March 18, 2014

More Than 500 Economists Oppose Minimum Wage Hike

In an open letter released March 12, 2014, more than 500 economists voiced their agreement that increasing the federal minimum wage to $10.10 would not reduce poverty. The letter’s release coincided with hearings in the U.S. Senate’s Health, Education, Labor and Pensions (HELP) Committee to debate raising the federal minimum wage. The letter notes that poverty is a complex issue and simply raising the minimum wage is not “a silver bullet solution.” The letter’s signatories include Nobel laureates Eugene Fama, Edward Prescott, and Vernon Smith along with a number of previous administration officials, among them Glenn Hubbard, Greg Mankiw, and Harvey Rosen, all past chairs of the Council of Economic Advisors. (The full letter and list of signatories is available here.)

Raising the minimum wage costs jobs for the very workers it is supposed to help. A recent study by the Congressional Budget Office (CBO) found that the proposed increase would cost the economy 500,000 jobs by 2016. This outcome from raising the minimum wage agrees with previous work, including analysis that David Neumark and I wrote for the Show-Me Institute.

Missouri policymakers must consider the full impact of raising the minimum wage. It simply is not good public policy to raise wages for some individuals at the expense of other workers who are made even worse off than they are now. The minimum wage simply is not a viable policy tool to fight poverty.

February 25, 2014

Why Would Unions And Some Big Businesses Support Raising the Minimum Wage? Some Reasons

Last week’s Congressional Budget Office (CBO) report brought the negative effects of a proposed minimum wage hike into sharp focus. The CBO found that while wages would, by definition, increase for some employees, up to a million of our most vulnerable workers could lose their jobs. For all the bluster about free-market advocates being “anti-worker,” I can’t imagine a more anti-worker effect to a policy than the one you would see with a minimum wage increase. After all, what could be worse for a laborer than having his or her job taken away?

That’s what makes support for a minimum wage increase from unions and big business seem so odd at first glance. Why would unions such as the American Federation of State, County and Municipal Employees (AFSCME) support a change of policy that would hurt hundreds of thousands of Americans? Why would some businesses want to increase the cost of labor?

A few reasons stand out.

For starters, artificially raising the cost of non-union labor can make union labor more attractive. As the Cato Institute noted more than a decade ago:

Unions are labor cartels that attempt to restrict the supply of workers entering given occupations. Since non-union labor is priced below the cartelized price of union labor, it is an attractive substitute for union workers. Because unionization of all potential competition to the cartel is impossible due to the high policing costs that would be involved, unions resort to the minimum wage. By artificially increasing the wage rate of lower skilled workers — who could substitute for union workers — the minimum wage increase the demand for union workers and hence their wage rates.

Hypothetically speaking, if the labor of an entry-level employee with no experience is worth $7.50 per hour in the open market but the law requires he be paid $15 per hour, trained union labor costing $20 per hour looks considerably more attractive. By harming non-union labor, unions are able to help themselves.

Moreover, some large businesses have supported increasing the minimum wage because it would harm their competition. Costco, for instance, supports raising the minimum wage today at least in part because the entry-level wage for a Costco employee is $11.50, more than $4 per hour above the federal minimum. At a minimum wage of $10.10 per hour, Costco’s business model would remain largely unaffected.

But you know who would be affected by the change in the law? Businesses, large and small, whose profit margins are far narrower. That’s especially true of small businesses in our communities already suffering under a mountain of tax and regulatory burdens in a difficult economy.

Yes, there are, no doubt, some in both the business and labor camps who in good faith might think a minimum wage increase won’t hurt our vulnerable poor. But labor and business leadership know better, and the economics are as clear as the incentives.

February 20, 2014

Left Wages War On Poor With Minimum Wage Push

Over the last few months, the push has been on to raise the minimum wage. While increasing the wage sounds altruistic, in reality, it harms many of the people it should be helping. Tuesday’s Congressional Budget Office (CBO) report — which showed that up to a million people could lose their jobs if the wage was hiked to $10.10 — serves to hammer that point home.

I discussed those policy problems in a KCPT interview broadcast last week, which can be viewed below.

