Category Archives: Economics

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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.

State and Local Government Employees, Kansas and Nearby States 2014-06

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.)

State and Local Government Employees, Kansas and Nearby States 2014-06When 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)

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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.

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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.

Economic Outlook Ranking for Kansas and selected states.

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.

Photograph by the U.S. Census Bureau, Public Information Office (PIO).

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.

Using the visualization: Sorting and selecting.

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 in the United States, from Bureau of Labor Statistics

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
Kansas wind turbines

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.

wind-power-turbine-closeup

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

Click image for larger version.

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.

clouds-164757_1280

Viewing the seen and unseen

clouds-164757_1280

The 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.

Medicaid expansion: The impact on the federal budget and deficit

From Kansas Policy Institute.

Medicaid Expansion: The Impact on the Federal Budget and Deficit

By Steve Anderson

Medicaid.gov Keeping America HealthyThe problem with the uninsured is not going to be solved by expanding Medicaid. Even amongst Medicaid’s staunchest proponents you’ll be hard pressed to find any who will claim it to be the equivalent of high quality private health insurance coverage. The number of federal senators and representatives that choose to exclude their staffers from Obamacare shows that many Washington politicians understand the quality of government insurance plans Medicaid and Obamacare represent. The simple fact is, that health insurance is not to be confused with health care.

Medicaid’s proponents can only claim anecdotal claims of improving health outcomes of recipients. Even in pre-ObamaCare Medicaid, beneficiaries largely do not access available preventable care services. In fact, a Harvard University study shows that emergency room visits actually increased by 40 percent for Medicaid recipients in Oregon after their expansion. Citizens would do well to remember, a “decrease in ER visits” was a key selling point of ObamaCare generally and Medicaid expansion specifically. ER visits are the most expensive form of care. When these increased visits are paid for by Medicaid, the taxpayers are picking up BOTH the state and federal portion of the high cost of emergency room visits. This flies in the face of the Obama Administration’s claim that Medicaid expansion would actually save money by limiting this sort of behavior.

It doesn’t stop there and this is the part that hardly anyone has mentioned, and what the Obama Administration would rather you not know — a staggering number of those enrolling in ObamaCare will actually be sent to Medicaid and not be in the private market. And by “private market” we mean one established and controlled by government.

The following charts are the pre-Medicaid expansion projection of revenues versus expenditures from the Congressional Budget Office. They were completed before the decision by 25 states and the District of Columbia to expand eligibility.i

The three lines with the steepest slopes and therefore the fastest growing expenditures are Medicaid, Unemployment payments (called Income Security) and Other Programs. The U.S. House of Representatives has addressed the unemployment expense growth by bringing the program back to its original intent – to provide a safety net between jobs. Other Programs will be largely controlled if current trends hold and extension of the various “stimulus” programs are curtailed. However, the one that is going to accelerate with expansion and is larger than the other two combined in total state and federal expenditures is Medicaid. At least 3.9 million of Obamacare participants are expected to be enrolled in Medicaid and 19 million nationwide overall will be added to Medicaid in the next year. A 35 percent increase in Medicaid participants.ii Picture these two charts with 35 percent greater additional costs for the Medicaid entitlement and you have an idea how problematic this is for the federal budget and deficit. Is it any wonder that President Obama has started to back track from the claim that the federal government—which let’s not forget, is funded by you the taxpayer — will pay all the costs for 3 years and 90 percent thereafter. Instead, his administration and he himself talk about blended rates that will transfer a sizeable portion of the cost to state budgets.iii Despite his promises to the contrary.

The Impact on the Kansas State Budget

Even the leftist Center on Budget and Policy Priorities, which typically finds spending citizens’ tax dollars an event to celebrate, is cautioning that the “blended rate” shift by the President will “likely prompt states to cut payments to health care providers and to scale back the health services that Medicaid covers for low-income children, parents, people with disabilities, and/or senior citizens (including those in nursing homes). Reductions in provider payments would likely exacerbate the problem that Medicaid beneficiaries already face regarding access to physician care, particularly from specialists.”iv This analysis actually left out the administrative cost of expansion that is largely being absorbed by the states. If anything, this suggests that reality will be more dire than CBPP’s predictions.

