The usual suspects are out in full force with the Parade of Economic Horribles they say would come from Missouri enacting Kansas-style growth policies. However, a survey by Thumbtack.com and the Kauffman Foundation published this week throws yet another bucket of cold water on those warnings. The survey asked more than 7,000 small businesses how states are doing in facilitating small business development . . . and the results are not good for Missouri.

Kansas was viewed favorably for its support of small business, improving upon last year’s A- ranking. The state graded well for the ease of starting a business, especially its regulatory systems.

Missouri slipped slightly in 2013 after earning a B- a year ago. That decline can be attributed partly to issues with licensing and permitting requirements.

You can find an interactive map that looks at all the aspects the survey examined — including regulations, health and safety, licensing, and more — here. As with any index, all of the survey’s findings have to be put in the proper context: survey methodologies, assumptions, and objectives do matter, so your mileage may vary on whether you think Thumbtack.com and the Kauffman Foundation are balancing their factors credibly. In that context, I think it is still worthwhile to highlight their topline results, visually represented in the screenshot below and available on Thumbtack’s website.

That Midwestern section sure looks like the kind of growth corridor I have discussed in the past, but unfortunately, Missouri sticks out like a sore thumb on the map. The question is, will Missouri be a part of this growth corridor? Will Missouri go the way of Kansas . . . or of Illinois?

Articles written about why we must invest in transit in Saint Louis often say young people want to live in vibrant, diverse, dense downtown areas. They say transit is an essential factor in that equation. Why is investment in these young urbanites so important? As we learned in Patrick Ishmael’s posts on “The Smallness of the Potentially ‘Hip’ Core,” there has been a belief in America that the “creative class” is the key to revitalizing cities. It is the idea that we must attract and accommodate the 20- and 30-somethings who are marrying later and focusing on careers in areas such as software, social media, and entertainment. They do not want to live in suburbs, so we must give them what they want if we want a revitalized downtown.

But over the past decade, the “cool” cities have not seen any faster job or population growth than cities dominated by non-creative industries. The fastest employment growth has been in areas such as Houston, Dallas, Oklahoma City, and Omaha. The main employment in those cities is not in the cool, creative sector, but in industries such as oil and manufacturing. And, even the rapidly growing “cool” cities, such as Raleigh and Austin, are not transit-centered places.

So why do we keep hearing that transit is what causes economic development and revitalizes downtowns? Transit may attract a certain demographic, but trends over the past several years in our country hint that this demographic is not the economic driver it appeared to be.

Now, it is not to say that transit precludes development. But why keep focusing our efforts (and subsidies) on something that is not an absolute necessity to promote growth in Saint Louis? We have written about our support for toll roads to limit subsidies for roads, but at least those subsidies benefit a majority of the population. With transit, we are taking money from a majority of the population to pay for something that benefits the few. Even Citizens for Modern Transit unintentionally admits this with their statement “You may not ride transit, you may not know anyone who uses the bus or MetroLink; however, Missouri needs transit.”

U.S. Sen. Elizabeth Warren (D-Mass.) wonders why we do not pay workers a minimum wage of $22 an hour (hat tip: The Corner). Regarding that $22 an hour, Sen. Warren probably is referring to this study by the Center for Economic and Policy Research (CEPR) that showed what the minimum wage would be if it had kept up with increases in worker productivity. However, one key thing that Sen. Warren fails to notice is the source of that increase in productivity.

The study linked to above talks about average productivity. Average workers do not earn the minimum wage. This study does not track changes in the productivity of workers who make at or below the minimum wage. Isn’t it possible that the largest increases in productivity have been among more skilled employees who already earn above the minimum wage?

Also, if workers do not feel that they are being fairly compensated, they are free to look for employment elsewhere.  In non-monopolies, employers have to compete for workers and thus offer a competitive wage in order to attract and keep talent. Christina Romer, President Barack Obama’s former chair of economic advisers, made this point in her analysis of increasing the minimum wage: “Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.”

