October 21, 2014

Chart Correction on Show-Me Institute Essay

An astute reader brought our attention to an error in one of our charts. The chart in question was in the foreword that I co-wrote with David Stokes to Professor Howard Wall’s essay discussing the negative effects of earnings taxes on city population and employment growth. There was an error in calculating one of the averages. The corrected chart is below:

Wall Chart 1e

Instead of losing population between 1990-2000, the cities without an earnings tax gained population over that period. This new result strengthens Professor Wall’s conclusion that earnings taxes negatively impact a city’s growth.

October 19, 2014

Missouri Is One of the Top States . . . in Corporate Welfare

Typically it’s a good thing to be ranked high. That’s certainly the case for college football and the Forbes 400. However, a high ranking isn’t always a good thing. According to a report from the Mercatus Center (H/T AEI), Missouri has given $5.2 billion in subsidies to private businesses. This gives Missouri the dubious distinction of being the ninth most generous state in terms of corporate welfare. Now, I like being in the top 10 as much as the next guy, but not for this reason.

Statesubsidies-600x431

Tax credits and enterprise zones are among the items included in calculating the total amount of subsidies provided to these companies. We have written extensively on how these and similar programs do not generate the type of growth that supporters of these programs claim. Unfortunately, policymakers seem to be big fans of these types of subsidies, as are the companies that benefit from receiving them.

Guess which company is the biggest beneficiary of corporate welfare. I’ll give you a minute. Need a hint? They build airplanes. Give up? I’ll show you.

C3-Top-20-Parent-Companie-vero_0

Boeing collects more in corporate welfare than the next two companies combined. Missouri did its part in improving the company’s bottom line when it gave Boeing a massive handout so that it would locate additional aircraft manufacturing here. However, the state is unlikely to get enough money in return in order to justify these subsidies. To generate sufficient returns, Boeing’s investment in the area would have to be in excess of what they made in profits for all of last year. Color me skeptical that they’ll make an investment that large.

Instead of giving out all of this taxpayer money to specific businesses, why doesn’t the government just cut taxes for all businesses? The state would make itself more attractive to businesses, and it would avoid the management problems that occur with these tax credits.

October 7, 2014

The Sad State of Missouri’s Labor Force Participation

Like the Transformers, there is more to the standard unemployment rate than meets the eye. You might have heard that the national unemployment rate fell to 5.9 percent in September. On the surface, this is good news. However, the unemployment rate is determined by dividing two numbers. The first is the number of people unemployed (those out of work and actively seeking it). The second number is the labor force (the number of those working plus the number of those who are not working, but are actively seeking work). At AEI, James Pethokoukis explains how a smaller labor force can affect the unemployment rate.

According to data collected by The Liberty Foundation, Missouri’s Labor Force Participation Rate (labor force divided by population) has declined since 1999. The foundation’s figures also offer breakdowns by gender and race.

LF-99-13

This means that a lot of the drop in Missouri’s unemployment rate can be explained by the increasing number of people who have given up looking for a job. The two charts below show this phenomenon.

URMO-08-13

LFPR-08-13

I wanted to see what the unemployment rate would be in 2013 if these discouraged people continued looking for work at the same rate they did in 2008. According to my calculations, Missouri’s annual unemployment rate in 2013 would be 12.5 percent instead of the officially listed rate of 6.5 percent. That’s a big difference. If anybody out there is touting how well Missouri is recovering, show them this number. It might give them a moment of pause.

It’s been stated before: Missouri is not doing well economically. Since the recession ended, the Show-Me State has had trouble recovering. This decline in the labor force masks just how bad things have been from an employment standpoint. If Missouri is to get back on track, a lot needs to be done.

 

September 24, 2014

On a Scale of 1-10, It’s 15

Dollars an hour, that is. There is a continuing push in Saint Louis and other cities throughout the country to improve the pay of low-wage workers. That is a noble sentiment and I, for one, hope that wages do go up. In fact, I want wages to go up for everybody. However, increasing the minimum wage is the wrong way to go about it.

If proponents are successful in raising the minimum wage to $15 an hour, there will be a lot of pain. First, such an increase will cause job losses. A Congressional Budget Office (CBO) report estimated that if the minimum wage went up to $9 an hour, 100,000 jobs would be lost. If the wage went up to $10.10 an hour, the number of jobs lost would increase to 500,000. If the CBO is correct about job losses, one shudders to think about how many jobs would be lost if the minimum wage went up to $15.