February 19, 2014

Raising The Minimum Wage Will Cost 500,000 Jobs

The Show-Me Institute has talked a lot about the negative effects of raising the minimum wage. In his two policy studies for the Show-Me Institute, David Neumark found that an increase in the minimum wage likely would reduce employment among low-skilled workers. Yesterday, the non-partisan Congressional Budget Office (CBO) released a study detailing the estimated economic impact of the federal government raising the minimum wage. The CBO found that raising the minimum wage to $9 an hour would eliminate 100,000 jobs by 2016. If the minimum wage is raised to $10.10 an hour, 500,000 jobs would be lost. On the other hand, the report also found that overall real income would increase by $2 billion and between 300,000 and 900,000 people (a huge range) could be lifted out of poverty.

Helping people get out of poverty is a good thing and if these estimates are correct, an increase in the minimum wage could help do that. However, the question is, does this fact compensate for the large number of people who would lose their jobs? Possibly, but raising the minimum wage is not the only way to help combat poverty. In fact, while it might help some poor families, it also would give a pay increase to many suburban teenagers and students while costing jobs for the very people it is designed to help.

In his 2012 policy study, Neumark mentioned the Earned Income Tax Credit (EITC) as a possible tool to increase the incomes of low-wage workers. The CBO report found that, “To achieve any given increase in the resources of lower-income families would require a greater shift of resources in the economy if done by increasing the minimum wage than if done by increasing the EITC.” In other words, the costs associated with raising the minimum wage greatly exceed the costs of expanding the EITC. This is true because many minimum wage workers are not from low-income families. On the other hand, the EITC only goes to low-income families. Even proponents of raising the minimum wage admit that the minimum wage is a “blunt instrument” for helping low-income families. Missouri should consider establishing a state EITC alongside the federal one.

The new CBO report projects that raising the minimum wage could help some people get out of poverty at the cost of hundreds of thousands of people losing their jobs. If policymakers want a way to combat poverty, there are more effective means to doing so, including expanding the EITC.

January 28, 2014

Do You Know The Pay In San Jose?

In late December 2013 and early January 2014, the Employment Policies Institute (EPI) in Washington, D.C., conducted a telephone survey of restaurants in San Jose, Calif. San Jose was chosen because in March 2013, the city leaders enacted an immediate 25 percent increase in its minimum wage, from $8 to $10 per hour. EPI wanted to see how one group of affected businesses — fast food and table-service restaurants — respond to such a wage hike.

As always, we caution against putting too much weight on the outcome of one survey of one industry in one town. With that caveat in mind, what did the survey say?

In response to the higher minimum wage, two-thirds of the responding firms, the majority of which fall in the 10-49 employee size, will (or have) increase prices. More than 40 percent of the establishments plan to reduce employee hours and staffing levels. While 7 percent of the firms are now considering closing locations in San Jose, 30 percent are, after the wage increase, not likely to expand operations.

The EPI survey of food establishments in San Jose offers one observation supporting the predictions of basic economic theory; namely, that a higher minimum wage will lead to undesirable consequences, including higher product prices for consumers and, especially for those workers on the lower rungs of the job market, reduced income.

September 26, 2013

Federalist Society To Explore Dodd-Frank On Oct. 14 In Clayton

The Dodd–Frank Wall Street Reform and Consumer Protection Act is probably one of the more contentious pieces of legislation to become law in the last decade. Often referred to only as “Dodd-Frank,” the bill passed in response to the Great Recession to help the country avert another economic meltdown, in part by reforming the financial services industry. Yet critics argue that the bill did very little to protect the United States against the issues that made the recession so deep and damaging.

What do the experts think? Did the law protect Americans? Did it leave the U.S. economy exposed? The St. Louis Federalist Society sponsors a panel event featuring U.S. Rep. Blaine Luetkemeyer (R-Dist. 3-Mo.), Saint Louis University Law professor Ann Scarlett, and attorney Gregory Jacob. The panel will discuss those issues from 5 to 6:30 p.m. on Mon., Oct. 14 at the Crowne Plaza Hotel in Clayton.

Reservations, which close on Oct. 11, can be made here. Should be a very interesting event.

September 11, 2013

Is Kansas City A ‘Low Tax’ City?