KPI’s own cost study of Medicaid expansion, conducted by a sitting member of the Social Security Advisory Board and former chief economist at the Federal Reserve in Cleveland, shows that Kansas taxpayers can expect to pick a $600 million tab if Medicaid is expanded. Hardly the “free money” that the Kansas Hospital Association has tried to foist on your family. They’ve even hired a former George W. Bush cabinet secretary to aggressively lobby for this “free money.” They’ve also yet to explain what services they recommend the state cut to fund the expansion and if their members are willing to pick up the additional costs when “blended rates” almost certainly take effect.

As a taxpayer you are going to pay for this on both the federal and state level and you deserve answers when any special interest groups come asking for more of your money.

http://directorblue.blogspot.com/2011/01/liberals-democrat-party-will-split-if.html
ii http://www.bloomberg.com/news/2014-01-02/obamacare-s-medicaid-expansion-may-create-oregon-like-er-strain.htm
iii http://www.cbpp.org/cms/index.cfm?fa=view&id=3521
iv Ibid

The war on poverty

For about 50 years we’ve been fighting a war on poverty. Initially, the poverty rate declined. But over the last four decades, the poverty rate has gone up and down, but is largely unchanged over this period. Spending on welfare programs, however, has continually risen, and rapidly in the past few years. The accompanying chart shows the poverty rate and welfare spending. The spending is per person in the U.S., adjusted for inflation, and doesn’t include spending on health care.

poverty-rate-welfare-spending-2013-12

For more on this topic, see:
The American Welfare State: How We Spend Nearly $1 Trillion a Year Fighting Poverty — and Fail (Cato Institute)
Examining the Means-tested Welfare State: 79 Programs and $927 Billion in Annual Spending (Heritage Foundation)
The Failure Of The War On Poverty (FreedomWorks)
Does Welfare Diminish Poverty? (Foundation for Economic Education)

Walter Williams: How to do good

From September 2011.

Thursday’s lecture in Wichita by economist Walter Williams featured a section covering how greed, or what some call enlightened self-interest, is the best way to produce good acts.

This lecture was presented by the Bill of Rights Institute and underwritten by the Fred and Mary Koch Foundation.

When government is used in an attempt to do good, it requires either elimination or attenuation of private property and market forces, Williams told the audience. But it is private property and the desire by people for more that motivates people to do the difficult and laborious things that benefit their fellow man. It all happens without government. In fact, government involvement in the market reduces the motivation of people to acquire, protect, and improve private property.

Here’s a transcript of Williams explaining how this works:

But do-gooders fail to realize that most good done in the world is not done in the name of good.

If you were to ask me “Williams, what’s that human motivation that gets wonderful things done? What’s the human motivation that you like?” I tell them greed. I love greed.

I’m not talking about ripping off people, fraud, and misrepresentation. I’m talking about people trying to get as much as they can for themselves. Now consider the following, because a lot of people don’t understand greed.

Last winter we had Texas cattle ranchers getting up in the dead of winter, running down stray cattle and trying to feed them, making a huge personal sacrifice to make sure New Yorkers had beef on their shelves.

This summer we had Idaho potato farmers getting up in the morning, doing back-breaking work, sun beating down on them, bugs biting them, making this personal sacrifice so that New Yorkers would also have potatoes.

Now, why do you think they’re doing that? Do you think they’re doing that because they love New Yorkers? They may hate New Yorkers — I’m not that wild about New Yorkers myself — but they make sure beef and potatoes get to New York every single day of the week.

Why? Because they love themselves. They’re trying to get more for themselves. And this is what Adam Smith was talking about in The Wealth of Nations: That the public good is served best by the private interest. That is, by people trying to get more for themselves. And in the free market, in order to get more for yourself, you have to find ways to please your fellow man, to make your fellow man happy.

How much beef and potatoes do you think New Yorkers would have if it all depended on human love and kindness? I’d be worried about New Yorkers.

Let me give you another example. Some people tell me “Well Williams, instead of saying greed, you’re trying to win friends and influence people, why don’t you say enlightened self-interest?” Well, that’s okay, but I like greed instead.

Let me give you another example of the virtue of self interest and private property. I have often said that I don’t care much about future generations. Some people think that’s awful. People have sometimes asked “Williams, why don’t you care about future generations?” And I ask “What have future generations ever done for me?”

