Author Archives: Ben VanMetre

About Ben VanMetre

Ben VanMetre is an MA Fellow at the Mercatus Center at George Mason University. Before joining Mercatus, Ben earned his Bachelor of Arts degree from Beloit College where he double majored in Economics and Management and Psychology. His research interests include international and state-based development issues, entrepreneurship, institutional arrangements, and economic freedom. His work has appeared in Forbes, Economic Affairs, the Cato Journal, the Journal of Business and Economic Perspectives, the Journal of the James Madison Institute, the Free Market Foundation, and the second volume of the Wealth and Wellbeing of Nations.

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.

 

Economists Agree – Illegality Increases the Street Price of Drugs

The University of Chicago’s Booth School of Business launched a website earlier this year titled The Initiative on Global Markets. The purpose of this website is to explore the extent to which economists agree or disagree on some of the major debates in the public policy arena. Specifically, 40 economists respond to a policy related question each week and their answers are then posted on the website.

In describing the process behind choosing the panel, the website states:

our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States.

This week’s question was

All else equal, making drugs illegal raises street prices for those drugs because suppliers require extra compensation for the risk of incarceration and other punishments.

93 percent of the economists on the panel either agreed or strongly agreed with this statement. Berkeley Economist Aaron Edline commented that “Illegality leads to high prices and crime.”  MIT economist Richard Schmalensee said that the answer to this question is “Basic micro” and that “Illegality also rules out some efficient forms of production & distribution.”

Other topics the questions have covered include treasury holdings, federal tax rates, voucher programs in the education system, exchange rates, stock prices, “buying American,” and healthcare.

Overall, I think this website provides a unique opportunity see where top economists stand on some important policy issues. It will be interesting to follow their answers to these weekly questions.

 

Requiring Volunteer Work for Unemployment Benefits

Georgia’s historically high unemployment rate coupled with the fact that its unemployment trust fund has recently reached insolvency, has led law makers to reconsider the structure of their state’s unemployment system. One solution posed by John Albers, a Republican Senator in Georgia, is to require unemployed individuals to volunteer for at least 24 hours a week with a nonprofit organization in order to receive their unemployment benefits.

The problem that Albers is seemingly trying to address is the idea that generous unemployment benefits can increase the attractiveness of unemployment. As Eileen Norcross and Emily Washington argue in their paper The Cost and Consequence of Unemployment Benefits on the States:

The perverse incentives of unemployment benefits are well documented. Subsidizing unemployment draws out a job search. Generous benefits that subsidize “temporary idleness” may result in “chronic idleness.” As the state makes chronic idleness more attractive, more and more people will choose that option over productive employment. As people remain unemployed, their decreased spending will slow production throughout the economy, and the system will become less and less sustainable.

I think Albers’s solution is an interesting idea in the strict sense that it is a creative approach to making unemployment benefits less desirable. Essentially, requiring volunteer work increases the costs of collecting unemployment benefits and thus, in theory, creates a greater incentive for individuals to decrease the duration of their unemployment.

I do not, however, think that this legislation will fix Georgia’s unemployment fund. There are two big problems with the solution posed by Albers: (1) there are legal barriers that will likely prevent this legislation from becoming law and (2) the problem isn’t volunteer work, its unemployment.

A better way to address the solvency of Georgia’s unemployment trust fund is the creation of private Unemployment Insurance Savings Accounts (UISA). Instead of making compulsory contributions to public trust funds, UISAs require employees and employers to contribute to individual savings accounts that the employees can access during unemployment. If an individual is never unemployed, the money accrued in their UISA rolls over into their retirement account. As Norcross and Washington make clear, the virtue of UISAs is that they turn unemployment insurance into savings.

It is important to point out that the idea of UISA is somewhat controversial because it requires individuals to save. In other words, it moves the system from forced unemployment contributions to forced savings. Although both systems are coercive, UISAs would certainly be a step in the right direction for Georgia and will likely be a better solution than forcing people to volunteer (which, after all, is oxymoronic).

Two States Are Cutting Back on Alcohol Regulations

Earlier this week, voters in the state of Washington passed Initiative 1183 which will close state-run liquor stores and allow for privately owned retail stores to sell liquor. This move effectively ends the state’s 78 year-old monopoly on the sale of alcohol. In a similar move this week, voters in Georgia showed an overwhelming support for repealing the state’s “blue laws” which prohibited the sale of liquor on Sunday.

With regards to Washington, the move to privatize the sale of liquor is certainly not a new idea. In fact, just last November, citizens in the state of Washington voted on two ballot initiatives, each attempting to end the state’s reign over the sale of alcohol.  However, neither ballot received enough votes to become law.

It is of no surprise that heated debates often arise when the state control of alcohol is questioned. Naturally, various questions arise in regard to liquor privatization. For instance, what will happen to the people currently employed in Washington’s state-run liquor stores? More importantly, though, what effects, if any, will privatization have on social outcome measures such as alcohol consumption and/or alcohol-related traffic fatalities?