The conventional wisdom seems to be that Missouri is a “low tax state,” but to come to that conclusion, you almost have to ignore how taxes are actually levied and collected in practice here. Indeed, I believe that a closer examination of Missouri taxes produces a very different conclusion. Consider, for instance, Kansas City:

  • Kansas City has a top marginal income tax rate of 7 percent — the state’s 6 percent income tax, plus the city’s 1 percent earnings tax. Kansas has an income tax of 4.9 percent. In 2018, it will be 3.9 percent. No earnings tax. We’ve said it before and we’ll say it again: Income taxes hurt growth, penalizing productivity and deterring greater investment. And this is to say nothing, of course, of the 100 percent deduction Kansans get for non-wage pass-through income. For Kansas businesses organized as LLCs, S-corporations, and sole proprietorships, the tax rate is effectively 0 percent. (And as we all know, 0 percent is also a lower tax rate than 7 percent.)
  • Not counting its special taxing districts (TDDs, CIDs, etc.), Kansas City’s sales tax ranges from 8.1 percent to 8.85 percent, depending on the county. Those are pretty comparable to the rates charged on the Kansas side of the metro area — generally between 8 percent and 9 percent on sales, also not including special taxing districts. Not a huge difference. But what if we include special districts? Kansas City’s “1200 Main/South Loop TDD and DT Streetcar (KC Live!)” area — in other words, the Power & Light District — has the top sales tax in the bi-state area, with a whopping 12.35 percent tax on the sale of prepared food. (Click that last link to see the rates not only of the city, but also of the special districts. I found them startling.) One special tax costing a fraction of a cent may not seem like much, but put a few together and — as we’re seeing across the city — it adds up to real money. And the new, and bad, sales tax ideas keep coming.
  • As our own David Stokes would note, apples-to-apples property tax calculations are tough to come by because property valuation norms can vary wildly from jurisdiction to jurisdiction. If I’m charged a 5 percent tax on a property valued at $100,000 by one set of assessing criteria, or a 6 percent tax on the same property valued instead at $83,333 using different criteria, I’m still paying the same amount in taxes ($5,000) regardless of the legislated property tax rates. Kansas property taxes, driven in Johnson County by taxes for schools, generally sit at higher rates, yet that doesn’t say a great deal on its own. What is notable on this front is that both Kansas and Kansas City have a bad habit of concentrating their property taxes on fewer and fewer taxpayers with special incentives. Check out the latest example on the Kansas City side; I’ll have more to say about that project later.

And we won’t even go into the city’s hotel taxes, rental car taxes, water and sewer fees, which are all high. Kansas City is one of the highest-taxed cities in the region, and Kansas Citians are the first to tell you as much. Especially after Kansas’ tax reforms, is it credible for Kansas City, Mo., policymakers to suggest the region has been or is tax competitive with its Jayhawk neighbors? Do they really believe the city’s businesses, particularly its small businesses, don’t know what’s happening in Kansas and won’t consider moving under these circumstances?

September 9, 2013

On Tax Policy And Iocane Powder

Last week, our friend and fellow blogger Dave Helling at the Kansas City Star wrote a critique of my post about how much accumulated income has left Kansas City and Saint Louis since 1992. Missouri’s urban out-migration, he argues, has less to do with economic environments than it does macro trends of suburbanization and warm-weather retirement. “Inconceivable” assertions on his part? Not at all. But that doesn’t really address the actual policy problems — past and present — that have led people to leave Saint Louis and Kansas City.

Suburbanization, whether between or within states, doesn’t happen in a vacuum. Lots of factors are considered when people decide to move, and among those considerations is taxes. And to be clear, tax policy matters not just when taxes are reduced or repealed, but also when bad tax policies persist. And a bad, bad tax that both Kansas City and Saint Louis have had for a long time is the earnings tax. As our own Joe Haslag concluded in a policy study way back in 2006:

[T]he growth rate in [the modeled] economy where there is no city earnings tax is 1.72 percent, while the growth rate in the economy with a city earnings tax is 1.66 percent. Thus, a city earnings tax results in the growth rate falling by 0.06 percentage points on an annual basis.