I mean, some kid being born in 2050, what has he done for me? And if he has not done anything for me, how then am I obliged to do anything for him? Where is the quid pro quo?

But however, if you watch my actual behavior, my behavior would belie that sentiment.

I have a very nice house and property in Valley Forge, Pennsylvania. Several years ago I took $400 that I could have used to buy two bottles of Chateau d’Yquem Sauterne wine and selfishly enjoyed it all by myself, but instead I planted some trees on my property.

Now when those trees reach full maturity, I’ll be dead. There will be some 2050 kid swinging in my trees. Mrs. Williams, who is now departed, made extensive improvements to our house — built a big sunroom — with my money of course. That sunroom is going to outlast both of us, and there’s going to be some 2050 kid tracking mud in my sunroom.

If you ask the question “why did I make those sacrifices of current consumption to produce something that’s going to benefit somebody in 2050,” the answer’s very easy: The nicer my house is, the longer it will provide housing services, and the higher the price I get when I go to sell it.

That is, by pursing my own narrow selfish interest, I can’t help but make a house available for future generations, whether I mean to or not.

Now, would I have the same incentives if the government owned my house? Would I have the same incentives if there were a 75 percent transfer tax when I went to sell my house? Whatever weakens my private property rights interest in that house, weakens my incentive to do the socially responsible thing, namely, conserve on the scare resources of our society.

Let me give you one other example. … I was listening to NPR, a number of years ago, and people were picketing the UN because they were concerned about the extinction of the giraffe, the gorilla, and the lion. So I wrote down a list of animals that people were in a tizzy over the possibility of their becoming extinct.

Then I wrote down another list of animals, very valuable to us, but people are not worried about them. I said “How come people are not marching for the chicken? Why are people not forming save the pig clubs?”

What’s the difference between these two lists of animals? The essential difference is that with this list of animals — cows, chickens, and pigs — they belong to somebody. Somebody’s personal private interest is at stake. But this other list of animals — they don’t belong to anybody. Nobody’s personal private wealth is at stake. If you’re concerned about the extinction of various animals, I would recommend trying to privatize them.

Job growth visualization updated

Despite the government shutdown, I was able to retrieve data from the Bureau of Labor Statistics and update an interactive visualization. This shows job growth in states and areas within states.

I’ve structured this visualization so that you may click on a state, and all areas of the state that BLS tracks will appear. You can select one sector at a time: Government, Total Nonfarm, and Total Private. The data is indexed so that each area starts at the same relative level. Data is annual, current through 2012.

kansas-job-growth-government-sector-2013-10

Here’s a snapshot of Kansas for the Government sector, with Wichita highlighted. (Click for a larger version.) Compared to other areas in Kansas, Wichita does well in government jobs. Topeka, the purple line at the bottom, has experienced a loss in government jobs in recent years.

kansas-job-growth-private-sector-2013-10

Looking at the private sector, we see that Wichita does not perform well. When we couple slow growth of the private sector with faster growth of government, we’re setting the stage for even slower growth of the type of jobs that produce prosperity. Those are, of course, private sector jobs.

Wichita city leaders seem pleased with this performance. They continually praise those in charge of economic development. For more on this topic, see Wichita job growth and Visioneering peers.

Data is from the Bureau of Labor Statistics of the U.S. Department of Labor. Visualization created by myself using Tableau Public. Use the visualization below, or click here to open it in a new window, which will probably work better in most cases.

A learning opportunity for Wichita

Next month the Wichita Metro Chamber of Commerce brings a speaker to town who might be able to offer Wichita helpful advice. As reported in the Wichita Business Journal, “Jim Clifton, the chairman and CEO of Gallup Inc., says cities that create a culture of entrepreneurial development are the ones succeeding today.”

Clifton is the author of The Coming Jobs War. Here’s material from the inside flap of this 2011 book:

WHAT EVERYONE IN THE WORLD WANTS IS A GOOD JOB

In a provocative book for business and government leaders, Gallup Chairman Jim Clifton describes how this undeniable fact will affect all leadership decisions as countries wage war to produce the best jobs.

Leaders of countries and cities, Clifton says, should focus on creating good jobs because as jobs go, so does the fate of nations. Jobs bring prosperity, peace, and human development — but long-term unemployment ruins lives, cities, and countries.

