For advocates of free markets, St. Louis city presents a disturbing environment for the conduct of business. Indeed, the fact that so few construction projects occur here in the absence of subsidy necessarily makes the rare market-based development a news item in its own right. But what about projects that do not make the news?

Pictured above in August 2010 is the 1818 Washington Ave. Building in downtown St. Louis. Paired main entry doors punctuate the center of the building’s primary facade, while four ground-level storefront bays are at right. A pizza restaurant occupies this retail space, displaying a bright red-on-white background ”Now Open” sign, in addition to handsome neon signs for Bud Light and Bud Light Lime.

Two blocks to the southwest, at 2001 Olive St., a one-story building features plywood boards over the entirety of its glazed area. Permanent signage for the pizza place remains atop this building, while a banner reading “We Will be Relocating to 1818 Washington Ave. July 1st, 2010,” with red lettering on a white background, hangs from a ground-level storefront bay at left.

In a truly competitive free market, the story would end here: A business moved from one building to another. So what?

As this business relocation occurred in St. Louis city, however, legislated market distortion and an administrative exercise in symbolic violence likely contributed to the outcome pictured above.

On the legislative front:

Ordinances 67319, 67462 and 67463 designated 1818 Washington Ave. as a redevelopment area, executed a redevelopment agreement between the developer and the city of St. Louis, and authorized “$2,380,000 Plus Issuance Costs” in Tax Increment Financing (TIF) notes for the construction of 1818 Washington and another nearby project.

On the administrative front:

In addition to TIF, the 1818 Washington project stands to utilize “Federal and State Historic Tax Credit programs.” Combined, they could yield up to 45 percent of the project’s costs in tax credits for the developer — 20 percent for the federal credit; 25 percent for the state credit. (The building is a contributing resource in the “Lucas Avenue Industrial Historic District (Boundary Increase),” after all.)

In a free market, favorable lease terms or a street address on the vaunted Washington Avenue could prove enticements enough for a business to relocate. In St. Louis city, we are instead left to ask what role public monies are playing in a business location decision, and whether associated municipally approved TIF legislation is actually legal.

Missouri TIF law states the following in §92.805(4), RSM0:

For redevelopment projects or redevelopment plans approved after December 23, 1997, if a retail establishment relocates within one year from one facility to another facility within the same county and the governing body of the municipality finds that the relocation is a direct beneficiary of tax increment financing, then for purposes of this definition, the economic activity taxes generated by the retail establishment shall equal the total additional revenues from economic activity taxes which are imposed by a municipality or other taxing district over the amount of economic activity taxes generated by the retail establishment in the calendar year prior to its relocation to the redevelopment area;

If the pizza restaurant succeeds at growing its revenues dramatically at its new location, the rehabilitated building’s developer will prosper as government loses funds that it would receive were the restaurant not in a TIF district. Had the rehabilitated building attracted a business truly new to St. Louis city, government would receive a greater share of the TIF project’s associated revenues.

Subsidizing projects that displace economic activities from one site to another is a losing proposition for cities and their residents. In St. Louis city, the elimination of TIF would allow our community to awake from its current nightmare of ever-increasing taxes and instead move us toward broadly shared prosperity, courtesy of the free market.

A friend emailed me this story from the Sun-Times about the City of Chicago continuing its privatization efforts. According to the article, officials are considering privatizing the famous Taste of Chicago, which I have attended a couple of times. My friend’s response was, “Why wasn’t it fully private in the first place?”, which I completely agree it should have been (no surprise there).

So, I started thinking about St. Louis’ own premier restaurant festival — the Taste of Clayton. I quickly learned two things about Taste of Clayton: I assumed it was private, but it has actually been run by the city; and, it isn’t happening at all in 2010. The Taste of Clayton was always run as a nonprofit event. The restaurants donated their time and effort, the city made all its expenses back so that taxpayers didn’t foot the bill, and the rest went to charity. (See pages 38 and 43 of the Clayton budget if you want the financial data.)

So, if the city really is considering new ideas for 2011, here is a simple one: Allow a private organization or entrepreneur to operate it as a for-profit enterprise! Charge them for the costs of street and police services at the event, and allow them to make money off of it.

But back to Chicago. Mayor Richard Daley says some terrific things in this story (ellipses in original):

But, Daley said he’s determined to hold the line on property taxes and all other taxes and fees and there are precious few alternatives.

“People don’t want to see government growing. They don’t want to see their taxes growing. … People are suffering,” he said.

“What can you do if it costs you more and more money? … You have to look at government differently. If you don’t look at government differently, you live in the past.”

I would dispute the line about precious few alternatives. Chicago could choose to fire the thousands of its city employees that essentially do nothing, including the infamous “Boiler Watchers” who do nothing but monitor public building boilers that have had internal alarm sensors for decades now. But that would mean taking machine party hacks dedicated public employees off of the public payroll.

Nonetheless, the proposal (and other similar privatization ideas) is getting the predictable response from the public employees’ union:

Phillips has said he’s “totally against” farming out recycling because it’s “less jobs for us” at a time when his members are taking unpaid furlough days and comp time instead of cash overtime.

I appreciate the honesty there. Government work is not about providing services; it’s about jobs for their union members. It’s almost refreshing to hear it said.

I commend Mayor Daley for these ideas (not that he cares what I think), and hope that our big city mayors in Missouri can learn from them. Although, to be fair, the Chicago system gives the mayor much more power there than is the case in St. Louis or Kansas City.

I attended my first Land Clearance for Redevelopment Authority (LCRA) board meeting in Saint Louis yesterday. I couldn’t help but notice stark similarities and differences between the LCRA and the Land Reutilization Authority (LRA) board.

One stark difference is the amount of information that each board expects from the petitioners. When presenting before the LRA board, an individual has to demonstrate financial ability and provide the written endorsement of an alderperson, as contributors to Show-Me Daily have communicated previously. When presenting before the LCRA board, apparently, the presenter provides neither. He only has to cite the dollar amount that the developer is spending on the project, as well as the projected number of jobs that will be created.

As a related point of contrast, committee members of the LRA board pose probing questions to petitioners, whereas those of the LCRA members ask few, if any.

As a point of similarity, both the LRA and the LCRA promote policies that remove properties from the tax base and therefore reduce the amount of property tax revenue received by the city. Each has a different way to accomplish this, however — the LRA board denies proposals from individuals to buy properties that are withheld by the city, and the LCRA board approves proposals from private corporate developers to abate property taxes.

I encourage you to compare the number of suits in the first photo below to the number in the second photo.

To me, it begs the following question: Whom is Saint Louis City government serving: taxpaying individuals or corporate developers?

Land Clearance for Redevelopment Authority (LCRA) Meeting, August 24, 2010

Photo Credit: Thomas Duda

Land Reutilization Authority (LRA) Meeting, June 30, 2010

Photo Credit: Thomas Duda

As the end of the year draws nearer, the expiration of tax cuts passed in 2001 and 2003 also begins to creep over the horizon. As this happens, our federal government continues to spend what seems to be an infinite line of credit. Recent financial and health care reforms bring with them cost estimates that undoubtedly understate true costs. The same can be said about unemployment extensions.

The egregious amount of deficit spending is leaving taxpayers with a sizable bill. The federal government would like the “rich” (those that make more than $200,000 in pre-tax income) to pay a higher proportion of that bill, making them the lucky recipients of a tax rate increase. The politics of the tax cuts have already begun. It seems like an impossible task for Washington to divorce the economics from the politics. At this point in history I’m betting that that those individuals and families in the highest tax brackets will certainly see a tax increase come January.