That might seem small, but it can result in large differences in the size of the economy. Suppose that the initial value of the economy’s income is $78 billion. (This is the 2002 personal income level in the Missouri part of the St. Louis metropolitan area). After a generation (25 years), the no-tax economy would be $1.78 billion larger than the economy with a one percent tax rate. That is a difference of 1.5 percent.

Indeed, tax policy can be a contributing (rather than motivating) factor in where people live and grow their businesses. Even small tax policy mistakes can be economically destructive for a city — just more quietly and over a longer horizon. If you hurt your city’s capacity to grow economically, you truly hurt your city’s future.

Alas, unlike Iocane powder, it’s very difficult to build up an immunity to destructive taxes over time. And obviously, suburbs developed around Kansas City on the Missouri side as they did on the Kansas side. But the fact that Jackson County lost “only” a half billion dollars of Missouri income to Johnson County before Kansas enacted significant tax cuts in 2012 (and 2013) should be cold, cold comfort to Missouri tax cut opponents. Tax policy was a factor considered in moving from Missouri to Kansas before; it may be the preeminent factor considered today. Where people retire is a thornier proposition bound up with both economic and non-economic considerations, but one thing is certain — Kansas Citians haven’t moved, and won’t be moving, en masse to Olathe, Kan., for its sun-kissed shores. Will they move there for its tax climate? Quite possibly. And that’s the problem.

On a more personal note: I have heard from businessmen and businesswomen across Kansas City about the pressure longtime-Missouri businesses are under to consider a move to Kansas — motivated almost entirely by the new taxing environment there. Businesses already are asking the question, “Is it time to leave Kansas City?” I cannot stress enough how serious their concerns are. How long can Kansas City and the state of Missouri afford to ignore them before risking a plunge off the Cliffs of Insanity?

I’ll Gladly Cost You Your Job On Tuesday For My Pay Raise Today

On Aug. 29, hundreds of fast-food workers in dozens of cities across the United States (including Saint Louis) walked off their jobs in protest. The focus of their discontent is the minimum wage, currently $7.25. Arguing that this wage simply isn’t enough, they demand that their employers increase the entry-level wage to $15.

Economists of all stripes recognize the impacts that imposing such a wage on these employers would have. Most notably, it would reduce the number of jobs available for entry-level, unskilled workers. Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning think tank that labor unions partly fund, noted on NPR’s Marketplace, “I’m sure you would see a lot of jobs lost.” Even a liberal economist agrees: Raising wages above that which market forces determine is a recipe for job loss.

How do Baker and others of similar views assuage their conscience at this prospect? When a hypothetical job loss of 20 to 30 percent was suggested, Baker responded that the remaining workers would “take home twice as much pay. They’re still way better off.” However, at the higher, artificial wage, fast-food employers will sensibly opt to keep the most productive workers. For the rest, well, they’ll just have to find employment elsewhere or be driven to rely on government assistance.

This episode and liberal support for it recalls an argument that economist John Stuart Mill made almost 150 years ago. Mill staunchly supported the rise of Unionism in England. Mill viewed union workers as the best representatives of the “upright and public spirited working man.” Mill argued that by excluding the “ignorant and untrained” part of the working class, unions benefited society. He believed that “We do them [the unskilled masses] no wrong by intrenching ourselves behind a barrier, to exclude those who competition would bring down our wages, without more than momentarily raising theirs.” Unions, in other words, would drive the unskilled and poor to the wall, reducing their numbers. And with a smaller labor force, there would be no downward pressure on wages overall.

Haven’t we learned anything over the past 150 years? Mill was just as wrong then as supporters of raising the minimum wage or mandating living wages are today. If everyone agrees that imposing wages that exceed those based on mutually beneficial decisions of workers and employers alike leads to increased unemployment for those who need work the most — the poor and the unskilled — how can responsible civic leaders call for further increases in the minimum wage?

September 4, 2013

You Can Call Them Buzzards, But That Makes Missouri The Carcass

Another day, another governor courting — or as some are saying, “trying to poach” — Missouri’s businesses. This time, it’s another Rick: Florida Gov. Rick Scott.

Gov. Rick Scott is teaming up with a fellow Republican governor this week in urging businesses based in Missouri to head to states with better business climates.