Minimum wage laws simply amount to “compulsory unemployment,“ as they make it illegal to hire a worker below the prescribed minimum. At an hourly minimum of $22, an employer loses money if he or she hires anybody who produces less than $22 of value an hour. One Missouri small business owner stated that he “would fire one employee, maybe two” if the minimum wage increases to $22. That is quite a lot, given that he only employs three people. Politicians understand all of this, which is why they typically propose only modest increases. After all, if the forgoing economic critique is flawed, why not raise it to $100 an hour?

Raising the minimum wage is an attractive idea to many voters (at least on the surface). Yet, it really is not an effective way to help poor families. According to David Neumark, in his 2012 study for the Show-Me Institute, “. . . minimum wages may do little or nothing to help poor and low-income families.” People from both sides of the ideological spectrum have issues with raising the minimum wage, and increasing it all the way to $22 an hour would just be silly. Let’s focus on ways to truly help the poor.

St. Louis Post-Dispatch columnist David Nicklaus, in his column “Missouri tax cuts aren’t a magic formula for economic growth,” cites a report by Leachman, Mazerov, Palacios, and Mai that the Center on Budget and Policy Priorities published. In the report, the authors present evidence and then interpret it as indicating that changes in income tax rates are positively correlated with economic growth.

First, the evidence is that six states enacted large personal income tax cuts in the years before the Great Recession. Three of these six states reported economic growth rates that were lower than the nation’s growth rate while the other three reported growth rates that exceeded the nation’s growth rate. The three faster-than-nation states were major oil-producing states, benefiting from the sharp run-up in oil prices that occurred after the tax rate changes were implemented.

Leachman et al. are correct in pointing out that multiple events affect each state’s economic growth rate. But the analysis is so perverted that it is more politics than economics.

Let’s try to be objective about the effects associated with a reduction in the income tax rate. First, the partial effect of a decrease in the income tax rate means that the after-tax returns to factors of production will increase. In other words, the return to workers and to those people taking risks as entrepreneurs and business owners. As the after-tax returns increase, the aggregate supply increases at a faster rate. This is how lower income tax rates, holding everything else constant, result in faster income growth. Leachman et al. do not present a new economic model that overturns this reasoning, so this point is indisputable.

What they must have in mind is the next round of effects associated with smaller state budgets. In the near term, state spending shrinks because the product of the tax rate and the tax base initially shrinks when the tax rate is reduced. The Leachman et al. argument is essentially that the government spending is on public goods — infrastructure, schools, and other capital investments — that offer a higher average return than private citizens could possibly realize from investing on their own. Honestly, this may be true. However, states purchase lots of things that are not about infrastructure, schools, and other capital investments. It may be a hard choice, but if there are fewer resources poured into state coffers, then the state must allocate those to the public projects that offer the highest return to its citizens.

The other part to this dynamic analysis is what happens when income grows faster because of the lower income tax rate. Because of this effect, over time, the state budgets will also grow faster, meaning that the path of state government future spending will exceed the high-tax-rate path. Leachman et al. do not even consider this.

Now, back to the evidence. Their interpretation is the worst kind of science. Ideally, a scientist would like to run a controlled experiment, isolating the treatment that they are considering and then compare results from the control group with the treatment group. Leachman et al. start off by recognizing that no such controls exist. Then they pervert their analysis by using the absence of the controls to argue that oil-producing states benefited only from their oil. Shame on them!!! What they cannot tell you is whether the non-oil producing states would have grown even slower if the income tax rates had been left at their higher levels. Now that would be a comparison.

There are other objective ways to rip their analysis. For example, they focus on a short time horizon. No growth theorist relies on data less than a decade old to try to infer what the growth-rate effects are. Yet Leachman et al. boldly assert the causality from just a few years of data.

You do not have to trust me. You can read the literature on factors affecting economic growth. At the state level, it is important to spend resources on public goods that are most valuable to people living within those boundaries. The next objective is to collect taxes from these people in the way that does the least harm; that is by creating the smallest distortions. Such taxing principles will result in higher living standards and happier people than for one group to nakedly claim their sense of fairness is the right tax structure.

The debate is too important to not carefully think about the best approach. Let’s think carefully.

Starbucks is one of the most ubiquitous brands on the planet: Since its founding in 1971, the upscale coffee chain has expanded rapidly to more than 20,000 stores worldwide. Many American urbanites have probably grown accustomed to passing one regularly, if not frequently dropping in themselves. The company has arguably saturated the U.S. market, making its weak presence in Kansas City proper a curious anomaly. This prompted me to delve deeper into potential reasons for Starbucks’ tepid growth in Missouri’s largest city.