Is the loss of so many jobs worth the increase in wages for those workers who manage to keep their jobs? That’s a question for proponents to consider. They also should consider the fact that many people who work for minimum wage are not poor. Why mandate raises for them while risking job losses for the same people wage-hike proponents are trying to help?

There is a better way to help poor families. Both the CBO report and Professor David Neumark’s 2012 study on the minimum wage find that the Earned Income Tax Credit (EITC) is a better alternative for helping poor families than increasing the minimum wage.

The EITC is a refundable tax credit that provides direct cash assistance to low-income families. The tax credit is more effective at helping poor families because it is specifically targeted toward them. The minimum wage is not. For example, a teenager working a minimum-wage job whose father is a corporate attorney and whose mother is a surgeon would receive the same monetary benefit as a single mother of two working at McDonalds. That would not be the case with the EITC. If Missouri and other states really wanted to help poor families, expanding the EITC would be a more effective tool than increasing the minimum wage.

September 4, 2014

Is the Super Bowl a Super Boost for Local Economies?

The Kansas City Star published an article reporting on the creation of a task force whose goal is to bring the Super Bowl into Kansas City. My colleague Patrick Tuohey did a great job explaining how claims of large economic impacts to Super Bowl host cities have been overstated. However, there is more to the story than just saying the economic impact of a Super Bowl is overstated.

Does the Super Bowl have any positive net economic impact on a host city?

The answer is it can, but it probably won’t. In a 2009 study, Michael C. Davis and Christian M. End found that hosting a Super Bowl has no economic impact on a city’s real per capita income, and in some cases it can have a negative effect. Robert A. Baade, Robert Baumann, and Victor Matheson examined the economic impact of mega-events (including the Super Bowl) in Southern Florida from 1980 to 2005. During that period, three cities (Tampa Bay, Miami, and Jacksonville) hosted the Super Bowl a total of seven times. The Super Bowl had a statistically significant positive impact on the city’s economy in only one instance (Tampa in 2001). Dennis Coates found that Houston saw increased sales tax revenue because of the Super Bowl in 2004. But the next year in Jacksonville, the Super Bowl was found not to have had an economic impact.

This takes us back to the Kansas City Super Bowl task force. Why is the state in the business of trying to lure the Super Bowl to Kansas City? Couldn’t a private group of interested residents and businesses sell the city as a Super Bowl destination just as well? Possibly, but the state can offer the NFL subsidies. However, just because the state can do something, doesn’t mean it should. Economists in general oppose sports subsidies because, “The large and growing peer-reviewed economics literature on the economic impacts of stadiums, arenas, sports franchises, and sport mega-events has consistently found no substantial evidence of increased jobs, incomes, or tax revenues for a community associated with any of these things.”

It’s true that there could be intangible benefits to hosting a Super Bowl, like increased exposure to the outside world. Yet, is there any concrete measure on what kind of return the city would see from such exposure? Will businesses or residents move to Kansas City because it hosted the Super Bowl? I don’t know, and the burden of proof should be on those arguing for government subsidies.

Kansas City is a great football town, and I agree with Joe Clifford when he says, “The Super Bowl’s tremendous.” However, I don’t think the residents of Kansas City nor the rest of Missouri should pay for the privilege.

 

 

August 23, 2014

The Pension Problem Non-Teaching Personnel Pose

In a recent post, Education Policy Research Assistant Brittany Wagner discussed a new study examining the large growth in non-teaching personnel in schools. The study found that over the past 60 years, schools have increased non-teaching personnel positions by 702 percent.

Besides their salaries, non-teaching personnel also accrue pension benefits through the Public Education Employee Retirement System of Missouri (PEERS). According to the PEERS annual report, “PEERS is a mandatory cost-sharing multiple employer retirement system for all public school district employees (except the school districts of St. Louis and Kansas City), employees of the Missouri Association of School Administrators, and community college employees (except St. Louis Community College).” Members of the plan and their employers both contribute to the pension.

Over the last five years, the unfunded liabilities (liabilities minus assets) of this plan have increased by more than $64 million. Pension benefits like PEERS benefits are guaranteed and must be paid out. If PEERS can’t make those payments, taxpayers (i.e., you) will have to.

One way to prevent a situation like the one described above is to shift these pension plans away from a defined benefit plan (PEERS) to more effectively structured plans like defined contribution plans, hybrid plans (a plan that is a mix of defined benefit and defined contribution), or cash balance plans.

Maybe the addition of new non-teaching hires over the past 60 years is justified, but maybe it isn’t. School districts are making the public pension bomb bigger, and if they aren’t going to defuse it, shouldn’t school districts at least give the taxpayers, who are ultimately on the hook if these pensions can’t make their payments, some evidence to support their increase in hiring?