Creating good jobs is tough, and many leaders are doing many things wrong. They’re undercutting entrepreneurs instead of cultivating them. They’re running companies with depressed workforces. They’re letting the next generation of job creators rot in bad schools.

A global jobs war is coming, and there’s no time to waste. Cities are crumbling for lack of good jobs. Nations are in revolt because their people can’t get good jobs. The cities and countries that act first — that focus everything they have on creating good jobs — are the ones that will win.

visioineering-wichita-video-thumbnail

It sounds like Clifton has some good advice that Wichita could follow in two areas: Fostering entrepreneurship and improving schools. Wichita certainly needs help in creating jobs. In the nearby video, the record of job growth for Wichita, the nation, and our Visioneering peers (Kansas City, Omaha, Oklahoma City, and Tulsa) is presented. (Click here to watch the video on YouTube, which may work best.) If you don’t have time to watch, I’ll let you know that Wichita performs badly in this comparison. In last place, that is.

why-kansas-school-standards-low-video

Regarding schools, the record of Kansas schools is not as good as it first appears if we look beyond a simple comparison of NAEP scores with other states. As shown in Kansas school test scores, a hidden story, Kansas trails Texas in most areas of comparison. Further, the National Center for Education Statistics, in the most recent version of Mapping State Proficiency Standards Onto the NAEP Scales, found that Kansas had weakened some of its standards. NCES judged Kansas’ standards as being low to begin with, and then they were lowered farther. This was during the years immediately after the Kansas Supreme Court ordered higher school spending, and while the legislature complied with that order. See Why are Kansas school standards so low?

But our government leaders in Wichita and Kansas won’t recognize these facts, at least not publicly.

Entrepreneurship in Wichita

Wichita’s economic development policies are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita uses programs that are targeted investment in our economic future, our elected officials and bureaucrats believing that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Wichita and Kansas economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates for everyone is an example of such a policy. Abating taxes for specific companies through programs like IRB, EDX, PEAK, and HPIP are examples of precisely the wrong policy.

In explaining the importance of dynamism, Hall wrote: ” Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”

We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

Business employment dynamics, a visualization

graph-1

Besides the usual employment and jobs numbers delivered each month, there are other interesting statistics gathered about business firms and workers.

According to the U.S. Bureau of Labor Statistics, “The Business Employment Dynamics statistics track changes in employment at the establishment level, revealing the dynamics underlying net changes in employment. These data include the number and rates of gross jobs gained at opening and expanding establishments, as well as the number and rates of gross jobs lost by closing and contracting establishments.”

The data is not a complete picture of employment, as certain jobs are not included: self-employed workers, government employees, religious organizations, most agricultural workers on small farms, all members of the Armed Forces, elected officials in most States, most employees of railroads, some domestic workers, most student workers at schools, and employees of certain nonprofit organizations.

The job changes are separated by changes in employment at existing firms (expansions and contractions), or by firms starting in business or ending (openings and closings).

This page further explains the data, and a helpful presentation that explains and illustrates this data is at Analyzing BLS Business Employment Dynamics Data.

The interactive visualization I’ve prepared is for all private sector industries and all firm sizes. This visualization uses rates instead of levels. Visualization created using Tableau Public. Use the visualization below, or click here to open in a new window, which will probably work best.

Seen and unseen on display

clouds-164757_1280

The 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.

Trends in Kansas entrepreneurship

Kansas Entrepreneurial Activity

Entrepreneurship is important for a growing and dynamic economy. The nearby illustration highlights the rate of entrepreneurship in Kansas compared to other states. The performance of Kansas in entrepreneurial activity is not high, and the trend over time is in the wrong direction.

The Ewing Marion Kauffman Foundation prepares the Kauffman Index of Entrepreneurial Activity. According to the Foundation, “The Kauffman Index of Entrepreneurial Activity improves over other possible measures of entrepreneurship because of its timeliness, dynamic nature, inclusion of all types of business activity, exclusion of ‘casual’ businesses, and information on owner demographics.”

I’ve prepared an interactive visualization using KIEA data. As this is a large visualization, please click here to open it in a new window. Use Ctrl+Click to add or remove states for comparison. Data is from Kauffman Index of Entrepreneurial Activity. Visualization created by myself using Tableau Public.

Do economic development incentives work?