A book co-authored by Arthur Rubinfeld, known as the “architect behind Starbucks’ expansion,” outlines the logic underlying the company’s growth strategy. With a target market comprised of “urban professionals, high-income individuals from the age of 18 to 45,” Starbucks sought to conquer the country’s major metropolitan areas. Demographic considerations, the intensity of competition, city-specific macroeconomic conditions, and a number of other factors, determined the pattern of expansion.

The areas surrounding Kansas City are home to a multitude of Starbucks coffee shops, which form something of a ring around the city itself. This same distribution is not evident in other Midwestern cities such as Saint Louis, Oklahoma City, Omaha, and Indianapolis. We can learn a lot about certain areas from the behavior of private enterprise.

My colleague Patrick Ishmael and I intend to explore this phenomenon in greater detail. We wish to better understand why Starbucks has chosen to focus disproportionately on Kansas City’s peripheral markets. As Rubinfeld’s volume makes clear, a substantial amount of research goes into determining how capital can be most profitably distributed. Accordingly, there is almost certainly a strong rationale under-girding Starbucks’ behavior in Kansas City. Perhaps further investigation can teach us some important lessons about the business climate in the City of Fountains.

Note: The green circles with white numbers simply represent areas with such a high density of Starbucks stores that individual emblems cannot be displayed. A circle with a number, n, corresponds to an area with a concentration of n stores.

It appears that questioning the merits of raising the minimum wage is a phenomenon that stretches across the ideological spectrum (hat tip: The Corner). Christina Romer, who once served as the president’s chairman of economic advisers, believes that a minimum wage increase would not be as great a boon to poorer Americans as some would lead us to believe.

Lara Granich, of Missouri Jobs with Justice, supports raising the minimum wage in Missouri and presumably throughout the country. Granich contends that in Missouri, “the modestly higher wages received by low-paid workers in Missouri this year will go right back into the economy, generating economic growth as these workers put food on their tables and raise their families.” On the contrary, Romer contends that “. . . economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.”

That is the same conclusion that David Neumark reached in his 2012 study for the Show-Me Institute examining whether Missouri should raise its minimum wage. Neumark stated in his study that “. . . research fails to establish that higher minimum wages help poor or low-income families.” Neumark also stated that “there is simply no evidence” to conclude that raising the minimum wage will stimulate the economy.

Raising the minimum wage is an appealing idea to many voters. However, that is not the case with many economists. There are better ways to help alleviate poverty; increasing the minimum wage is not one of them.

Facing a potential stampede of businesses heading across our western border, the Missouri Senate came one step closer to lassoing some of them back. The Senate Ways and Means Committee recently approved proposed legislation that would reduce individual and corporate income taxes by 1.5 percentage points. This is great to see. If a major tax cut bill can get out of committee, it has cleared a major obstacle toward becoming law.

My colleague Patrick Ishmael and I have written about the benefits for Missouri if corporate income taxes are cut. Considering that Senate Bill 26 (SB26) proposes reducing the corporate income tax, it seems the Senate Ways and Means Committee agrees with our assessment. Allowing businesses to keep more of their money will enable them to reinvest their earnings into expanding their facilities, hiring employees, or lowering their prices to consumers.

Patrick and I have also talked about the need for Missouri to respond to the Kansas tax cut. Lowering our tax rates will minimize the  advantage that Kansas has over us and potentially keep Missouri businesses from moving across the border. With other states moving toward serious tax reform, it is encouraging to see Missouri move in that direction as well.

SB26 is not a perfect piece of legislation. Like the Kansas law, it does not include any alternatives to offset the lost revenue from the tax cut. A previous version of the bill included a hike to the state sales tax. Capping or eliminating economic development tax credits would also serve to offset some of the lost revenue. However, the perfect should not be the enemy of the good.  The fact that the Senate has come this far in getting tax reform passed is encouraging and I hope some kind of tax cuts are enacted. Missouri cannot afford to wait.