The president recently said, “There will be no more taxpayer-funded bailouts. Period.” But, as Dan Henninger of the Wall Street Journal points out, “Raising taxes to cut the deficit is a bailout for the spenders.”

I’m beginning to think that an effective training regimen for politicians would include an undergraduate degree in linguistics.

Maybe I am missing something. Maybe classical microeconomics has become outdated and doesn’t adequately reflect decisions in the real world anymore. Maybe the nuance of their arguments is too much for me. Or maybe they’re wrong.

Economists have been developing mathematical equations since the days of Adam Smith, attempting to ascribe reality to a system of variables that can be changed and tweaked to more accurately reflect what economists empirically see. The problem with these equations is that they are not reality. That being the case, it is best to avoid needless complication.

Someone best illustrated this to me using the game of billiards as an analogy. Hitting the cue ball into the eight ball in an effort to send the eight ball into a corner-pocket requires skill and accuracy. Ricocheting the cue ball off the rail into the three ball which then will kiss the nine ball on its way into the two ball which will subsequently fall into the pocket is an entirely different problem. The more complex the system gets, the more accuracy is required, and initial mistakes are magnified further down the line.

Intertemporal decision making can be a complex problem to study, but most of the world makes such decisions intuitively — we are all practicing economists. The amount available for future consumption is future income plus savings plus the amount of interest earned on savings. If savings are negative, the person is borrowing and must pay back the amount borrowed plus the interest in the second period. This has the effect of reducing future consumption.

Future Consumption: P₂C₂ = M₂ – M₂t + S + iS

This means that today’s purchases change tomorrow’s parameters.

Current Consumption: P₁C₁ = M₁ – M₁t – S

Reality is an integration of these two equations. We do it constantly, and instantaneously most of the time. Income (M₁ & M₂) is a function of spent spent in leisure and work, and wages. People often decide how much they will work based on how much they plan to consume and how long it will take them to achieve the desired amount of income for that consumption (this also allows income to implicitly represent labor decisions in these micro equations).

Enter government, with a budget constraint that looks very similar. What is different is that the government doesn’t have to make labor decisions; it makes taxing decisions, and consumes through expenditures.

Government Expenditures: p₁E₁ = M_G + S

Government Revenue: M_G = M₁t (this form represents an income tax)

Taking from the income produced by others is the government’s only real source of revenue. This has two very obvious implications: 1) Taxation has an obvious impact on private consumption decisions, because it subtracts from real income (this also affects savings and consumption patterns, both now and later); and, 2) tax rates and government expenditure choices signal to the public the likely outcome of future taxation and expenditure decisions. This model of the aggregate economy suggests that eliminating the tax cuts will have deleterious effects on output and employment.

For some reason, Keynesian economists believe they have the power to affect the M₁ variable in this equation on a massive scale. The government is just adding pool balls to the equation. When the government decides to increase expenditures, it also has to increase revenue, by increasing the tax rate (t) now or in the future (after borrowing). This will have a negative effect on personal income, which translates to a decrease in personal consumption. The government has also decided to implement a progressive income tax structure. This means that, as M₁ increases, so does t. Because people tend to make decisions based on marginal welfare at their original consumption pattern, the last unit of consumption is roughly equal to the leisure that a person gives up to work that extra little bit so they can afford that last bit of consumption. With a progressive income tax, or an increase in the tax rate on any person, production is decreased at a marginal rate. When this happens to 300 million people at the same time, we begin to see problems.

The opponents of tax cuts often ask: What is the difference between swelling the public sector and cutting taxes, in terms of the federal government’s deficit? The answer is that they have different compensation structures and lead to different production decisions. Public money doesn’t force firms (whether they are public firms, or private firms contracted by the government) to make marginal decisions that maximize efficiency. Unfortunately, this means that public money is attached to inefficiency margins for anyone accepting it. Raising taxes therefore has a double whammy effect: Private production slows based on marginal decisions, and when it is converted to public money, it integrates inefficiency into each dollar.

Does this sound like a good prescription for an ailing economy?

“If all the economists in the world were laid end to end,” George Bernard Shaw famously wrote, “they wouldn’t reach any conclusion.” Although economists may disagree on many policy issues, they do agree on many others. The concept that free trade is beneficial is one of these areas of consensus. In fact, 90.1 percent of economists disagree that “the U.S. should restrict employers from outsourcing work to foreign countries.” Even Paul Krugman supports free trade.

If free trade is one area that this contentious group can agree, why do elected officials in Washington and in Jeff City continue to pass measures that impede, rather than proliferate, free trade?

As the latest example of impeding free trade, the U.S. Senate is targeting companies that outsource, particularly to India:

Democrat Senator of Missouri Claire McCaskill on Thursday said the proposal would increase fees for particular companies that exploit two categories of visas — H-1B and L.

Not only do legislators seem to ignore economists, they also seem to ignore history. The fact that protectionist policies do more harm than good has been repeatedly demonstrated in the past (e.g., the Smoot-Hawley Tariff Act in 1930, the steel import tariffs in 2002, and protectionism in the vehicle manufacturing industry).

When a country or a state protects certain industries, those companies do not have to innovate their product to compete in the marketplace. As additional negative consequences, such protectionism dampens downward pressure on consumer prices and reduces the variety of goods and services available to consumers in a region, who are more limited to that which they can produce themselves because goods from elsewhere are artificially priced out of market availability. If this proposal progresses, perhaps the same problems could plague the IT services industry.

Subsidizing favored companies and industries and simultaneously imposing restrictions on those that are not favored is an expensive and inefficient practice. In doing so, the government sends the fallacious message that it can pick winners and losers in the marketplace. Overall welfare would improve if the United States and Missouri both embraced the creative destruction of their respective economies, instead of cementing favored activities for reasons of nostalgia and/or xenophobia.

Read this short article from the Springfield News-Leader offering an encouraging account of politicians avoiding partisan wrangling and getting along at a recent Springfield announcement. Then read the quote by William Graham Sumner from which the title of the The Forgotten Man by Amity Shlaes is taken (or re-read it, given that many of you have probably read Shlaes’ book):

As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. [...]

He works, he votes, generally he prays — but he always pays — yes, above all, he pays.

Don’t take this as a specific criticism of any of the officials discussed in the News-Leader article. Even more so, don’t take it as a criticism of the programs discussed in the story, especially the great people in the Missouri National Guard. The deal to lease part of the airport may well be a good deal for taxpayers.

However — and I want subtlety to be my friend here — is it really that amazing that politicians will get along at an event where they are all either spending or receiving other people’s money? State tax dollars are being used to lease local government property, and it is supposed to be noteworthy that all the politicians are happy? It does not matter that the expenditure in this example is an arguably fully legitimate use of public money. (I’ll leave aside for a moment that it could be even better if the Springfield airport were privatized, like its competitor to the south in Branson.)

Anyone who sees public officials getting along in an instance like this and thinks that it is a notable example that bears repetition lacks an understanding of public choice economics and interest group politics.

Thanks to johncombest.com and derrickjeter.com for the story links and quote.

As the president tries to ramp up education reform with the administration’s new Race to the Top funding structure, he is receiving blow-back from the NAACP and a number of other groups. Their major critique of this most recent outreach program is that a funding structure based on competitive incentives during a recession cannot help the massive education problems that exist in the nation’s low-income communities.