Government takes and gives

Judging 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.

Job creation and the snake oil of tax incentives

Here’s an interesting article by Mark Funkhouser, who recently served as mayor of Kansas City, Missouri. It starts off well, but in the second paragraph derails when the author approves of government intervention to correct what he calls a market failure. But true cases of market failure are exceedingly rare. And if we can justify subsidizing a grocery store in an attempt to revitalize a neighborhood, what can’t we justify subsidizing? Still, a useful article.

Every politician wants to appear to be creating jobs. The problem is that in America today most elected officials think that the way to do this is through the use of tax incentives. Even when they sincerely want to do the right thing, the pressure to give away the public’s money is just too strong: Ribbon-cuttings celebrating business openings secured with public dollars are a staple of the political realm. If you’re not seen doing these regularly, you can be assured that you’ll be called a “jobs killer” in attacks fueled by corporate interests that see you as denying them a place at the public trough.

The truth is, when used in a narrowly focused way to achieve a specific public purpose by correcting a market failure, the use of tax incentives for economic development can be justified — for example, to bring a decent grocery store to a neighborhood where the residents do not have access to healthy food at reasonable prices. In this case, the income base in the area might initially be insufficient to support a store profitably, but once it is built higher-income residents may find the area more desirable and begin to move into the area in such numbers that after a few years the store is sustainable without a government subsidy.

Continue reading at Job Creation and the Snake Oil of Tax Incentives.

‘Economics in One Lesson’ explains today’s economics

Economics In One Lesson
Henry Hazlitt

Economics In One Lesson, first published in 1946 and reissued by the Ludwig von Mises Institute, explains fallacies (false or mistaken ideas) that are particularly common in the field of economics and public policy.

At the very start of the book Hazlitt explains:

Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

At first it seems as though not much has changed since the end of World War II. What has changed, however, is the scope of the dangers Hazlitt identifies. That’s because government is much expanded and more intrusive today than when this book was written. We should take these lessons as even more important today.

It is overlooked consequences that cause harm. They are overlooked sometimes because they are difficult to see, as in the broken window fallacy explained by Frederic Bastiat and also in this book. They are also “overlooked” because, as Hazlitt tells us, one group wants special favors from the government, and because there is no way to grant these favors without harming some other group, the favor-seeking group will seek to hide, obfuscate, muddle, or minimize the bad effects. At the same time they will promote the policy as good for everyone. This is roughly the job lobbyists perform, and billions are spent on it each year. That’s because a powerful government has the ability to bestow valuable favors, but those favors are paid for by someone else, someone often not easily seen.

These two ideas — the special pleading of selfish interests and the overlooking of secondary consequences — are the core ideas of the book. As Walter Block explains in his introduction (This Book is So Me) to the Mises Institute’s new edition of this book:

… the plan of Economics in One Lesson is clear: drill these insights into the reader in the first few chapters, and then apply them, relentlessly, without fear or favor, to a whole host of specific examples. Every widespread economic fallacy embraced by pundits, politicians, editorialists, clergy, academics is given the back of the hand they so richly deserve by this author: that public works promote economic welfare, that unions and union-inspired minimum-wage laws actually raise wages, that free trade creates unemployment, that rent control helps house the poor, that saving hurts the economy, that profits exploit the poverty stricken; the list goes on and on.

An example of overlooked secondary consequences is government spending. When government spends, it must tax or borrow. What government spends is not available for individuals to spend. When we see magnificent public works (say a new downtown arena in Wichita), we don’t see all the things that would have been bought had the government not taxed to build the public work. We see the jobs created by the public work — all the construction workers that built the new arena — but we don’t see the jobs destroyed because people had to reduce their spending elsewhere.

Foreign trade is a case where people often fail to grasp the complete picture. We often see exports as something good for our economy, while imports are seen as bad. Imported things are things that American workers can’t compete with, and so American jobs are lost, it is often said. But as Hazlitt says: “It is exports that pay for imports. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have to funds with which to buy our goods.” So those wanting restrictions on imports are also calling for fewer exports — although they do not say this, either because they do not recognize it or it doesn’t matter to them.