Drawing done for the February book club meeting by former SMI intern Mary Chism

Last night was obviously Snowmaggedon, and I hope everyone is staying safe out there as some of the roads are still nasty. The previous night, Wednesday, we hosted the second Show-Me Institute Saint Louis Book Club meeting of the year. We discussed the classic The Road to Serfdom, by Friedrich Hayek. The central theme of the book is that fascism is a natural outgrowth of socialist central planning. Hayek’s desperate wish was to warn the western nations, especially England and the U.S., not to pursue the path of central planning. Hayek believed that a descent into fascism was more likely than it seemed to his audience: the citizens of non-fascist western nations in 1944.

But all that just makes the book sound like a dated warning against something no one really advocates anymore, right? Well, the book has staying power because of two timeless features which are perhaps separate sides of the same coin: Hayek explains why the price system not only works, but is the best system possible for maximizing individual welfare while also making a strong case for individual liberty and limited government, which Hayek calls (using the connotation of his time), liberalism.

It was a wonderful meeting and a rousing discussion. Book club meetings start at 7 p.m. and usually wrap up about 8:30 or 9 p.m. But Wednesday’s meeting did not end until shortly after 9:30 p.m. — we all had so much to discuss. Here are some of the topics and ideas we discussed:

• Whether a person’s concept of what is possible constrains their action.
• The important distinction between freedom and power: what it is and why it is important that they not be confused.
• This wonderful quote from Adam Smith (introduced roughly by Hayek): “[the regimentation of economic life puts governments in a position where] to support themselves they are obliged to be oppressive and tyrannical.”
• Where Hayek drew the line on the proper role of government and how that might undermine his overall message of liberty.
• Whether market competition is inherently violent (hint: it is not).
• Whether a legal system is necessary for competition, and David Friedman’s “the discipline of constant dealings.”
• The contradiction and ugliness of “competitive socialism.”
• An extended interlude about “Little House on the Prairie.”

The reading for next month is The Machinery of Freedom, by David Friedman, another classic. Friedman is an economics and law professor with a Ph.D. in physics, and the son of free-market titan Milton Friedman. From the Amazon description: “This book argues the case for a society organized by private property, individual rights, and voluntary co-operation, with little or no government.” I am looking forward to some excellent discussion on this one at our March meeting, so please join us if you can (date of meeting to be announced, check here).

There has been a lot of talk in the community about transit-oriented development (TOD) and its supposed benefits (which I contest). If you want to hear about these supposed benefits, a second round of public meetings regarding future Saint Louis TOD projects are scheduled over the next week.

Citizens for Modern Transit recently hosted a luncheon with national TOD expert Dena Belzer on the Economics of Building Around Light Rail. I had an opportunity to review her Powerpoint presentation, which did not convince me of any such economic benefit.

Granted, I have to hedge my comments with the fact that I did not physically attend the presentation. That being said, the most outrageous trend running throughout the presentation is that TOD will save money. It will save money for the government, it will save money for households, employees, employers — pretty much everybody.

The presentation suggests that compact development helps municipalities save money. Just like you save money at Jos. A. Banks buying two suits to get the third one free, when you did not even need a suit. Spending money just to get a “good deal” is not always a good justification for spending that money.

And what about households? Belzer’s presentation suggests that TOD can save households billions of dollars and that money can be reinvested in the community. First of all, TOD will not save us money when we are paying for it in our taxes.

Secondly, she cites figures that suggest Portland’s transit policies save residents $2.6 billion per year. However, more than half of that imaginary figure comes from the estimated value of commute time that has been reduced due to transit options — the opportunity cost. I do not know about you, but I have not found a way to manufacture gold coins from the time I save on days that traffic is light. Nor do I mind my commute to work. Many people choose to spend more time commuting in favor of lower housing costs, community preference, or a variety of other factors.

Other people prefer to use transit or live near a Metro stop and enjoy a predictable commute. There is nothing wrong with that. However, it is not a sufficient reason to compel all taxpayers to subsidize housing, retail, and office facilities around transit stops so that planners can impose their views on the rest of us.

President Barack Obama delivered his State of the Union address last night and in it, he called for raising the federal minimum wage to $9 an hour. “This single step would raise the incomes of millions of working families,” he said.