The statement that the civil rights and other activist groups produced at the end of July suggested as a solution more of the status quo — or, at least, more for the status quo. It seems that their position is to give current schools more money (with no qualifier) and trust them to fix the problems.

Unfortunately, the economic reality is that money doesn’t grow on trees. Whether or not this attempt at ensuring that the dollars devoted to education are spent effectively actually achieves all the program’s goals, competition for the grants will hopefully create change in a stagnant system.

One of the criteria in this system that the civil rights groups oppose is the use of charter schools. Today, an article in the Wall Street Journal pointed out that minority support for these institutions is on the rise, and the numbers suggest that nearly 50 percent of African Americans and Hispanics support the formation of charter schools, while only 14 percent of African Americans and 21 percent of Hispanics oppose them. It is time for these groups to stop playing politics in education. The current system doesn’t work.

The Show-Me Institute’s most recent policy study shows that superintendents in school districts across the state are receiving compensation based not on performance factors, but rather correlated with school district characteristics, such as population size.

The time to reform education is now; competition and a fundamental change in how schools are funded have a far better chance of helping the kids that need it most. Although Missouri is not on the short list to receive any of the grants, we should pay close attention to this new federal market-based funding structure and track its results.

On Tuesday, Saint Louis city residents voted overwhelmingly to pass a $155 million bond for Saint Louis Public Schools (SLPS). According to the city’s Board of Election Commissioners, nearly 76 percent of the city residents who showed up at the polls voted for the bond.

One of the primary strategies with which proponents of a school bond promote such measures is to say that the bond will not result in an increase in taxes. This is misleading at best, and disingenuous at worst.

There are two main ways that school districts ask residents for more money. The first is by asking voters to approve a tax levy increase, which, if approved, results in a direct increase in the property tax rate. The second is by requesting that voters approve a bond. A bond is an issuance of debt. It does not directly raise your property tax rate, but the debt must be paid off in the future. And school districts pay off the bond issued today with property taxes tomorrow, plus interest.

According to St. Louis Public Schools’ 2009 Comprehensive Annual Financial Report (CAFR), district residents paid $3.8 per $100 of assessed property valuation. Of the school property tax rate, $0.6211 was used to pay off debt and debt-related costs. That means that more than 16 percent of the property taxes that district residents pay for SLPS are used to pay for the district’s debt. Tax dollars will be used to pay for the just-approved $155 million bond. Those millions will not appear out of thin air.

Reading the coverage leading up to the election, one statement stood out as particularly bad. As St. Louis Post-Dispatch reporter Elisa Crouch put it, “The bond measure would not result in a tax increase, [h]owever, taxpayers would pay the levy longer if the bond is approved. The district would retire its bonds in 2025, rather than 2018.”

Read that quotation again. It’s kind of ridiculous. Rationalizing school debt by saying that it won’t increase the tax rate, only the duration of payments, is akin to justifying taking on more credit card debt because it won’t increase your monthly payment — you’ll just have to spend a few more years making the minimum payment. If I applied this logic to my own finances, I’d have many wonderful impulse purchases (ooh!), but it would take me years of austerity to climb out of debt in the future.

I wonder when SLPS will get around to paying off all of this debt it has accumulated. Going back to the 2009 CAFR, you can see on page 105 that since 1999, SLPS has never managed to reduce the rate of taxes it charges residents for debt purposes. The rate has only increased, from $0.55 to $0.6211. In 2009, SLPS had accumulated a total of more than $245 million in bonds and notes payable, according to the CAFR. Furthermore, SLPS paid down $14.3 million of its debt last year, while paying an additional $8.95 million in interest charges. In fact, according to the CAFR, only $1 of every $2 that SLPS spent in 2009 on debt service went to paying down its debt. The rest was eaten up by interest, payments to an escrow agent, and bond issuance costs.

Debt is expensive. I’m sure SLPS — and Nicolas Cage — would agree.

Yesterday’s primary election featured a statewide vote on Proposition C, otherwise known as the Health Care Freedom Act. The bill originated as a proposed amendment to the Missouri Constitution, but when it became clear that the bill could not be brought to a vote in the Senate, its proponents reached a compromise that would allow citizens to vote on it as a statute. The new statute is unlikely to have much legal effect, but it was touted as a way for Missourians to concretely express their opinions about the individual health insurance mandate that serves as the cornerstone for the federal health care reform law adopted by Congress earlier this year.

The Health Care Freedom Act passed with more than 71 percent of the vote, but this alone does not truly tell the story. Primary elections have a different dynamic than general elections, with lower turnouts that can be dominated by one party or another; a measure passing with 71 percent of the vote might not be surprising if, say, the party most likely to favor that measure had far more supporters going to the polls. And, in fact, about 64 percent of those who voted yesterday chose Republican ballots, while only 35 percent chose Democratic ballots. The Health Care Freedom Act was sponsored by and primarily driven by Republicans, and its target was a provision in a bill passed by a Democratic Congress and a Democratic President — so, given the turnout, perhaps the landslide victory for Prop C was just to be expected.

Not so fast.

Looking more closely at the data, it appears that a significant percentage of Democrats also voted in favor of Prop C, presumably indicating dissatisfaction with the individual health insurance mandate. How can we know? Just compare the number of Democratic ballots cast in the race for U.S. Senate (315,787) to the number of votes cast against Prop C (271,102). That means that even if we assume that every person using a Republican, Libertarian, or Constitution Party ballot voted in favor of the Proposition (an unlikely prospect), more than 40,000 people using Democratic ballots also supported the measure. In St. Louis city, at least 29 percent of those casting Democratic ballots voted in favor of Prop C (26,696 Democratic ballots; 18,989 votes against Prop C). In Kansas City, at least 20 percent of those casting Democratic ballots voted in favor of Prop C (20,534 Democratic ballots; 16,383 votes against Prop C). When one considers that it is likely that at least a small percentage of Republican, Libertarian, and Constitution Party voters voted against Prop C, that means that anywhere from 25 percent to 40 percent of Democrat voters statewide probably supported the measure.

There are limits to what yesterday’s vote can tell us. For example, are Prop C’s supporters opposed to all parts of the federal health care law, or just the individual mandate? At a minimum, though, it does seem remarkably clear that Missouri voters have demonstrated a broad and bipartisan opposition to the idea that Congress should force people to purchase health insurance.

Now that the $150 million incentive package for Ford has passed, it’s apparently time to reverse positions and talk tough on tax credits again. On Wednesday, the governor created a commission that is supposed to evaluate the effectiveness and return on investment for each of Missouri’s tax credit programs.

Unsurprisingly, rent seekers tax credit supporters are critical of the new committee. According to an article in the St. Louis Post-Dispatch (emphasis added):

While the commission does include several prominent tax credit advocates, [...] it lacks any representatives from small town Main Street groups, community development organizations or historic preservation groups, “all of whom have firsthand experience in how well the program works for the average citizen,” the [Coalition for Historic Preservation and Economic Development's] press release reads.

