference between deductions and credits, the latter, as we’ve seen, being direct subsidies: “Whereas deductions and cost-recovery mechanisms available to all energy sectors are different than credits, loans and grants, and are therefore not taxpayer subsidies; [and] Whereas a deduction of costs and cost recovery with respect to timing is not a subsidy.”

Part of what the resolution calls for is to “begin tax simplification and reform by eliminating energy tax credits and deductions and reducing income tax rates.”

Kerr wants to deflect attention away from the cost and harm of the PTC. Haranguing Pompeo for failing to attack percentage depletion and IDC with the same fervor as tax credits is only an attempt to muddy the waters so we can’t see what’s happening right in front of us. It’s not, as Kerr alleges, “playing Clintonesque games of semantics with us.” As we’ve seen, Pompeo has called for the end of these two tax deductions.

If we want to criticize anyone for inconsistency, try this: Kerr criticizes Pompeo for ignoring the oil and gas deductions, “which creates a glut in natural gas that drives down the price to the lowest levels in a decade.” These low energy prices should be a blessing to our economy. Kerr, however, demands taxpayers pay to subsidize expensive wind power so that it can compete with inexpensive gas. In the end, the benefit of inexpensive gas is canceled. Who benefits from that, except for the wind power industry? The oil and gas targeted deductions also create market distortions, and therefore should be eliminated. But at least they work to reduce prices, not increase them.

By the way, Pompeo has been busy with legislation targeted at ending other harmful subsidies: H.R. 3090: EDA Elimination Act of 2011, H.R. 3994: Grant Return for Deficit Reduction Act, H.R. 3308: Energy Freedom and Economic Prosperity Act, and the above-mentioned resolution.

I did notice, however, that Pompeo hasn’t called for the end to the mohair subsidy. Will Kerr attack him for this oversight?

Finally, Kerr invokes the usual argument of government spenders: Cut the budget somewhere else. That’s what everyone says.

Creating entire industries that exist only by being propped up by government subsidy means that we all pay more to support special interest groups. A prosperous future is best built by relying on free enterprise and free markets in energy, not on programs motivated by the wants of politicians and special interests. Kerr’s attacks on Pompeo illustrate how difficult it is to replace cronyism with economic freedom.

Energy subsidies for electricity production

Kansas wind turbinesWhen comparing federal subsidies for the production of electricity, it’s important to look at the subsidy values in proportion to the amount of electricity generated. That’s because the scales vary widely. For example, in 2010 for the United States, as can be seen in the accompanying table, coal accounted for the production of 1,851 billion kWh (or megawatt hours) of electricity production. That’s 44.9 percent of all electricity produced. Solar power accounted for the production of 1,851 billion kWh, which is 0.025 percent of all electrical production.

Solar power, however, received 8.2 percent of all federal subsidies, or about 328 times its share of production.

Click table for larger version.
Click table for larger version.

The nearby table and chart are based on data from the Energy Information Administration (EIA), Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010 through the Congressional Research Service, along with the author’s calculations.

Of particular interest is wind power, as it is receives subsidy in the form of cash equivalent tax credits, and many states (including Kansas) have mandates forcing its use. For the year covered in the table, wind accounted for 2.3 percent of U.S. electricity generation. It received 42.0 percent of federal energy subsidies.

Electricity production and subsidy, 2010

American economy is more competitive and carbon-efficient, says economist

Stephen Moore. Credit: Willis Bretz/Heritage Foundation
Stephen Moore. Credit: Willis Bretz/Heritage Foundation

The oil and gas boom in America boosts our competitiveness in the world economy while at the same time reducing carbon emissions, says economist Stephen Moore.

Moore recently left the Wall Street Journal to accept a position at Heritage Foundation as chief economist. He presented to an audience at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity.

A large portion of his presentation was on energy and its important role in the economy, and how radical environmentalists — the “green” movement — are harming our economy and people. An irony, he said, is that while President Barack Obama is in the “hip pocket” of radical environmentalists, he is presiding over the greatest oil and gas boom in American history. This boom is proceeding in spite of government, not because of it.

Moore emphasized the importance of energy costs to low-income people. Rising energy costs are like taxes on them, he said, while the wealthy can more easily absorb higher energy costs. “To be green is to be against capitalism, against progress, against poor people, against jobs.”