July 15, 2014

Breaking: Another Study Backs Up The Show-Me Institute

The Competitive Enterprise Institute grabbed our attention when it released a new report comparing the unfunded pension liabilities of all 50 states. Spoiler alert: Missouri ranks in the middle third (more on this later).

An interesting point raised in the report was that, “…the discount rate used in the valuation of liabilities should be a low-risk rate, ideally as low as the rate on Treasury bonds.” In a Show-Me Institute Policy Study, Andrew Biggs also urged state pensions to use a low-discount rate in valuing their liabilities (the discount rate is the interest rate that pension plans use to translate future liabilities into current dollars). It’s encouraging to know that other institutes are reaching similar conclusions.

However, it isn’t encouraging that this report found that after using a more appropriate discount rate, the amount of Missouri’s unfunded pension liabilities totaled more than 4 percent of Missouri’s entire economy. As of the end of last year, Missouri’s economy was $258 billion; 4.2 percent of that is $10.8 billion. If the state cannot make up that amount, then you, the taxpayer, are on the hook to make up the difference. Table7.1There are other states whose pensions are in much worse shape than Missouri’s, but our state still faces an economic ticking time bomb. Whether dealing with a grenade (Missouri) or a daisy cutter (Illinois), taxpayers will not be happy to be caught in the blast. The Show-Me Institute has written extensively about how Missouri can start to address its pension problems by shifting to more efficient plans such as defined contribution or cash balance plans. Hopefully, this new report can serve as a wake-up call to policymakers that change is needed.

June 30, 2014

Vetoes, Vetoes, And More Vetoes

There has been a lot of consternation in the Missouri Legislature about Gov. Jay Nixon’s vetoes and withholds (withholds differ from vetoes in that withheld money can be released if state revenues are available later in the year, while vetoed funds are just not spent) from the fiscal year 2015 budget. Many legislators are upset with the governor for claiming that their budget is out of balance while his own executive budget was larger than the one the legislature passed. To be fair, a lot of the difference is due to the governor’s budget including funds for expanding Medicaid, but the governor’s budget also was relying on revenue growth that was higher than even the legislature was expecting.

All that said, there actually is a lot to like in these vetoes. For example, the governor vetoed more than $7 million in funds for biodiesel incentives. The state should be eliminating these types of incentives and it is a good thing that Gov. Nixon is cutting back on them. The governor also is vetoing $2 million in funding for the Rolling Stock Tax Credit. The Show-Me Institute has published numerous writings about the desirability on cutting back on these types of tax credits. It is good to see Gov. Nixon trying to do so.

Gov. Nixon’s vetoes could go further. For example, he withheld $5 million from efforts trying to lure the Republican National Convention to Kansas City. There has been a lot said about using government money to try to lure big events, but in this case, the money isn’t necessary because the Republican National Committee has already narrowed its search down to Cleveland and Dallas. Gov. Nixon should have simply vetoed this specific appropriation.

There was a lot to like in the governor’s vetoes. If the legislature was more disciplined, many of the vetoes would not have been necessary. Hopefully, state spending can be controlled going forward.

June 27, 2014

Lovely Rita’s New Meters

Yesterday, I attended a town hall meeting that the Saint Louis Treasurer’s office hosted regarding citizen feedback on the parking technology field tests in downtown Saint Louis and the Central West End. The city is running these tests in order to modernize parking operations in the city. The vendors included T2 Systems, Aparc Systems, Xerox, and Duncan Solutions. All of the vendors gave impressive demonstrations.

The city should go state-of-the-art with its technological upgrades, no half measures. People have told me, and I agree, that it is annoying to have to go to a centralized meter, pay, wait for a printout, and then go all the way back to the car to place the printout. It is an added pain to go refill the meter when there is heavy rain or snow outside. If the city upgrades its meters, it should either have a meter at each individual space and/or allow people to pay through a smartphone app. At the town hall, all of the vendors stated that they will allow people to pay through a smartphone.

There also should be some flexibility in regards to charging different prices based on the time of day. During busier times, the prices for parking should increase. During quieter times, prices should be lower. This would allow the city to properly react to the demand for parking and hopefully reduce congestion.

However, no matter the appeal of state-of-the-art technology, the city needs to balance that against the costs of the upgrades. Added parking convenience is one thing, but the city should not break the bank for it.