Judging from the list of people on the committee, I don’t foresee many calls for scaling back these programs. Not only does the committee include bureaucrats and politicians, who have an incentive to grow the size of government, it includes businessmen whose companies have been issued tax credits. The committee includes a member from Hallmark, in Kansas City, which has received $8,657,730 in tax credits from the state government since 2000, according to the “Show-Me: Tax Credits” application. There is also a member from Commerce Bank in Saint Louis, which received $5,401,975 in historic tax credits in 2002. Legacy group investments received $183,586 in historic preservation credits in 2003. In addition, many other members come from the real estate industry, which would likely benefit from increased construction activity.

As I communicated to the Missouri Watchdog, I applaud the effort to review these programs, but I am skeptical that this commission will accomplish anything, given that the governor continues to dole out tax credits to his favored few (e.g., Ford, IBM, sugar substitute producers, data centers, filmmakers, etc.).

We live in a world of second-best options, and a review process is more desirable than nothing. The optimal solution would be to cut these incentive programs altogether, because they distort the playing field.

If the governor were serious about stimulating productive economic growth in Missouri, he would eliminate the programs entirely and return the money to taxpayers to spend on their own. People tend to spend their own money better than they do other people’s money, after all.

I was pleased to see that the Post-Dispatch ran a letter to the editor today that I wrote in response to its recent editorial calling for St. Louis officials to renew efforts to subsidize the NorthSide redevelopment plan. This is the text of the letter:

Developer Should Bear Risk of Failure

In responding to Judge Robert Dierker’s ruling that St. Louis officials lacked authority to offer hundreds of millions of dollars to subsidize the NorthSide redevelopment plan, the editorial board, in the editorial “Celebrating Decline” (July 12), implies that the plan can proceed only if the city provides the anticipated subsidies. The developer’s own estimates indicate a belief that he will realize a profit of at least $251 million even without those subsidies.

Nothing in the ruling prevents the developer from pursuing his quixotic vision or from enjoying any profits that might result from its success; rather, it requires that, like all other entrepreneurs, the developer must personally bear the risks of failure instead of pushing them onto the taxpaying public.

Dave Roland — St. Louis

Policy Analyst, Show-Me Institute

According to the St. Louis Business Journal, the Missouri state government just doled out $17 million in state funds to Mamtek, a sugar substitute manufacturing company, to locate a plant in Moberly. The incentive package also included $37 million in city bonds. From the article:

The state of Missouri awarded Mamtek $7.6 million in Missouri Quality Jobs Program tax credits and $6.8 million in Missouri BUILD program tax credits, [the governor's] office said Friday. The state also provided $2 million in Community Development Block Grant Industrial Infrastructure Program grant funds; $800,000 in funding for job training; and $368,000 for employment recruitment and referral services.

Wait, I’m confused. Wasn’t this incentive package endorsed by the same person who supported limits on Missouri tax credits in April? Isn’t this the same person who the Associated Press described as “cutter in chief” in May? If cutting such expenditures is a good idea, it’s important to maintain that position with more consistency, especially in the face of political pressure to the contrary.

According to the United States Census Bureau’s American Community Survey, the city of Saint Louis has an estimated 21.5-percent residential vacancy rate. This rate compares unfavorably to the 12-percent rate for the nation as a whole and aligns closely with those found in Cleveland, Ohio, and Buffalo, N.Y. In raw numbers, this amounts to 38,743 empty housing units within the boundaries of Missouri’s second-largest city.

With vacancy pervasive throughout our community, St. Louisans may often logically conclude that said emptiness is the direct consequence of the stark reality that persons simply do not want to live here in the same numbers that they once did. In fact, it would be difficult to argue that losing nearly two-thirds of the city’s peak population would have a negligible impact on the appearance of the city’s landscape.

But does so much property necessarily remain vacant from a lack of market demand for single-family homes, larger yards, and new business locations, or could vacancy be the product of market distortion by a governmental agency?

At the urging of a colleague, I attended my first ever hearing of the St. Louis Land Reutilization Authority (LRA) on Wednesday morning, looking for an answer.

Within moments of its commencement, the meeting shattered every expectation that I had for a body with the following statutory mandate (emphasis and link added):

The land reutilization authority is hereby created to foster the public purpose of returning land which is in a nonrevenue generating nontax producing status, to effective utilization in order to provide housing, new industry, and jobs for the citizens of any city operating under the provisions of sections 92.700 to 92.920 and new tax revenues for said city.

Instead of operating in a manner consistent with its above-enumerated legislative intent, the LRA appeared to operate according to a morass of opaque cultural practices that stand divorced from any legislative language. Indeed, the insistence by the assembled commissioners that prospective buyers of tax-foreclosed properties have the express written support of the alderman representing the ward that is home to the vacant property struck me as patently absurd. (After all, the word “alderman” does not appear in Chapter 92 of the Revised Statutes of Missouri.) Five people attempted to purchase property from the LRA this month without a letter of support from their alderman. Of those five, four offers were rejected, because the LRA purportedly treats a lack of aldermanic support as a reason to reject a prospective buyer’s offer.

After witnessing Wednesday’s proceedings and perusing the many purchase offers on the LRA agenda, I can say with great certainty that much of the vacancy subject to the LRA’s jurisdiction in St. Louis city is not a consequence of a lack of private demand for property; rather, much of it derives from government legitimation and infringements on the free market.

The special legislative session starts Monday in Jefferson City. I am very excited that one of the bills being considered is Rep. John Diehl’s proposal to amend how counties charge the commercial surcharge property tax. Instead of handing out additional tax credits, here is a perfect opportunity to lower taxes for all businesses, including the Ford Plant in Claycomo, which paid more than $80,000 in surcharge taxes alone in 2009. This legislation would:

• Make it easier for counties to lower the surcharge if they want.
• Require the surcharge to roll back like all other real property taxes.
• Sunset the entire tax in five years.

Counties would be able to adjust to the sunsetting of the tax without unduly putting the burden on residents by adopting the St. Louis County system of setting different rates for different property classifications. First, they would have to adopt that system, and legislation might be required to reopen that option. These surcharge changes would be terrific for the economies of Missouri’s larger counties, and I am excited that they will again be considered in special session.

I do my best thinking at night. At least, that is how I justified my late-night walk this week through downtown St. Louis, where I could not help but feel a sense of utter helplessness. It was not simply seeing “Space Available” signs on every corner that prompted my emotional response; rather, it was my understanding that the slack in the retail, housing, and office markets represents a striking illustration of government’s inability to intelligently deploy our limited public resources.

After all, the image above is representative of dozens of corners recalled to ‘life’” with public funds in what some term “a vital pillar of Missouri’s economy.”

At present, the above-pictured TIFed and tax credited property is home to a small chain retailer, thousands of vacant square feet, quite a few presumably sold condominiums, two dozen available condominium units ranging in price from $250,000 to more than $750,000, many presumably leased apartments, and some parking.

If this building and its appearance were solely the products of truly private investments, I would feel far less concerned about its future. However, given that the city of St. Louis is going to start making me pay for trash service, I get a little upset when passing empty corners like the one pictured above.

All levels of government irresponsibly allow private actors to externalize their risks and costs to the public. In times of austerity like those that we now confront, these long-term public debt obligations increasingly become a drain on our individual resources.

So, how much did the corner shown above cost Missouri taxpayers? More than $30 million. (And likely more than $40 million, assuming that it also utilized the 20-percent federal historic preservation tax credit.)

Let’s call it what it is: a handout, a freebie, a bailout.