This an appealing sentiment, but Prof. David Neumark’s 2012 study for the Show-Me Institute, “Should Missouri Raise Its Minimum Wage?” found that “research for the United States on state minimum wage increases generally fails to find evidence that minimum wages help the poor.” This is because the minimum wage targets low-wage workers and not low-wage families.

In 2008, 12.7 percent of all workers earning the federal minimum wage ($7.25) were in poor families, while 44.6 percent of workers earning less than $7.25 were in families that earned more than three times the poverty line. In their book “Myth and Measurement: The New Economics of the Minimum Wage,” authors David Card and Alan B. Krueger admit that the minimum wage is a “blunt instrument” for reducing poverty.

Not only would raising the minimum wage be ineffective in helping poor families, it would also mean that many businesses will hire fewer workers because of increased labor costs.

On the surface, increasing the minimum wage is an attractive idea. However, doing so does not help those who need it. The market should set wages, not the government.

Last night, the Show-Me Institute hosted our first book club meeting of the new year. The reading we discussed was a short story by Daniel Abraham called “The Cambist and Lord Iron: A Fairy Tale of Economics.” The story is available free online and conveys some important economics lessons that are not often covered in fiction, such as the idea that valuation is determined by exchange, and that trade creates wealth. It is a short and fun read, and because of our recent changes in book club, I wanted to pick something that had both of those qualities for our first meeting.

Our discussion started with introductions around the table. Among our 10 attendees, some have been attending book club regularly for years, some have come in the past and had not attended in a while, and one person had never attended. Former Show-Me Institute intern Mary Chism gave a synopsis of the story for the few people who had not read it. Next, I gave a brief summary of the history of intellectuals’ views on the concept of value, from Aristotle’s “value for use”/”value for exchange” dichotomy, to the Labor Theory of Value, to the modern marginalist conception of value, attributable to Alfred Marshall.

We then started addressing the discussion questions I had prepared in advance (with Mary’s help). Leading from those questions, here are some of the topics we discussed:

• Whether anything can be exchanged for anything else
• The how and why of international currency exchange
• Government policy relating to the supply of money and exchange rates
• Whether sweatshop laborers, especially children, are making a free choice to work where they do
• The opportunity cost of reckless behavior
• Risk aversion and diminishing marginal utility of income
• A question from one attendee: “When a participant in a market has more resources, how does that affect that party’s ability to make beneficial exchanges?”

Some topics were discussed on an introductory level and others on a very high level. Many questions were asked and much knowledge shared. In addition to the lively discussion of economics and such, we talked about what our next reading selection should be and when we should meet again. The respective decisions were Hayek’s “The Road to Serfdom” and Wed., Feb. 20. If you are interested in the book or related topics, stop by our office at 7 p.m. on that evening for pizza, soda, and interesting discussion. See ya there!

As I diagnosed in my last post, Baumol’s disease is running rampant in Missouri’s public schools. This means Missouri school districts continue to spend more and more on education, with little improvement in the actual quality of education.  How can we combat the growing expenses and near stagnant achievement?

Obviously, there are two ways to control Baumol’s disease. One is to slow the rate at which spending increases and the other is to increase output.

We are in a time of declining state budgets and Missouri already spends approximately 34 percent of general revenue on K-12 education. This may force us to curb or slow education spending, but the public has shown little interest in holding education spending constant or even decreasing spending.

The other option, increasing output, is easier to say than to actually do. And, as we have noted on Show-Me Daily, Missouri has seen very little in terms of gains in academic achievement.

Students and taxpayers cannot support this type of system indefinitely, but fixing Baumol’s disease is not as simple as saying “we will do better.”

If we want to cure this disease, by increasing achievement and putting education on firmer financial footing, we need to rethink schooling.

Harness the power of technology

We at the Show-Me Institute have written at length about the potential benefits of using technology more effectively.

Rethink how we staff and operate schools

The traditional education system is designed to treat teachers like widgets, because teachers are paid in lock-step fashion, they are almost entirely evaluated with high marks, and we retain low-performing teachers just as readily as high-performing ones.

Missouri schools need to do a better job of identifying and rewarding good teachers and removing the worst. Furthermore, educators must figure out how to expand the reach of great teachers so they can have an impact on more students, not just the 25 students in their class.