In recent years we have been told that our is a “consumer-driven” economy, fueled by people tapping their home equity that accumulated from increased home values, or spending by going into debt. It is as though if consumers started saving rather then spending on immediate consumption, the American economy would collapse. But Mr. Hazlitt tells us that “saving is only another form of spending.” After all, what is done with money that is saved? Today, few put their savings under the mattress. Instead, it is loaned to a bank or invested. Then it is spent on capital goods, which businesses use to increase their productive capability. The key fact is that businesses spend it. And, they spend it on capital goods that either expand their capacity to produce, or decease their present costs of production. Either way, that is good for everyone. It means more jobs, and better jobs. But this saving is derided as not being “productive.”

As a conclusion Hazlitt tells us:

And this is our lesson in its most generalized form. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than producer, are considered.

To see the problem as a whole, and not in fragments: that is the goal of economic science.

This is a very valuable book which cuts through the fog and haze of economics and public policy and lets us understand the true effects of our government’s policies.

An excerpt of this book can be read at One Lesson.

Friedman: The fallacy of the welfare state

As we approach another birthday of Milton Friedman, here’s an insightful passage from the book he wrote with his wife Rose: Free to Choose: A Personal Statement. It explains why government spending is wasteful, how it leads to corruption, how it often does not benefit the people it was intended, and how the pressure for more spending is always present.

A simple classification of spending shows why that process leads to undesirable results. When you spend, you may spend your own money or someone else’s; and you may spend for the benefit of yourself or someone else. Combining these two pairs of alternatives gives four possibilities summarized in the following simple table:

friedman-spending-categories-2013-07

Category I in the table refers to your spending your own money on yourself. You shop in a supermarket, for example. You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend.

Category II refers to your spending your own money on someone else. You shop for Christmas or birthday presents. You have the same incentive to economize as in Category I but not the same incentive to get full value for your money, at least as judged by the tastes of the recipient. You will, of course, want to get something the recipient will like — provided that it also makes the right impression and does not take too much time and effort. (If, indeed, your main objective were to enable the recipient to get as much value as possible per dollar, you would give him cash, converting your Category II spending to Category I spending by him.)

Category III refers to your spending someone else’s money on yourself — lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth.

Category IV refers to your spending someone else’s money on still another person. You are paying for someone else’s lunch out of an expense account. You have little incentive either to economize or to try to get your guest the lunch that he will value most highly. However, if you are having lunch with him, so that the lunch is a mixture of Category III and Category IV, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

All welfare programs fall into either Category III — for example, Social Security which involves cash payments that the recipient is free to spend as he may wish; or Category IV — for example, public housing; except that even Category IV programs share one feature of Category III, namely, that the bureaucrats administering the program partake of the lunch; and all Category III programs have bureaucrats among their recipients.

In our opinion these characteristics of welfare spending are the main source of their defects.

Legislators vote to spend someone else’s money. The voters who elect the legislators are in one sense voting to spend their own money on themselves, but not in the direct sense of Category I spending. The connection between the taxes any individual pays and the spending he votes for is exceedingly loose. In practice, voters, like legislators, are inclined to regard someone else as paying for the programs the legislator votes for directly and the voter votes for indirectly. Bureaucrats who administer the programs are also spending someone else’s money. Little wonder that the amount spent explodes.

The bureaucrats spend someone else’s money on someone else. Only human kindness, not the much stronger and more dependable spur of self-interest, assures that they will spend the money in the way most beneficial to the recipients. Hence the wastefulness and ineffectiveness of the spending.

But that is not all. The lure of getting someone else’s money is strong. Many, including the bureaucrats administering the programs, will try to get it for themselves rather than have it go to someone else. The temptation to engage in corruption, to cheat, is strong and will not always be resisted or frustrated. People who resist the temptation to cheat will use legitimate means to direct the money to themselves. They will lobby for legislation favorable to themselves, for rules from which they can benefit. The bureaucrats administering the programs will press for better pay and perquisites for themselves — an outcome that larger programs will facilitate.

The attempt by people to divert government expenditures to themselves has two consequences that may not be obvious. First, it explains why so many programs tend to benefit middle- and upper-income groups rather than the poor for whom they are supposedly intended. The poor tend to lack not only the skills valued in the market, but also the skills required to be successful in the political scramble for funds. Indeed, their disadvantage in the political market is likely to be greater than in the economic. Once well-meaning reformers who may have helped to get a welfare measure enacted have gone on to their next reform, the poor are left to fend for themselves and they will almost always he overpowered by the groups that have already demonstrated a greater capacity to take advantage of available opportunities.