With Gov. Jay Nixon vetoing $700 million in tax cuts earlier this year, Scott is calling for businesses to move from the Show Me State to the Sunshine State….

Scott’s office sent a letter to Missouri businesses earlier in the week, highlighting Florida’s business climate. So far this year, Scott has sent similar letters to businesses based in California, Colorado, Connecticut, Illinois, Maryland, Massachusetts, Minnesota and New York. Like Missouri, all of those states have Democratic governors.

You may not like The Ricks, but the fact of the matter is that when you look at where Missouri’s money is moving these days, Florida is high on the list of its destinations. Like Texas, it is a serious threat to Missouri’s economic future.

How do we know that? Let’s start with Saint Louis County as an example, from the website How Money Walks. Where has the wealth from Missouri’s largest county been moving since 1992? (Graph omitted for space.)

Two of the top five counties that Saint Louis County lost wealth to are in Florida, although the County’s neighbors — particularly Saint Charles — got in on the action as well. (Note also that Saint Louis County’s main source of inbound wealth was … Saint Louis City.)

Of course, Florida isn’t the only threat. Which state is an obvious threat to the wealth of Jackson County, our second-largest county? (Again, graph omitted.)

No. 1 destination: Kansas, specifically Johnson County.

Missouri is not powerless in all this. We should be actively seeking ways of making the state a better place to live, work, and play — not a better place to grow government. Frankly, it’s frustrating to hear politicians with a penchant for false bravado act like this cash exodus isn’t happening. For once, policymakers, try empowering Missourians to grow this state rather than turning them into Texans, Kansans, and Floridians through your inaction. Stop the excuses. Enough is enough.

August 20, 2013

That Sucking Sound Is Your Money Being Taken From Missouri’s Private Economy

Whose money is it?

Supporters of higher taxes have spilled a lot of ink suggesting that Missouri House Bill 253 will decimate the state’s budget, the bill’s revenue triggers notwithstanding. Taking their figures as gospel only for the sake of argument, I wonder, do tax hike supporters recognize that all that tax money is actually the taxpayers’ money first and foremost? By sustaining the governor’s veto, tax cut opponents are actually taking every dollar it “costs” the state or a political subdivision from the private economy to grow the size of government. Put another way: Does taking more money out of taxpayers’ hands and letting the state spend it — a state that, under the present status quo, ranks 48th in the country in GDP growth since 1997 — sound like a recipe for economic success to you? Sounds like business as usual, and here in Missouri, business has been too bad for too long.

The implication at the core of the veto supporters’ argument is that the state knows how to spend that money better than we do. I disagree. If you support smaller government, you support tax cuts. If you support bigger government, you make excuses.

August 16, 2013

The Price Of Air Travel

Steve Sexton at the Freakanomics blog has an informative post about the cost of air travel. But the costs he discusses are not the kind that affect ticket prices; rather, he analyzes the cost of time for delayed and canceled flights. He writes:

Researchers at MIT and George Mason University estimate that delayed and canceled flights imposed on passengers an aggregate delay of 28,500 years in 2007. The cost of these delays, and of risk-averting behavior like traveling early to destinations, was estimated at $15.3 billion, a startling number that accounts for the opportunity cost of time but doesn’t measure the consequences of missing critical appointments like weddings or job interviews.

While Sexton refers specifically to airline cancellations, his larger point is about the time costs to passengers. This study mirrors recent observations from SaveKCI’s blogger Kevin Koster:

Yesterday, I had to make a day trip to Denver. As I tweeted yesterday morning, it literally took me only 8-minutes from the time I locked my car in the KCI garage until I was through security and standing at the gate ready to board. By comparison that afternoon in Denver, it took me 45 minutes from the time I was dropped at the curb until I was at the gate – and I was told the security lines were unusually short.

More impressive though was our return to KC. It took me less time to get from the gate to my home than it did in Denver to get from the gate to a waiting cab outside. To the business traveler time is money – on average $150/hr. We should be selling KCI’s “private jet speed” convenience to businesses in other markets, rather than considering destroying it.

Airport administrators want to move to airport models used elsewhere in the country to maximize revenue. Kansas Citians like Kansas City International Airport because it allows them to be efficient with their time. For many in the region, this time cost is the most important.

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