Monthly Archives: December 2011

State finances going into 2012

In 2012, municipal bonds are unlikely to return at same levels as 2011

Investment analysts worry that without further fiscal action Illinois bonds will underperform the market in the coming year.

On January 1, many new laws go into effect in the states. The National Conference of State Legislatures has a rundown.

According to the U.S. Census the 100 largest public pension plans declined 8.5 percent in the third quarter of 2011.

The $237 billion drop in public pension plans is the biggest drop since the crash of 2008

 

Daycare unionization debate in Minnesota

A debate has been taking place in Minnesota over whether in-home day care providers should be able to unionize. Unionization of self-employed individuals raises a few questions. With whom do they negotiate? In other words, “How can you be the employer [the business owner] and a union employee?” According to the pro-unionization providers their complaint is not with the parent-client but with the state (and county) and its regulations. A provider may be cited for any number of small infractions such as not having a cover on a trash cash. When cited, in the case of Minnesota, such a blemish doesn’t just stay on the provider’s record, it must be posted on the owner’s front door for two years.

But is unionization the answer?

Daycare providers already have a state association to represent their interests. Few owners have actually been cited under these regulations. And unionization will result in dues that will raise prices for parents, as well as more state involvement in the owner’s business. An effort to stop unionization is also underway.

Since 2005, 15 states have organized childcare providers. The main fiscal outcome of daycare unionization is higher state-provided subsidies.

Washington state child care providers are represented by the SEIU which negotiates with Olympia over subsidy rates for providers as well as health insurance plans.

In 2009, providers in Washington received a state subsidy between $18 and $40 a day, per child, depending on the county. According to the SEIU’s 2009-2011 agreement with the state, both parents and providers are affected. Daycare providers who refuse to join the union for religious reasons must still pay dues. Rates are set for different age groups of children, (e.g. Infants are 15% higher than the Toddler/Preschool rate). After ten hours of childcare any additional hour is equal to one half day of child care.

The agreement also affects all taxpayers in the state. The state pays monthly contributions to provider’s health care plan ($588.8 per month per provider in 2010) for a total of $366,894 per month for all daycare providers. A further $175,000 is set aside by the state for training classes for providers. The result of unionization is not what advocates suggest. Instead flexibility is decreased for owners and clients to come to terms over hours, rates and arrangements while the ever-increasing costs are passed to everyone.

Down With One-Dimensional Politics!

Last Sunday, ABC’s This Week ran a new segment titled “The Great American Debates.” It featured George Will and Paul Ryan debating Barney Frank and Robert Reich on the question: “There is too much government in my life.”

It was a fun and spirited debate with lots of good lines from both sides. In my view, Barney Frank was at his strongest when he was pointing out the inconsistencies in the conservative positions on foreign policy and personal freedom. He noted that while the conservatives are happy to permit greater freedom when it comes to economic matters, they are the first to “tell us that an adult shouldn’t be able to gamble on the Internet” and they are the first to want to regulate personal matters from the bedroom to recreational drug use. Moreover, while conservatives are skeptical of government’s role in the economy, Frank noted that they are often eager to use the government to rebuild other societies, something “we’re not very good at.”

Having pointed out the inconsistencies of conservatives (more freedom in economic matters but more government in personal and foreign affairs), he might have embraced a more consistent approach: freedom in all spheres. Instead, he ended his opening statement by declaring that he, too, was inconsistent:

And so my answer is yes, I want more government involved in economic regulation and environmental cleanup and for reasons of public safety. I want less government telling me what personal choices to make as an individual.

This answer, I believe, highlights the inadequacy of one-dimensional political thinking. Try as we might, it is pretty difficult to describe many peoples’ political beliefs without making them seem inconsistent.

That’s why I think it is much more helpful to think in terms of (at least!) two dimensions. Consider the animation below.

The common positions of “left” and “right” on economic and personal matters seem inconsistent when viewed on a conventional one-dimensional spectrum. But if you allow for a little richer information, you can think in terms of two dimensions: a) more or less economic
freedom as shown on the horizontal axis and b) more or less personal freedom as shown along the vertical axis. You can think of “libertarians” as favoring freedom in both spheres and “statists” as favoring intervention in both spheres. And you can think of “left” and “right” as favoring freedom in one sphere but not the other and vice versa.

Of course, you can take it one step further and think of a third dimension coming straight out of your computer screen. It would show more or less intervention in foreign matters. (Sadly, my animation skills are not yet advanced enough to render such an image).

I understand why U.S. political parties feel the need to conform to the tired, old one-dimensional view of politics. Long ago, the political scientist Maurice Duverger asserted that two and only two political parties are likely to be viable in democracies that employ the type of voting rules the U.S. employs (one member represents each district and that candidate with the most votes is declared the winner). With such voting rules, third parties rarely win and so their financial and political support tends to dry up over time. Conversely, in countries where, say, the top three vote-getters each get a seat in parliament, third parties are much more viable. Given the fact that the U.S. is likely to have only two parties, these two parties must, by default, simplify matters and pretend that politics can adequately be described with a simple dimension.