The boom in oil and gas production in America, made possible by horizontal drilling and fracking, is ahead of the rest of the world. While European countries have in the past embraced green energy technologies, these policies have failed, and the countries are retreating from them. Now, European countries want to use American drilling technologies, he said.

The lower electricity prices in America are a competitive advantage over Europe and China. German auto manufacturers are shutting plants in Europe and moving them to the United States, he said.

Of radical environmentalist groups. Moore said: “They don’t even care about global warming. If they really cared about global warming, they would be cheerleading fracking. Because fracking is making natural gas the new fuel for America. And guess what? Natural gas emits less carbon. It’s a great antidote to global warming.”

(According to the U.S. Energy information Administration, when generating electricity, coal emits from 2.08 to 2.18 pounds of carbon dioxide per kilowatt-hour electricity generated. Natural gas emits 1.22 pounds, or about 43 percent less carbon dioxide.)

Moore went on to tell the attendees that it is the United States that has reduced its carbon emissions the greatest amount in the last five years. He said this is remarkable in light of the fact that the U.S. didn’t sign the Kyoto Treaty, the U.S. didn’t implement cap-and-trade, and didn’t implement a carbon tax. “You would think these environmental groups would be applauding natural gas. Now these environmentalist groups have a new campaign called ‘beyond natural gas,'” he said.

Moore explained that at first, environmentalists said they could accept natural gas as a “bridge fuel” to solar power and wind. They were in favor of natural gas, he said, up until the time it became cheap and plentiful. Now, they are against gas. “My point is, the left and environmentalists are against any energy source that works.”

Over the past six years the U.S. has spent $100 billion promoting wind and solar power, but these two sources together account for just 2.2 percent of electricity generation. Even if the country were to quadruple the portion of electricity generated by these two renewable sources over the next 10 to 20 years, the nation would still need to get 90 percent of its electricity from other sources. Moore was doubtful that the country could quadruple the output from wind and solar.

Trends in carbon emissions

To further investigate the topics Moore raised, I gathered data from Global Carbon Atlas and prepared interactive visualizations using Tableau Public. You may access and use the visualizations by clicking here. Following are static excerpts from the visualizations. Click on each image for a larger version.

Click image for larger version.
Click image for larger version.

Looking at the amount of total carbon emissions, we see two important facts. First, after rising slowly, carbon emissions by the United States have declined in recent years. Second, carbon emissions by China are soaring. China surpassed the U.S. around 2005, and the gap between the two countries is increasing.

Click image for larger version.
Click image for larger version.

Note also that carbon emissions in India are rising. Emissions in most advanced economies are steady or falling. These trends are emphasized in the chart that shows carbon emissions for each country indexed from a common starting point. Emissions from China and India are rapidly rising, while emissions from countries with advanced economies have risen slowly or have declined.

Click image for larger version.
Click image for larger version.

A chart that shows the carbon emissions efficiency of countries, that is, the carbon emitted per unit of GDP, shows that in general, countries are becoming more efficient. Advanced economies such as the U.S., Japan, and Germany have an advantage in this metric. These countries emit about one-fourth as much carbon per unit GDP as does China.

Click image for larger version.
Click image for larger version.

The chart of carbon emissions per person in each country show that the United States leads in this measure. In 2011, the U.S. emitted about 17 tons of carbon dioxide per person. China was at 6.6, and India at 1.7. But, the trend in the U.S. is downward, that is, less carbon emitted per person. In China and India, the trend is up, and rising rapidly in China.

Viewing the seen and unseen

clouds-164757_1280The lesson of the book “Economics in One Lesson” by Henry Hazlitt is this: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

(The Ludwig von Mises Institute has published an edition of this book which is available at no cost at its website; click here. Amanda BillyRock has illustrated most of the chapters in video. Click here for the playlist.)

Looking beyond what we see at first glance, that’s important. And considering everyone, not just some small group, is important too. You may be familiar with the term “special interest group.” A local example might be the Wichita Area Builders Association, which represents homebuilders. The purpose of groups like this — and I’m sorry to have to single out this group — is to represent their members, and them alone. So last year the Builders Association was able to persuade the Wichita City Council to pass a program that rebates Wichita property taxes on new homes for a few years. This makes it easier to sell these new homes. Homes which are built, of course, by members of the Wichita Area Builders Association.