By rejecting automotive bailout funds in 2008 and 2009, Ford managed to shield itself from the political hit that was sure to result. As an article in the Columbia Missourian points out, now Missouri politicians are looking to find room in the budget for a $15 million per annum tax incentive program to provide the Claycomo Ford Plant with income tax breaks to reinvest in the plant. This time, the remuneration coming under the guise of tax incentives. As Show-Me Institute scholars have pointed out in the past, when the tax burden is reduced for one targeted business or industry, but overall government spending does not simultaneously decrease, the marginal tax rate for other taxpayers necessarily increases. In this way, Ford would be the beneficiary of taxpayer money.

This illustrates another flaw of the tax credit system, adding to an already long list of inadequacies. Public disapproval of the auto industry bailout in December of 2008 was well documented. This disapproval most likely stemmed from the general public’s disdain of using taxpayer funds to shore up profits for big business. The tax credit system does much the same, except that politicians and recipients of the tax incentives have figured out how to have their cake and eat it too. Missouri’s tax credit system effectively funnels money to a business or group of the government’s choosing while at the same time serving as a buffer to shield the politicians involved from losing political capital.

I understand the importance of keeping jobs at home in a competitive nationwide market, but empowering the government to play favorites through the use of tax credits and incentives is not the most effective way to accomplish this goal (if it’s a successful strategy at all). There are many other potential solutions that would not only help the Ford Claycomo plant stay afloat, but would also help in attracting other businesses to the state. Earlier this year, Show-Me Institute policy analyst David Stokes suggested that lowering the large commercial property tax surcharge in Clay County would help Missouri businesses located in that county retain more of their profits for reinvestment. Policies like this allow all businesses in an area to benefit, spurring reinvestment, stimulating growth, and widening the tax base. By improving the economic climate in general, benefits accrue to far more than just those lucky few businesses that government officials deem worthy.

While reading the Springfield Business Journal, I ran across a mention of the governor’s recently formed Executive Advisory Board, which will produce “a five-year plan for economic growth.” The governor’s press release states:

The final outcome of the planning process will be six to 10 strategic objectives to transform Missouri’s economy for the 21st century. The objectives will pinpoint existing and future industries that will drive growth. Along with each strategic objective, the plan will include specific tactical steps necessary to accomplish the goal. The strategic objectives and tactics will focus on the next five years.

Although I find the Executive Advisory Board’s mandate ludicrous — that state government should chart and shape the course of something as complex as our collective future economic development, I do find it encouraging that a committee member quoted in the Springfield Business Journal stated:

“We spend lots of money on economic development every year. The question is, ‘Are we strategically aligned to do it in the most effective way?’”

Obviously, the panel will not consider the possibility that the state of Missouri leave the business of economic development entirely, but I am somewhat hopeful that Executive Advisory Board just might conclude that the termination of some market-distorting policies would set Missouri on a course toward a freer and more prosperous future.

Here’s hoping.

The governor will be jetting around Missouri over the coming week for ceremonial signings of H.B. 1311, the Autism Spectrum Disorder Coverage Bill. On Thursday, he will go to Joplin, Springfield, and Columbia. On Friday, he’ll be in St. Louis and Kansas City. On Tuesday, he’ll be in Cape Girardeau. Why one bill requires the governor to be present at six signing ceremonies across the state leads to questions about fiscal responsibility. One would hope that this expense and hoopla isn’t devoted to each of the more than 100 bills delivered to the governor for a signature.

Beyond travel expenses, though, the signing of this bill will be costly for Missouri. I’ve written before about why I think an autism mandate is bad policy for Missouri. The bill may be a huge gain for the 300 to 350 families that will be helped by the mandate, but the rest of Missouri will pay for it in higher insurance costs and foregone jobs.

Consider: There are more payday loan storefronts in the United States than there are McDonald’s and Starbucks outlets combined. Also consider, these payday loan storefronts are much more geographically concentrated than other types of outlets. Whereas Starbucks and McDonald’s sprawl across disparate locations with very unique compositions and characteristics of residents, payday storefronts tend to cluster densely in regions where demand for payday loans is likely to be high. What do these conditions imply about the characteristics of the payday loan market?

For starters, basic economic intuition would suggest that the payday lenders operate in a competitive marketplace. Fairly low barriers to entry (both legal and financial) into the market and the vast number of storefronts implies that individual stores face strong incentives to underprice their competitors. The result, barring collusion or market distortion, would be that prices are efficient, and not exorbitant.

The empirical evidence bears out this claim. A paper released by the FDIC Center for Financial Research used panel data from a large vendor to demonstrate that, despite the high interest rates on payday loans, the profitability of payday lenders does not statistically differ from the profitably of other financial intermediaries, like “reputable” banks. This should appeal to intuition: Payday lenders cater to risky populations that are vulnerable to financial stressors and prone to defaults. Risky customers warrant high rates to compensate for high default rates. This understanding regarding the level of market competitiveness and the condition of interest rate efficiency is crucial to understanding the policy effects of regulation in the payday loan market.

Last week, in a conversation with state Sen. Mary Still — one of Missouri’s most vocal critics of the payday lending industry and author of regulatory legislation in the General Assembly — I hoped to identify her latitude of acceptance for various payday lending policies (including deregulating the market further). I discovered that the two policy tools that are most likely to hear debate in the General Assembly are interest rate caps and providing incentives for banks to become “legitimate” vendors of payday loans. In some important ways, these approaches are troubling. If the market is already competitive and interest rates are efficient, an interest rate cap will choke the market and force lenders out — and banks shouldn’t have the ability to offer significantly cheaper rates on similar products. At any rate, revealed preferences would suggest that there is a reason banks aren’t willing to offer payday loans without incentives.

As I’ve discussed earlier, payday loans have the potential to be both helpful and harmful. Imposing interest rate caps on the market will stifle the ability of payday loans to help consumers, and incentivizing banks to offer such loans will do little to shield consumers from harm.

The Columbia Daily Tribune published an article about the opposition to SB 586, a bill on Gov. Jay Nixon’s desk that places restrictions on the erotic services industry. Although this effort is probably well-intentioned, it would have negative economic ramifications.

First, it could negatively affect 3,000 jobs statewide, according to the article. These 3,000 jobs don’t require subsidization from taxpayers, quite unlike the 600 jobs that the IBM service center has promised to create. The government should not favor certain occupations over others (i.e., computer technicians over strippers). Furthermore, these establishments provide employment for workers who are low-income and low-skilled, so restricting them would negatively affect this group. Additionally, because the bill outlaws contact between dancers and customers, such as tipping, a dancer’s income may decline.

Second, if the state government places these restrictions, the government will see a significant reduction in revenue. From the article:

[T]he Association of Club Executives [...] says the note attached to this bill — $100,000 — grossly underestimates the loss in sales tax, income withholding and other costs to the state. They claim that if adult businesses are restricted as proposed, at least 60 percent of them would close, costing the state about $2.7 million in lost sales tax and $720,000 in lost state withholding taxes and would put about 1,800 people out of work.

This is another striking contrast from the aforementioned IBM service center, which will be located on tax-abated property and will therefore contribute no revenue to state coffers.

Additionally, as research analyst John Payne has previously argued, it is likely that some individuals would seek out substitutes, such as pornography and prostitution — perhaps even rape.

It would be beneficial if the government didn’t stop willing buyers and sellers from engaging in voluntary transactions in the marketplace. If a person happened to disapprove of these businesses, then he or she can choose not to patronize them and perhaps convince others to follow suit. Because this behavior does not cause physical harm to other people or their personal property, however, the government should not be involved. The scope of government should not extend to regulating the behavior of consenting adults in strip clubs, in sex stores, or in their own bedrooms.