Overall, it is good to see the city looking to upgrade its parking systems. With all that we can do with digital technology, it is about time parking meters join the 21st century.

June 18, 2014

Supply, Demand, And The Minimum Wage

Early last week, Lindenwood University Professor and Show-Me Institute Fellow Howard Wall debated the merits of raising the minimum wage on St. Louis Public Radio. It was an interesting discussion, but  one thing stuck out for me. In the debate, Chris Sommers, who co-owns Pi Pizza and is in favor of raising the minimum wage, stated that (at 5:37), “We raised the wage in order to also attract better people.” This was said in the context of Pi raising the wages its pays its employees.

This is interesting because Pi raised its wages voluntarily. It didn’t need the government to mandate a hike in pay, it chose to do it because it made sense from a business perspective. That is how it is supposed to be. In fact, that is what businesses do. They pay their workers a competitive rate commensurate with the value that these employees generate for the business. If they pay their employees too little, other businesses can offer these workers a higher rate and they will leave. Sommers mentioned his workers moving to another business because it offered a 25-cent increase in hourly wages (at 4:30). This is the market working.

Take what happened in North Dakota as an example. Because businesses were so desperate for workers, even fast food establishments had to significantly increase what they would pay their employees. For example, Taco John’s, a local area fast food restaurant, had to offer new employees $15 an hour salaries in order to get them to work there.

north dakota

I want to help the poor do better, but there are betters options available than raising the minimum wage, like the Earned Income Tax Credit. This would ensure the benefits would go to the people who really need them, the working poor.

June 6, 2014

Ballpark Village Crushing It . . .

It seems that state and local development officials hit a home run when they decided to subsidize the construction of Ballpark Village. Yet, as I mentioned in my post last month, other local businesses feared that while Ballpark Village would do well, they would suffer losses. Their fear is now turning into reality.

Ballpark Village 2

As reported in the St. Louis Business Journal, bars and restaurants are taking serious hits to their sales. For example, Paddy O’s, a popular bar for pre-game and post-game activities, is expecting to draw $1.3 million in revenue this baseball season, a far cry from the $2.5 million they received last year. The Flying Saucer, another restaurant located near Busch Stadium, is looking at a 20-25 percent drop in business. These reports are anecdotal, but they fall in line with what economists find when they examine subsidies for similar types of developments, such as sports stadiums. While the subsidized development might do well, in many cases, it comes at the expense of other businesses in the area. Little to no actual wealth is actually created.

The government should not be subsidizing private developments. Even the ones that actually do well, such as Ballpark Village, just end up shifting consumer spending from one location to another. Instead, the government should be focusing its spending on areas that can benefit the public at large, such as public safety.

Breaking: New Study Supports Old Show-Me Institute Study

I admit that I like to spend a good portion of my spare time at the casino. I gamble even though I know that the odds favor the house. At least I’m gambling with my own money. Public employee pension systems, on the other hand, make bets with other people’s money. Increasingly, they are taking riskier bets in the hope of hitting the jackpot. That’s what the Pew Charitable Trust found in their  new study. As the study’s authors show in the figure below, public pensions are shifting away from safer investments (e.g., U.S. Treasuries and Corporate Bonds) and toward riskier assets (such as equities and commodities) that are expected to deliver higher returns on investment.

Pension Asset Allocation

This behavior is taking place in Missouri. For example, in the late 1990s, the Missouri Department of Transportation and Highway Patrol Employees Retirement System (MPERS) had 42 percent of their assets in fixed income and cash. Equities and alternative investments such as real estate made up the rest. Now, MPERS has 22 percent of its assets in cash and fixed income.

The pensions are doing this “to deliver higher long-term returns in order to keep funding costs low . . .” In fact, in one of our previous policy studies, Andrew Biggs noted this phenomenon when examining how Missouri’s public pensions value their liabilities: “U.S. public sector plans, by contrast, have taken on greater investment risk, because doing so allows them to lower the accounting value of their liabilities and put off difficult decisions such as raising contributions or lowering benefits.”

I don’t have a problem with a pension plan seeking higher returns, but if these investments don’t deliver as hoped, then Missouri taxpayers will be on the hook to make up the shortfall. That is why I favor retirement plans such as defined contribution plans or cash balance plans that limit the exposure of the taxpayers to investments failing to generate expected returns. Hopefully, we can make a shift before one of these risky bets fails to pay off.

U.S. public
sector plans, by contrast, have taken on
greater investment risk, because doing so
allows them to lower the accounting value
of their liabilities and put off difficult
decisions such as raising contributions or
lowering benefits
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