January 26, 2015

Kansas City Embraces Baristanomics

Streetcars, entertainment districts, new airport terminals, Republican confabs, Super Bowls, creative-class millennials, and convention hotels all have grabbed headlines in recent months in Kansas City. Certainly they are evidence that city leaders think they can spend, spend, spend their way into wealth. But they are also evidence that Kansas City has embraced something my colleague at the Show-Me Institute dubbed “Baristanomics.” Baristanomics is the theory that lifestyle spending can revitalize an urban economy.

It doesn’t work.

Richard Florida first proposed the idea that cities need to attract the so-called creative class in order to survive. His prediction was not borne out by time. But like all good economic theories, zealous adherents aren’t swayed by plain evidence. Here in Kansas City, leaders still talk about attracting this creative class with streetcars despite the fact that the evidence tells us that even the millennial-age cohort is no less likely to own cars than their peers in past generations. They act the same way any group does: They move to regions that offer jobs.

A study of successful innovation hubs even demonstrated that among those that have been successful there is no winning government strategy—success does not lend itself to a simple formula.

Boosters of Baristanomics point to the slight growth of downtown residents to show the success of the city’s profligate spending. As another high rise is proposed for downtown—and subsidized with taxpayer dollars—the high availability no doubt will drive prices into the basement. Laying aside the question of whether such modest growth is worth the huge cost to taxpayers, it is clear that Baristanomics has not produced the jobs necessary to keep people downtown. Downtown residents commute out of the core for work—something that writers elsewheredubbed Urban Inversion. Basically, Kansas City is turning itself inside out.

Without jobs—baristas, hotel concierges, and restaurant staff notwithstanding—any measure of success will be short lived if Kansas City isn’t attracting jobs. In fact, the growth of residential development is coming at the cost of commercial and industrial growth potential as one-time office buildings and warehouses are converted into trendy lofts. Furthermore, many of those living spaces were built or renovated with tax abatements or subsidies that will make them much less attractive in 25 years when they end.

Cities do not form around coffeeshops and large entertainment venues. (If they did, where is the development around the Truman Sports Complex? There are barely hotels over there.) People generally live where they work, and if Kansas City continues to be an unattractive place to build a business, all the hip speakeasies and entertainment subsidies will amount to nothing more than curious finds for future archeologists.

January 5, 2015

Lower Gas Prices Produces Higher Spendable Income for Missourians

I hope you enjoyed the extra (and unexpected) gift of lower gas prices this recent holiday season! According to GasBuddy.com, gas prices in Missouri averaged about $1.90 a gallon during the first week of 2015. This is significantly below the January 2014 average of about $3.00. How does this drop in gas prices translate into spendable income for the average Missouri household?

To answer that question we need to make some assumptions. First, we need an estimate for miles driven. Using national driving data for 2014 from the U.S. Department of Transportation the average male aged 35-54 drove 18,858 miles. The average female in the same age group put 11,464 miles on the car. Adding two teenagers to our household increases mileage driven by 8,206 for a boy and 6,873 for a girl. All told, then, our average family of four put about 45,400 miles on their car(s). If we further assume that the cars driven by our family averaged 25 miles per gallon, our representative family bought 1,816 gallons of gas.

Now for the income effect. At the January 2014 price of $3.00 a gallon, our family would spend about $5,450 a year on gasoline. At the current price of $1.90 (and assuming they do not increase miles driven) their gas bill drops a whopping 37 percent to $3,450. If the average family of four in Missouri had an income of about $72,600 in 2014, an estimate based on updating the 2013 median family income figures from the U.S. Census, their $2,000 savings in gasoline expenditures is equivalent to a 2.75 percent increase in household income. Not a bad raise for our average Missouri family!

What brought about this unexpected windfall? Increased oil production in the United States has been one of the most significant developments leading to more competition in world oil markets. With OPEC’s control over oil prices curtailed, market forces have pushed oil prices and, therefore, gas prices down. Whether oil and gas prices remain at their current levels is unknown. What is clear, however, is that competition has once again benefited consumers.

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 3, 2014

Show-Me Institute Presents: Missouri’s Economic Record In The 21st Century

During good times and bad, Missouri is failing to keep up economically with its neighbors. In the Show-Me Institute’s new essay, “Missouri’s Economic Record In The 21st Century,” by Rik Hafer and me, see why we give Missouri’s economic performance during the current century a grade of “D” and how such a record could mean serious trouble for future Missouri residents. Please give it a look.

May 7, 2014

It’s Difficult To Compete With Free

If it were your decision and you could select any type of school, what type of school would you select in order to obtain the best education for your child? This question was posed to 660 Missourians in a poll that the Show-Me Institute and the Friedman Foundation for Educational Choice released this week. In their responses, Missouri voters overwhelmingly demonstrated that it is difficult to compete with free.

Only one-third of respondents indicated they would select the regular public school system. Thirty-nine percent indicated they would select a private school, making it the most common response. Another 21 percent indicated they would choose to homeschool their children or send them to a public charter school.

Q7 Friedman Missouri Poll

These responses stand in stark contrast to reality – nearly nine out of 10 students in Missouri attend public schools. Why this mismatch between preferences and actual choices? Cost and access.

Public charter schools are only located in Saint Louis and Kansas City and are limited on where they can expand. Private schools cost additional money. As anyone with a cursory knowledge of basic economics knows, demand decreases when cost rises. In other words, many parents are more likely to choose a free public school than they are to pay for a private school – regardless of preference.

But public schools do not have to be the only option for parents. Currently, 24 states and Washington, D.C., have school choice programs. Kansas became the most recent state to adopt a private school choice program with the creation of a tax credit scholarship program.

There is a clear desire for expanded educational options in Missouri. Yet, there is entrenched opposition to school choice from education establishment groups. These groups claim to oppose choice because they want to protect students. It seems obvious, they actually oppose school choice because they want to protect their advantage over the costly private competition. That is why economist Milton Friedman once said:

There is no doubt what the key obstacle is to the introduction of market competition into schooling: the perceived self-interest of the educational bureaucracy.

Opposition to school choice stands in the face of clear support among Missouri voters (including rural voters) and in the face of evidence that school choice works.

Paul DiPerna, the research director at the Friedman Foundation, and I discuss the new poll on this segment of Choice Media’s Reform School.

April 30, 2014

We Get Results

An April 23 post titled Kansas City Streetcar Economic Development Claims Don’t Add Up . . . Literally pointed out that a NextRailKC document detailing the economic development that resulted from the streetcar was poorly considered and even mis-tabulated.

Not only does the information provide no detail on how it was collected, but the table attached isn’t even properly tabulated. Simple arithmetic (we used a calculator) indicates that their table yields $791 million in development and 1,984 housing units. (The summary they provide is $879 million and 1,997, respectively. They even mis-tabulate the numbers provided in their legend. What did Kansas City pay for this?)

We noticed this morning that the link on NextRailKC has been taken down. So we’ve edited our post and provided the original flawed NextRailKC document here. We’re glad that streetcar supporters read this blog, and we hope that the corrections they make to the original document not only include correct tabulation but sound economic analysis as well.

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.

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