John Combest today links to a story out of the Mexico Ledger about the opening of a new brick factory in Mexico, Mo. There is certainly a lot of good news in the story. Who in the world complains about new factories and new jobs? I certainly don’t. But there is also something unsettling in the article — how it has become routine and accepted that private enterprises will be subject to major government involvement.

I don’t have any criticism for anything specific in the story. I don’t blame the new company for asking for aid. I don’t blame the politicians for getting involved. I’ll even admit that the deal itself (from what I can read in the story) might be a better use of taxpayer funds than many other such deals. But it is unfortunate, and bodes poorly for our economic future, that government involvement in projects like this is now so common and expected. From the article:

On Friday, Mexico City Council members unanimously approved a $1 million CDBG loan to the project that will be funded and serviced by the state’s Department of Economic Development. The loan was one of the final steps to finalizing the project.

In addition to local, state and federal grants and loans [...]

The news I want to hear would report on a business that gets going without any involvement from the government. That is the man-bites-dog story that I want to read.

Rand Paul, the newly designated Republican candidate for one of Kentucky’s seats in the U.S. Senate, has taken a lot of flack over the past couple of days as a result of his views on the landmark Civil Rights Act of 1964. MSNBC’s Rachel Maddow spent roughly 15 minutes of interview time with Mr. Paul trying to get him to directly express his belief that the government should not prohibit private business owners from engaging in racial discrimination. Rather than offer a soundbite that would allow political opponents to caricature him as a closet racist or opponent of civil rights, Paul first emphasized all that he found admirable and beneficial about the Civil Rights Act, then tried to express the difference between discrimination as a governmental policy, which he believes to be both abhorrent and unconstitutional, and discrimination as a private choice, which he believes to be both abhorrent and unwise, but beyond the proper authority of government to prohibit.

It’s true that a strict libertarian or free-market perspective might prevent the government from interfering when individuals choose to act in a discriminatory fashion. This may make people uncomfortable. But, as Mr. Paul pointed out, the very idea of freedom requires us to tolerate certain decisions that we might find distasteful, in order to ensure that we have the liberty to make decisions that others might find distasteful. For example: Our nation prizes freedom of expression so much that our constitutions deny governments the authority to restrict or punish speech, even if the ideas expressed are almost universally regarded as offensive. Respect for this form of freedom is so ingrained in our culture that its wisdom is only rarely challenged. Mr. Paul was trying to help Ms. Maddow understand that, similarly, if one believes in individual liberty then one must necessarily be prepared to tolerate the fact that some individuals will use that liberty in ways that others might find offensive.

The proper question, I believe, is how best to deal with those situations when they present themselves. Where speech is concerned, if someone says something offensive, the ideal solution for those offended would be either not to listen to that speaker or to respond with their own speech. Likewise, the best response to discriminatory business establishments would have been for others to boycott the offending establishments and/or to open non-discriminatory establishments of their own. The same principle can be applied to businesses that refuse to hire or promote qualified minority or female applicants. These discriminatory decisions create an opportunity for competing businesses to hire those same applicants — which, presumably, will allow them to offer higher-quality services than the discriminatory employer. The effect might not be immediate, but eventually it will become plain that discrimination is both foolish and costly.

It is also vitally important to remember that governmental power is a double-edged sword. A power that can be used in ways of which you approve can also be used in ways that you find repugnant. The problem of segregation/desegregation is a useful example, because the governmental action at issue represented flip sides of the same freedom-denying coin. In much of the Jim Crow South, segregation was not optional. Those allowed to vote — almost exclusively white people, many of whom had an interest in maintaining a privileged status in society — elected representatives who decided that individual business owners were not permitted to offer a desegregated environment. Thus, all people were forced to live with governmentally enforced segregation. After the Civil Rights reforms were enacted, individual business owners were not permitted to offer a segregated environment — all people were forced to live with governmentally enforced desegregation. At all times, individual citizens had only a limited ability to make these choices for themselves.

In a libertarian or free-market paradigm, the government would not have the authority to dictate these matters to individual in either direction. The government’s sole responsibility would be to ensure that those who sought actively to harm others would be brought to justice and, if necessary, their victims compensated for any demonstrable, quantifiable injuries suffered. Those who believed strongly in the importance of segregation would be permitted to live out their choice — but would also be forced to suffer the disadvantages that would flow from their choice. Those who favored integration would realize a unique competitive advantage that, eventually, would reveal the wisdom of that approach.

To sum up, governmental control over the decisions that individuals may make for themselves presents a seductive shortcut for those who believe that the world ought to be ordered in some particular way. But not only does it represent a denial of individual liberty, a government vested with the power to dictate decisions made by its citizens can very easily turn against those who had hoped to use it to pursue their vision of a “good” society. As George Washington once warned: “Government is not reason; it is not eloquence; it is force! Like fire, it is a dangerous servant and a fearful master.”

One of the hot topics in Missouri policy debate over the past several days has been Senate Bill 844, the legislature’s current attempt at ethics reform. Patrick Tuohey over at the Missouri Record just published a column I wrote assessing the constitutional questions raised by the bill that passed the House of Representatives last week. You’ll have to read the column to get the details, but suffice it to say that the bill merits some of the criticism that various media outlets have leveled against it.

This weekend’s Post-Dispatch had an interesting article on Florissant Mayor Robert Lowery. The article discussed at length the political difficulties and fights he is engaged in, but that is not my focus here. I will, however, briefly comment on one aspect of that — the criticism of his work schedule:

Lowery sets his own work schedule, often not getting to City Hall until midafternoon.

I think I have to side with the mayor, here, and not just because I’d like that schedule, too. I have been active in local politics, and I have no doubt that the mayor goes to innumerable nightly meetings of neighborhood associations, community groups, etc. I also believe him when he says that many of his lunch meetings are work-related. His job involves city management, various methods of civic boosterism, and sometimes just returning a bunch of phone calls. If he can do the job successfully from home, work, and the car, then I really don’t think the amount of time he spends in the office is an important measure.

Without going into detail, I think the article’s criticisms of using city workers for campaign purposes are much more valid. But onto the system debate.

Most cities like Florissant have a city manager. There are only two really comparable cities to Florissant in St. Louis County: Chesterfield and University City (where I live). Both of them use a full-time city manager or administrator. If Florissant were to choose such a system, the mayor could focus on the civic and political leadership aspect of the mayor’s office, a set of responsibilities that he is very good at performing, according to everything I have heard.

If the people of Florissant want the mayor to keep some role in daily city operations, they could choose the city administrator form of local government. If they want the mayor to have a very limited role in daily operations, they could choose the city manager form. In both instances, though, the role of the hired professional is to manage day-to-day government operations. The mayor would become more focused on the leadership aspects of the job, and less on the management aspects.

Obviously, the salary of the mayor would likely be cut significantly if either of those options were chosen, but the city manager form of government might be the proper compromise for Florissant. It would entail a limited role in daily operations for the mayor, and — considering the experience he has had as mayor and a police chief — the people might want to continue making use of that value. Here is the Missouri Municipal League’s description of the city administrator position:

The city administrator is employed by the governing body with the approval of the mayor. The administrator serves as the chief administrative assistant to the mayor and has general superintending control of the administration and management of city business and municipal employees, subject to the direction and supervision of the mayor. When the governing body adopts a city administrator ordinance, they may provide that all other officers and employees of the city, except elected officers, may be appointed and discharged by the city administrator, subject to reasonable rules and regulations of the governing body. However, the ordinance may provide that such powers are to be retained by the mayor.