It is unfortunate, however, that the media and pollsters play along. ABC, for example, could have easily invited guests to defend the libertarian and the statist position. And pollsters could easily make room for two questions. Instead of asking people if they are liberal, conservative, or moderate (how is a libertarian to answer?), they could ask people separate questions about their positions on social issues and economic issues.

There is ample evidence that people are smart enough to think in multi-dimensional terms. According to Dennis Mueller (p. 242):

Most observers of politics outside of the United States identify at least two salient dimensions to the political party space.

He cites research by Budge, Robertson, and Hearl (1987), Budge (1994), Laver and Schofield (1990), Schofield (1993, 1995), and Schofield, Martin, Quinn, and Whitford (1998).

Here is a fun, short quiz to help you think through your own position in multi-dimensional issue space.

NYC Taxi Reform Doesn’t Go Far Enough

Next week, New York Governor Cuomo is likely to sign a bill that will marginally increase competition in the NYC cab market. The new rule will allow passengers to hail some livery cars in outer boroughs and add 2,000 additional medallions for yellow cabs with wheelchair access.

Via Flickr user Ian Caldwell

The auction of these medallions  is projected to raise $1 billion. This figure might seem outlandish, but last month two medallions sold at auction for over $1 million. That’s right, it costs $1 million for the right to drive a cab in NYC, not accounting for any of the costs associated with owning and operating the vehicle.

The price tag of these medallions that are sold to the highest bidder demonstrates that in a free market, many more drivers would enter the cab industry. Artificially constraining the supply hurts both consumers and those who are not able to drive a cab because they are unable to purchase a medallion.

Unsurprisingly, the Metropolitan Taxicab Board of Trade remains strongly opposed to this bill. The increase in the supply of medallions will lower the value of the medallions that cab drivers and larger medallion companies already own. Their lobbying efforts reflect their desire to profit through the political system.

While this increase in the number of medallions available for yellow cabs and allowing some livery cars to be hailed represents a small improvement for New Yorkers, the reform does not go nearly far enough. For real reform, Mayor Bloomberg should look to Indianapolis.

Before Stephen Goldsmith was elected as the city’s mayor in 1991, the number of cabs permitted in Indianapolis was limited to 392. Goldsmith created a Regulatory Study Council whose first project was to reform taxi regulations. The RSC recommended eliminating regulatory barriers to entry and allowing cab drivers and companies to determine their own prices. In a case study of regulatory reform in Indianapolis, Adrian Moore writes:

The main resistance came from existing taxi companies, and initially much of the city and county council sided with them in the name of the “public interest.” However, the support for reform by seniors, the inner city poor, minorities, the Urban League, and the disabled soon brought many of them over to the RSC’s side. The RSC expected little support from Democrats on the council, but the strong support for deregulation from that party’s traditional constituents turned the tide.

Some price controls remain in the Indianapolis taxi market, but the city has seen an increase in supply, a decrease in fares, and an improvement in service. Indianapolis and New York City are of course very different, but the laws of supply, demand, and rent-seeking are the same everywhere. By phasing out the medallion system, New York City would benefit consumers and allow many more people to make a living driving cabs. Medallion owners who have invested in some cases over $1 million in the current system would need to be compensated in some way, but not by continuing to profit at the public’s expense.

Medicare fraud: bogus clinics in barns

Each year the Medicare program loses millions of dollars to fraud. Applicants simply set up fake clinics using stolen medical IDs and real addresses in barns, UPS stores and abandoned apartments. It’s called the drop box scheme and apparently it’s hard to catch every bogus clinic operator given the ease of presenting what looks like a legitimate medical clinic on paper. Reuters tracks down the scheme. But it’s just one of several the program has to contend with. Other kinds of fraud documented by GAO include “rent-a-patient” and “pill mills.”

 

More Corporate Tax Deals in Illinois: Was This Really a Win?

Illinois’s fall veto session was a disappointment – little was addressed and even less was achieved. In attempts to make up for their lack of achievement, Illinois lawmakers reconvened early last week to revisit a corporate tax relief package. Specifically, this session was meant to address the recent threats to leave the state coming from some of Illinois’s largest corporations. After a two day session, lawmakers approved a $330 million tax package that will supposedly prevent CME Group Inc. and Sears Holdings from leaving Illinois.

Governor Quinn described this legislative action as a win-win situation by telling reporters that this was a

win for workers and a win for employers in Illinois… what we did here the last two days is a part of making Illinois a good place to do business and a good place to work

But was this a win for Illinois? Not really…

In the case of Sears, it is important to look at the reason the company chose Illinois as a location to do business in the first place. Illinois has been the home of the Sears headquarters for more than 125 years. Interestingly enough, in 1989 Sears had announced plans to abandon its corporate headquarters in Chicago and relocate to another state. Illinois law makers, however, were able to convince the company to stay via the provision of $178 million in state and local subsidies (déjà vu?).