The second consequence is that the net gain to the recipients of the transfer will be less than the total amount transferred. If $100 of somebody else’s money is up for grabs, it pays to spend up to $100 of your own money to get it. The costs incurred to lobby legislators and regulatory authorities, for contributions to political campaigns, and for myriad other items are a pure waste — harming the taxpayer who pays and benefiting no one. They must be subtracted from the gross transfer to get the net gain — and may, of course, at times exceed the gross transfer, leaving a net loss, not gain.

These consequences of subsidy seeking also help to explain the pressure for more and more spending, more and more programs. The initial measures fail to achieve the objectives of the well-meaning reformers who sponsored them. They conclude that not enough has been done and seek additional programs. They gain as allies both people who envision careers as bureaucrats administering the programs and people who believe that they can tap the money to be spent.

Category IV spending tends also to corrupt the people involved. All such programs put some people in a position to decide what is good for other people. The effect is to instill in the one group a feeling of almost God-like power; in the other, a feeling of childlike dependence. The capacity of the beneficiaries for independence, for making their own decisions, atrophies through disuse. In addition to the waste of money, in addition to the failure to achieve the intended objectives, the end result is to rot the moral fabric that holds a decent society together.

Another by-product of Category III or IV spending has the same effect. Voluntary gifts aside, you can spend someone else’s money only by taking it away as government does. The use of force is therefore at the very heart of the welfare state — a bad means that tends to corrupt the good ends. That is also the reason why the welfare state threatens our freedom so seriously.

Research on economic development incentives

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.

Local economic development incentives: The economic perspective

Recently Russell S. Sobel, Ph.D., who is Visiting Scholar in Entrepreneurship in the School of Business Administration at The Citadel spoke in Wichita on the topic “Economic Development Incentives: A Necessary Evil?” A video presentation of his talk follows.

Sobel is the author of many books and publications, including Unleashing Capitalism and the popular university textbook Economics: Private and Public Choice, 14th edition. Video production is by Paul Soutar.

Minimum wage laws: Helpful or harmful?

A version of the following appeared in the Wichita Eagle (Wage hike isn’t that simple, September 8, 2007).

minimum-wage-poster

Will raising the minimum wage help or harm low-wage earners? And are the policy goals — taken in their entirety — of the groups pressing for a higher minimum wage in the best interest of workers?

The great appeal of a higher minimum wage mandated by an act of the legislature is that it seems like a wonderfully magical way to increase the wellbeing of low-wage workers. Those who were earning less than the new lawful wage and keep their jobs after the increase are happy. They are grateful to the lawmakers, labor leaders, newspaper editorialists, and others who pleaded for the higher minimum wage. News stories will report their good fortune.

That’s the visible effect of raising the minimum wage. But to understand the entire issue, we must look for the unseen effects.

The not-so-visible effect of the higher wage law is that demand for labor will be reduced. Those workers whose productivity, as measured by the give and take of supply and demand, lies below the new lawful wage rate are in danger of losing their jobs. The minimum wage law says if you hire someone you must pay them a certain amount. The law can’t compel you to hire someone, nor can it compel employers to keep workers on the payroll.

The difficulty is that people with lose their jobs in dribs and drabs. A few workers here; a few there. They may not know who is to blame. Newspaper and television reporters will not seek these people, as they are largely invisible, especially so in the case of the people who are not hired because of the higher wage law.

If we are truly concerned about the plight of low-wage workers we can face some harsh realities and deal with them openly. The simple fact is that some people are not able to produce output that our economy values very much. They are not very productive. Passing a law that requires employers to pay them more doesn’t change the fact that their productivity is low. But there are ways to increase productivity.

One way to increase workers’ productivity is through education. Unfortunately, there is ample evidence that our public education system is failing badly.

Capital — another way to increase wages — may be a dirty word to some. But as the economist Walter E. Williams says, ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption or taxes) and invested in a piece of equipment that increased the output of workers and our economy.

Education and capital accumulation are the two best ways to increase the productivity and the wages of workers. Ironically, the people who are most vocal about raising wages through legislative fiat are also usually opposed to meaningful education reform and school choice, insisting on more resources being poured into the present system. They also usually support higher taxes on both individuals and business, which makes it harder to accumulate capital. These organizations should examine the effects of the policies they promote, as they are not in alignment with their stated goals.