Florissant is a charter city, so it has some latitute in establishing a government that works best for its residents. I think that the city administrator form might be a good compromise for Florissant.

Missouri Auditor Susan Montee has found that fiscal notes relating to tax credit programs severely understate their costs. From the Columbia Daily Tribune:

The audit found fault with the legislature’s “fiscal note” system that estimates projected program costs.

“Fiscal notes associated with legislation establishing or modifying tax credit programs do not accurately project the financial impact on the state’s general revenue fund collections,” the audit said. “For 15 tax credit programs reviewed, the actual redemptions exceeded the projected long-term fiscal impact by a net amount over $1.1 billion for the five years ended June 30, 2009.”

Fiscal notes sometimes failed to accurately predict how many people and businesses would participate in the programs, the audit said. Sometimes agencies administering the credits would make changes that increased costs.

In 1997, the legislature enacted a tax credit for historic preservation, a program that offers subsidies to people refurbishing old buildings. The estimate of the program’s cost at that time was $14.3 million per year. When the legislature modified the program a year later, the fiscal note projected an “unknown” cost.

“Based upon our methodology, the projected fiscal impact was $14.3 million annually and $71.5 million over the 5-year period, while redemptions totaled over $637 million,” the audit said. “Recent tax credit program audits have shown agencies consistently overstate the economic benefit of tax credit programs.”

Of course, this is no surprise. On top of the difficulties inherent in projecting a program’s impact into the future, politicians always overhype a program’s benefits and undersell its costs. They will even use all manner of political influence and accounting chicanery to manipulate the projections produced by independent scoring agencies. Even at the federal level, where the highly respected and nonpartisan Congressional Budget Office does its level best to accurately project a bill’s costs and benefits, members of Congress frequently game the process by requiring the CBO to score unrealistic versions of bills. The most obvious recent example of this subterfuge is the last CBO scoring of the recently passed health care bill, which, in order to achieve the illusion of deficit neutrality, includes 10 years of taxes and only six years of spending — as well as cuts to Medicare that we all know will never come. Just remember that no matter how bad a government program sounds when a politician proposes it, the reality is almost certainly worse.

Link via John Combest.

Yesterday, I was invited to attend an informal meeting in Jefferson City between members and staff of the state’s Board of Cosmetology and Barber Examiners, several owners of cosmetology and barber colleges, and lobbyists for the state association of cosmetology schools. I was invited by John and Nancy Tirre, who own Current Trends Academy in St. Peters. They are the only people in attendance that I’ll name, out of an abundance of caution. The Tirres were concerned about the provisions in House Bill 2194, which would have further regulated an already heavily regulated industry: cosmetology and barber colleges. (Here is the bill summary.) There is no nice way for me to put this; the proposals in this bill are awful, and fundamentally anti-competitive and anti–free market. If you don’t agree with me, you probably feel that the government has a perfectly good reason to dictate via legislation that every new cosmetology school in Missouri must have at least nine instructors on staff before they can enroll even one student.

At the beginning of the meeting, the lobbyist for the cosmetology school association (of which the Tirres are members) told everyone that the bulk of HB 2194 will be pulled from consideration. This is excellent news. Next, he said that a new proposal would replace the deleted language with a simple two-year moratorium on any new cosmetology and barber schools opening in Missouri. This, of course, is an equally horrible idea.

After that, the meeting got down to business. One of the moratorium’s supporters, who owns three cosmetology schools in rural Missouri, stated that the primary problem the industry is dealing with is a lack of qualified instructors in colleges. He said that the moratorium — and the language that had been removed from the bill — are all just ways of dealing with that problem, and that the moratorium is designed so the industry can collectively propose solutions.

Many of you reading this will probably react exactly as I did, which is to say that if you don’t have enough instructors, then private colleges should offer a higher salary for instructors and the problem will solve itself — resulting in whatever equilibrium instructor allocation tends to be more efficient. The most basic economics tells you that shortages are best dealt with by increasing price. If you need more instructors at barber colleges, then offer to pay them more.

However — and this is where I wanted to tear my hair out, as I patiently sat there listening — it honestly took a half-hour of shortage discussion before anyone mentioned salaries. They went through the numbers of licensed instructors in Missouri in detail. There are 343 current instructors in Missouri. There are 279 people with active instructor licenses who do not teach. Finally, there are 364 people with inactive licenses who could very quickly and easily reactivate their licenses. So, there is a pool of 643 people who are trained to do this work but not doing it. Clearly, some of them would choose to again teach at cosmetology school is the salary offered were high enough. It should be noted that, in a related and worthy effort to increase the supply of instructors, the licensing qualifications for instructors were substantially pared down a few years ago. I am all for that, but if that strategy did not work by itself, another solution like raising salaries is a logical next step.

If the first half of the meeting might have been unsettling, the second half was inspiring. The arguments of those who favored the moratorium were strongly opposed by several of the other people in attendance. One member of the state board of cosmetology, who owns a school and would benefit from the moratorium, called it “selfish” and said that the industry had no right to stop someone who was trying to “fulfill a dream” by opening their own business. Another board member said similar things, and made it clear that she would oppose the proposal. The Tirres, too — who, as school owners, could also benefit from a moratorium — opposed it on principle. In the end, those present agreed not to move forward with proposing the moratorium, and it appears that all of the anti-competitive ideas in the bill are dead for now — hopefully, dead for a long time.

The discussion contained plenty of areas of positive agreement. I heard a number of great proposals on ways that the schools could work together to improve teacher recruitment, change their teaching methods to reach students who are a “new type of learner,” and more. There was discussion about the absurdity of parts of the current regulatory system, such as how a school can get in trouble if one of its instructors goes home sick, and a random state inspection comes later that same day to find the school temporarily short of the required 25-1 student-teacher ratio. It’s beyond me why tax documents would not suffice to demonstrate the correct number of instructors. (And I’m not overlooking the fact that a mandated 25-1 ratio is a dumb requirement in the first place, but they all seemed to think it is not a big deal.)

I did say my piece at the end of the meeting. I left feeling happy to have watched members of the board kill bad legislation. I readily admit that I don’t think cosmetology and barber practitioners and schools should be licensed at all, but it is worth my time and effort to help prevent bad rules from becoming even worse rules. It was great to see defenders of competition win out, at least for now.

Anyone reading this who was present at the meeting should feel free to use our comment section to claim credit for the above paraphrased quotes, expand on my opinions, or tell me how I am stupid.

In yesterday’s “Political Eye” column in the St. Louis American, the author welcomed the Show-Me Institute to the city of St. Louis:

A recent email sent to drive traffic to Slay’s campaign site with one of its inane polls referred blithely to “your tea party friends.” Slay’s team seems to want to send the message that government-hating right wingers are welcome here. No wonder the Show-Me Institute set up shop in the city.

There is, of course, only one legitimate reply to this, and, not surprisingly, it was said by Homer Simpson. From the fourth season, episode 14 — you’ll find the video here. The line comes at about the 0:48 mark. Definitely one of the best lines in one of the single best episodes of the best TV series ever.

Thanks to St. Louis’ own Bart Simpson for the article link.