This method of convincing companies to stay in or relocate to a specific state via the provision of large subsidies and tax breaks is often referred to as industrial recruitment. Despite Governor Quinn’s statement, industrial recruitment is one of the least effective ways to make a state a better place to do business.

As Robert Turner makes clear, when utilizing this approach, states generally lack the knowledge regarding how willing a business is to move or stay, how large the subsidy needs to be, and how much tax revenue the relocation will create. This necessarily means that a state cannot conduct an accurate cost-benefit analysis when creating the subsidy and thus, by definition, cannot make an efficient policy decision in this situation.

Ultimately, when states participate in this industrial recruitment method, it results in a prisoner’s dilemma type situation where states overbid for firms that end up bringing fewer jobs and less tax revenue than planned. The industrial recruitment process, therefore, generally ends up being a negative sum game.

It took $178 million to keep Sears the first time around and now Illinois is fronting a portion of the new $330 million tax package to convince the company to stick around for a while longer. Is it not yet clear that this is a fundamentally flawed method of fostering business activity?

A more efficient (not to mention, more equitable) approach would be to create a business climate which fosters all businesses rather than one that picks winners and losers.  Allowing people a measure of economic freedom with low, stable, and non-discriminatory taxation and simple, non-burdensome regulation would be a true win-win.

 

Happy Bill of Rights Day

Image is in the public domain

A few observations:

Common conceptions to the contrary, the first ten amendments to the Constitution do not grant people their rights.

The First Amendment does not say that, henceforth, people shall have a right to establish a religion or to speak freely. Instead, it says that “Congress shall make no law respecting an establishment of religion…or abridging the freedom of speech.” The second Amendment does not say that the people now have a right to bear arms. It says that “the right of the people to keep and bear Arms, shall not be infringed.”

This is not a matter of semantics. The framers knew that they could not possibly name all of the legitimate rights of the people. Indeed, as Hamilton expressed in Federalist 84, there was a danger in trying to do so, for if the list left anything out (as it surely would), then there would be a presumption that people lacked the omitted rights and this might be used as a “pretext to claim” that the federal government possessed more than the strictly enumerated powers laid out in Constitution.

So instead of enumerating the rights of the people, the Bill of Rights talks about the things that the Federal government may not do: “Congress shall make no law…”,  “the right…shall not be infringed”, “the right of the people to be secure in their persons…shall not be violated”, “In Suits at common law…the right of trial by jury shall be preserved”, “excessive bail shall not be required.”

Each of these is a limitation on the powers of the government, not a positive grant of a right to the people (I’ll concede that the Sixth Amendment, which says that in criminal prosecutions the accused “shall enjoy the right to a speedy trial…” comes close to a positive grant; but even there, the idea is that the government cannot lock you up without a trial).

The handy thing about this wording is that it sets up the presumption that we don’t have to go to the government to ask for our rights. Our rights existed before government was established. And if the federal government were to one day fall, then our rights would still exist. This was a central tenet of the Enlightenment philosophy and it can be found in the writings of Locke, Mason, and Jefferson, among many others.

The framers thought of these rights as God-given. But if you prefer a secular spin on it, you can imagine that they are reason-given. The point is that they are not government-given.

Cronyism vs. Capitalism, the Video

This is a nice, short illustration of the distinction. It stars GMU’s Don Boudreaux, George Washington University’s Susan Dudley and University of Nevada-Reno’s Bradley Schiller.

In other news, Stephanie Herman at Geke.us has a nice way of illustrating the problem:

Stephanie Herman, Geke.us

HT, Mario Rizzo.

California’s $500 billion pension shortfall

A new study estimates California’s pension shortfall at $500 billion. Employing a risk-free discount rate, this estimate is far higher than the $142.6 billion estimated by the state. Currently California assume a 7.75 percent discount rate for two plans: CalPERS and CalSTRS, and a 7.5 percent discount rate for UCRP. It’s an amount that is too large to be addressed solely by future benefit cuts. These findings haven’t been received very warmly by State Treasurer Bill Lockyear who says the estimate relies on an overly-low discount rate. Contrary to the Treasurer’s assessment, estimating pension liabilities isn’t about cherry-picking numbers but instead about how to accurately value pension liabilities which are guaranteed by the state of California, and thus should be considered safe and risk-free by beneficiaries.

Such a massive shortfall means bad news for California’s budget and fiscal outlook. The share of pensions in California’s budget will have to triple. Stanford professor, Joe Nation, author of the study and a former Democratic Assemblyman warns that each day the state does nothing it costs $3.4 million.

The study  finds that CalPERS under assumed rate of return of 7.75 percent has an 82 percent chance of its assets falling short of obligations. To meet the problem Nation proposes higher employee contributions, taxes, and reducing plan costs by increasing the retirement age, reducing benefit formulas, and moving to a hybrid Defined Benefit/Defined Contribution system. In addition, he critiques Governor Brown’s proposal. For more, read the study, which contains some very interesting data and analysis.