The candlemakers’ petition

candle

The arguments presented in the following essay by Frederic Bastiat, written in 1845, are still in use in city halls, county courthouses, school district boardrooms, state capitals, and probably most prominently and with the greatest harm, Washington.

A PETITION

From the Manufacturers of Candles, Tapers, Lanterns, Sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.
Open letter to the French Parliament, originally published in 1845

Gentlemen:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation.

This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture?Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and
the principle behind all your policy.

Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?

We have our answer ready:

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.

“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.” Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.

Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.

Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Frédéric Bastiat (1801-1850), Sophismes économiques, 1845

Kansas looks better in Rich States, Poor States report

A new edition of Rich States, Poor States signals a brighter future for Kansas.

Rich States, Poor States, sixth edition

Last week American Legislative Exchange Council (ALEC) released the sixth edition of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.

ALEC is a nationwide organization of state legislators, the center-right counterpart of the center-left National Conference of State Legislatures (NCSL).

In the forward-looking economic outlook ranking, Kansas moves up to eleventh place. That’s ahead of Texas (12), Colorado (16), Oklahoma (19), Missouri (23), Iowa (25), and Nebraska (37).

The report praises tax reform legislation Kansas passed in 2012. In a section headed “The Kansas Uprising”:

Gov. Sam Brownback campaigned in 2010 promising a tax cut to make the Kansas economy more competitive. But his plan to reduce tax rates and close loopholes ran into trouble in the Senate, which had been controlled by opponents of tax reform. The governor managed to pass his tax cut, but the Left-leaning Senate coalition refused to cut loopholes and pork spending projects. … The most outside of the box section of the plan is the “Small Business Accelerator,” which exempts all non-wage income from taxation for all pass-through entities. This means that the vast majority of small businesses in Kansas are now not subject to an income tax on their business earnings. This includes all sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs). … While the Kansas tax reform plan has received criticism from both sides of the political spectrum, the resulting economic growth in Kansas speaks for itself. The plan is not perfect, but it is a bold step toward pro-growth tax reform that will certainly continue to unlock more of Kansas’ economic potential.

No praise, however, for public pension reform. Commenting on lack of progress in converting to defined-contribution plan and a proposal to borrow additional money for fund KPERS, the report concludes:

The result was a double loss for pension reform advocates in Kansas. There would be no structural reform, and the Kansas retirement system and taxpayers would take on $1.5 billion in additional debt. While the proposal for fundamental pension reform failed this session, fiscally conservative legislators and Gov. Brownback are optimistic that real reform will have a good chance of passing in the future.

The bill to issue the KPERS bonds is still pending in the legislature.

An important chapter in this year’s report is titled “There They Go Again: A New Dose of Junk Economics.” This chapter addresses critics of Rich States, Poor States. In particular, this chapter explains the caution required when using per-capita statistics.

Kansas among the states

Rich States, Poor States evaluates state economies two ways. The “Economic Outlook Ranking” is a forecast looking forward. It is based on factors that are under control of the states. The “Economic Performance Ranking” is a backward-looking rating that measures state performance, again using variables under control of each state.

The Economic Performance Rank considers a state’s gross domestic product, absolute domestic migration, and nonfarm payroll employment. This ranking details states’ individual performances over the past ten years based on the economic data.

For Economic Performance Ranking, Kansas is ranked 35th among the states. In previous years, Kansas was ranked 39th, 40th, and 34th. Kansas has made some progress in this area.

The second measure, the Economic Outlook Rank, is 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.”

It’s in this ranking that Kansas made most progress. Kansas is ranked 11th, up from 26th the year before. In previous years, Kansas averaged around 26th place.

Notable areas where Kansas ranks better than average in Top Marginal Personal Income Tax Rate (15), Recently Legislated Tax Changes (6), State Liability System Survey (5), State Minimum Wage (1), and being a right-to-work states.

Kansas scores low in Property Tax Burden (29), Sales Tax Burden (35), Debt Service as a Share of Tax Revenue (41), Public Employees Per 10,000 of Population (48), and having a low number of tax expenditure limitations.

Read the report at Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.