It is no secret that I believe Congress has no constitutional authority to mandate that citizens purchase a product they do not want. But people who are eager to see this portion of the federal health care reform law struck down would be very wise to put the brakes on the current wave of litigation.

You see, it is a bedrock principle of American law that federal courts cannot offer “advisory opinions.” In order for a federal court to resolve a legal issue, the person or organization presenting that issue to the court must demonstrate that they have suffered, are suffering, or are in immediate danger of suffering some injury. If the complainant can’t show how they are being harmed, the court rules that there is no current “case or controversy” existing between the parties and the case gets thrown out.

In the weeks since Congress adopted the new health care reform law, state officials all over the country have been trumpeting their intent to challenge the law’s constitutionality. Attorneys general, governors, and lieutenant governors in 15 (or more) states have already joined or have pledged to join federal lawsuits intended to strike down the individual health insurance mandate. But there are two big, big problems.

First, the individual mandate is not scheduled to go into effect until 2014. In other words, no one will be required to comply with the mandate for another four years. And, until someone is bound by this requirement, it will be virtually impossible to persuade a court that anyone has been sufficiently harmed by this law to create the “case or controversy” necessary for the court to address the merits of the claim. The second problem is that federal courts do not generally allow one person to assert a claim based on injury suffered by someone else (although there are a few limited exceptions to this rule). Although these state officials could file lawsuits on their own behalves, if they did not have compliant health insurance policies, it is much tougher for them to suggest persuasively that these officials have any basis for asserting the rights of individual citizens, independent of any private citizen asserting a claim against the federal law. The state officials’ claims might have a bit more substance in states that have passed a statute or constitutional amendment limiting governmental authority to interfere with citizens’ decisions regarding health insurance, but it is still a tenuous legal position unless the state is intervening on behalf of a private citizen’s lawsuit.

So, in all likelihood, these impassioned crusades to knock down the health insurance mandate will prove to be utterly worthless until the targeted provision actually takes effect. And, in the meantime, those in support of the mandate will point to the failure of these lawsuits as proof of both the mandate’s constitutionality and the general wrongheadedness of those who oppose the mandate. My advice to these well-intentioned officials is to withdraw their lawsuits for the time being, and for the next four years focus instead on addressing the mandate through the legislative process. If the mandate remains in place after the elections of 2010 and 2012 pass by, then will be the appropriate time to take this issue to the courts.

Last Wednesday, I traveled to Jefferson City in the hopes of testifying about payday lending before the House Committee on Financial Institutions. That didn’t happen, because the session on payday lending became a purely informational presentation by representatives of the industry, with no outside witnesses testifying. (We still have a couple very interesting projects on the subject that should be forthcoming shortly, however.) Still, this was my first trip to the capitol to see Missouri’s democracy in action (so to speak), and I found it extremely interesting.

No, wait … not interesting. What’s that other word? Oh yeah: tedious. I spent three hours in a hearing room with most of the time taken up by an abstruse discussion of appraiser regulation. The only people in the room who seemed to be actually animated by the subject were the interested appraisers and representatives of appraisal management companies. Most of the representatives seemed to idle the time away browsing the Internet on their laptops and phones. The rest sat there, supporting their heads with their hands and wearing the painfully bored looks of people firmly convinced they are meant for something better in life than this.

Even for all the hearing’s spectacular boredom, however, I did learn a thing or two. First, appraisal regulation is a subject far more complicated than anyone should ever want to know. The big change under discussion that night was the move to a greater reliance on appraisal management companies (AMCs) over the old-fashioned kind of appraisers. This shift has been ongoing for some time but received a big boost when the Home Valuation Code of Conduct (HVCC) essentially became the law of the land. I will spare you most of the further details (if you really must know, I recommend this article) except to say that although it does appear the HVCC is kind of a disaster, the new bill being used to rectify the problems looks like it just benefits the appraisers at the expense of AMCs and consumers.

Now, I fully admit that I am no expert in the field, but when every appraiser testifying for the bill complains that AMCs do less expensive work than appraisers, it sets off my Rent-Seeking Alarm. It sure seems to me that the appraisers are using the problems in the HVCC as a way to limit their competition and raise rates. But I could be wrong. Given the massive complexity of the regulatory code surrounding appraisals, it probably isn’t possible to know how the bill would change the system ex ante, and this presents a massive problem for regulators.

Writing about Democratic members of Congress who did not understand how tax changes in the health care bill would affect large companies, Glenn Reynolds describes this same problem:

The United States Code — containing federal statutory law — is more than 50,000 pages long and comprises 40 volumes. The Code of Federal Regulations, which indexes administrative rules, is 161,117pages long and composes226volumes.

No one on Earth understands them all, and the potential interaction among all the different rules would choke a supercomputer. This means, of course, that when Congress changes the law, it not only can’t be aware of all the real-world complications it’s producing, it can’t even understand the legal and regulatory implications of what it’s doing.

There’s good news and bad news in that. The bad news is obvious: We’re governed not just by people who do screw up constantly, but by people who can’t help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or “better” rules will do any good: Incompetence is built into the system.

The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don’t know what they’re doing.

And that’s assuming the legislators actually take the time to try and understand the legislation. What’s more likely is what I witnessed last Wednesday: disinterested representatives killing time until the end of the session by checking their email and text messages. If a regulation is so complex that the regulators can’t even be bothered to understand it, it is likely to be ineffectual at best and counterproductive at worst. In regulation, less is often more.

The Springfield News-Leader today features a good op-ed about current plans for regulating Missouri’s payday loan industry.

Good bit:

The FDIC found that payday loan fees were justified by the costs and risks associated with offering such loans. The FDIC also found competitive products like bounced checks carrying APRs of up to 3,500 percent.That APR calculation – designed to compare competing, long-term forms of credit – is why a 36 percent APR cap, as proposed in current Missouri legislation, would ban short- term loans in the state.

If imposed, a 36 percent rate cap would mean lenders could only charge about $1.38 per $100 borrowed. At such a low rate, lenders simply can’t cover their costs – such as rent, employee salaries and benefits.

As I’ve written before, I’m opposed to payday loan regulation because:

1. I view payday loan transactions as legitimate, consensual business interactions between relatively rational actors.
2. The empirical evidence suggests that payday loans constitute a useful service. I look, for example, to Donald Morgan and Michael Strain, who show that increased access to payday loans reduces the volume of bounced checks. I also look to Edward Lawrence and Gregory Elliehausen, who find that payday loans “satisfy a real financial need within a certain segment of the population.” As I cite these authors, I’m fully willing to concede that there is literature out there that disagrees with their claims. The reading list I composed earlier lists some of those papers. In a future blog post, I will attempt a more detailed comparison of the methodologies employed in the different studies.
3. If payday loans are useful, then limiting or eliminating the payday loan market will drive consumers to underground or black markets. This is not favorable, for reasons that should be self-evident.
4. I think the most legitimate critique of payday loans is that it disadvantages the politically weak who have, for example, little access to legal recourse. If that’s the case, the better solution would be to reform the political/legal apparatus, rather than the payday loan market. Opponents can argue that this is less feasible, and they would be correct, but if the market is driven underground, then these people would have no legal recourse anyway.

My main concern now is the third. Those who seek to regulate payday loans toe a narrow line between tempering the market and hobbling it. Unfortunately, it looks as though the proposed reforms are poised to do the latter.