Did the city council consider the long term effects of this policy, such as the effect on tax revenue in future years? Did the council consider the “Cash for Clunkers” effect, in which incentive programs induce people to buy now, only to depress sales in later years after the program ends? The answer is either a) No, the council did not consider these effects, or b) The council decided to ignore these effects.

Then, what about the effect on other groups besides the builders? Did the council consider that by offering savings when buying these select new homes, it likely reduced the appeal and value of all other homes across the city? Did the council consider that these new homes will require services like police and fire protection, but since they don’t contribute property tax, other taxpayers have to pay to provide these services?

And what about setting another precedent, that when business is not doing well, a special interest group appeals to government for special favors?

This is an example of the city council considering only the immediate effects of a policy, and also the effects on only a single group — the self-interested homebuilders. Things like this happen all the time.

Remember how Hazllitt said these groups will argue “plausibly and persistently?” That happened. As an example, Wichita State University economists prepared an analysis showing that this rebate program benefited the city. Did that analysis consider the long-term effects or only the immediate effects of the policy? Did that analysis consider the effects on all groups? I’m afraid that if we could look under the hood of these models, we’d find that they suffer from the problems Hazlitt warns about.

And the president of the Builders Association argued persuasively before the council. That’s an example of when Hazlitt wrote about a special interest group: “It will hire the best buyable minds to devote their whole time to presenting its case.”

Hazlitt told us what we need to do in these cases, writing: “In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups.”

broken-window-glassSpecial interest groups expend lot of effort to get government to look at the seen and skip the unseen. That’s a reference to the famous parable of the broken window from chapter two of “Economics in One Lesson.” Ahe child who threw a rock through the window of the bakery. The crowd that gathered around the broken window: Someone suggested that the damage is actually a good thing, because the windowmaker now has work to do and earns money. And the windowmaker in turn will spend his new income somewhere else, and so forth. Economic development professionals who make arguments for subsidies to business call this the multiplier effect. It creates what they call indirect impacts.

A few years ago in an effort to drum up taxpayer subsidies for arts, a national organization — a special interest group — made this argument:

paint-bucket

A theater company purchases a gallon of paint from the local hardware store for $20, generating the direct economic impact of the expenditure. The hardware store then uses a portion of the aforementioned $20 to pay the sales clerk’s salary; the sales clerk respends some of the money for groceries; the grocery store uses some of the money to pay its cashier; the cashier then spends some for the utility bill; and so on. The subsequent rounds of spending are the indirect economic impacts.

Thus, the initial expenditure by the theater company was followed by four additional rounds of spending (by the hardware store, sales clerk, grocery store, and the cashier). The effect of the theater company’s initial expenditure is the direct economic impact. The subsequent rounds of spending are all of the indirect impacts. The total impact is the sum of the direct and indirect impacts.

That is the same argument made to excuse the destruction of the broken window in the bakery. Doesn’t this sound plausible? But Hazlitt, echoing Bastiat before him, notes this: The baker was going to buy a suit of clothes, and buying that suit would set off its own chain of economic activity.

But now he must spend that money on fixing the broken window. The new window is what is seen. The unbought suit of clothes is more difficult to see. It is the unseen.

If the window was not broken, the baker has a functional window and a new suit of clothes. After the window is broken, however, all the baker has is a replacement window. No new suit of clothes is purchased.

As Hazlitt summarized: “The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new ‘employment’ has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.”

In the case I cited above, it’s easy to see the benefit granted to the homebuilders. But the economic activity that does not take place because of the diversion of resources to the homebuilders? Where is that? It is unseen.

When the theater company spends $20 of taxpayer-provided money to buy paint: Where did that $20 come from? Isn’t it possible that a homeowner might have bought the same gallon of paint, but now is not able to because he must pay taxes to support the theater company? It’s easy to see the theater production with its taxpayer-funded painted set. It’s not easy to see the house that sits unpainted for a year to pay for the theater company’s paint. That is the seen and unseen.