These are precisely the questions that Mercatus scholars Antony Davies and John Pulito seek to address in their paper titled “Binge Thinking.”

In regards to job loss, the authors argue that although privatization may initially cause some job loss among individuals working in state-run liquor stores, it’s important to recognize that

many of the jobs will not disappear, but will merely shift from the public to private sector.

As Davies and Pulito further point out, one of the common arguments against the liberalization of alcohol control laws is the idea that

because state stores are not profit driven like private firms, privatization would result in increased alcohol consumption and problems associated with alcohol consumption, such as impaired driving.

However, the authors find evidence suggesting that

 States that recently privatized their liquor industries experienced a significant decline in per-capita alcohol consumption.

And

 States that have liquor controls experience significantly higher DUI-related fatality rates than states without controls.

Therefore, by liberalizing their alcohol control laws, Washington and Georgia may have created safer and more efficiently run alcohol industries. The other 17 “control states” should consider making similar moves.

Illinoisans Are Becoming More Realistic About Dealing with the Budget Crisis

Although Illinois has become the quintessential example of a state with a broken budget process, a recent poll by the Paul Simon Public Policy Institute provides evidence suggesting that there may be some positive change occurring among Illinois voters.

Since 2008, the Simon Institute has conducted an annual survey of 1,000 voters in Illinois in order to examine how the general public thinks the state should deal with its budget problems. Specifically, the Simon institute has asked Illinois voters if they think the state’s budget deficit should be handled by: 1) bringing in more revenue, 2) cutting waste and inefficiency in government, or 3) a combination of budget cuts and revenue increases.

A majority of Illinoisans (57.7%) still believe that cutting waste and inefficiency will solve the state’s budget problems.  Unfortunately, this is a non-serious way to cut – targeting inefficacy and waste is easy since there are no real constituencies for either. This is why it’s important to dig deeper and ask people about specific cuts.

Proposals for program cuts in the Institute’s poll include, among others, cutting spending on education, public safety, programs for poor people, and pension benefits for state workers. Not surprisingly, a majority of Illinoisans oppose cuts to each of these programs.

However, there has been a substantial increase in the number of people that favor cuts in Illinois’s pension system. In 2008, 24.1 percent of voters favored cutting spending on pension benefits for state workers. This number has increased by more than 20 percentage points over the past three years, to 45.5 percent.

There has also been a growing acceptance for various means of increasing revenues. This year’s results show that:

 in 2011, for the first time, majorities approve of two of the revenue-raising measures in the poll: expanding legalized gambling (56.8%) and expanding the sales tax to cover services as well as goods (50.1%).

This is good news. It suggests that Illinoisans are becoming more realistic about dealing with the state’s budget crisis. Specifically, it suggests that Illinoisans are beginning to embrace the principle of generality in taxation – broadening the base will allow the state to potentially lower its tax rates.  Additionally, a majority (74.1%) of Illinoisans oppose an increase in the state’s sales tax rate  – highlighting the fact that voters are not just in favor of more taxes, but a broader tax base.

Ultimately, the results from this year’s Simon Institute poll indicate that Illinoisans are not only beginning to understand the severity of their state’s budget crisis but are also starting to accept some pragmatic avenues of reform. Politicians and policy makers in Illinois must act on this opportunity and focus on passing structural reform.

The USPS: A Business or a Welfare Organization?

In our oped in the Chicago Tribune yesterday, Maurice McTigue and I argue that Congress needs to decide if it wants the USPS to be an independent business or a taxpayer-supported welfare organization.

Currently Congress wants to have its cake and eat it too – it wants to maintain the government controlled quasi-monopoly over postal delivery but it also wants USPS to operate as a profitable competitive organization. Striving to have the USPS operate in this sort of middle ground will simply not work.

From our oped:

In order for the USPS to operate as a business and become profitable, Congress needs to allow it to make the same decisions every private-sector business makes, which includes choosing the location of its assets, closing post offices, laying off workers and competitively pricing its services. This also means the USPS should not be allowed to borrow from the government or receive written guarantees.

Given the current fiscal problems stemming from the already overcommitted welfare system in the United States, creating another one is simply not an option. If instead, Congress were to remove the barriers to postal delivery, it would allow the USPS to restructure itself into a 21st century organization – an organization that could provide an improved quality of service at competitive prices.

 

Tightening Municipal Bankruptcy Laws

There have been 629 municipal bankruptcies in the US since 1937. Some of the most recent include: Vallejo California, Central Falls Rhode Island, Boise County Idaho, and as of last week, Harrisburg Pennsylvania.

As a result of these recent filings, municipal bankruptcy, or Chapter 9 of the U.S. Bankruptcy Code, has become an increasingly important topic in the policy community and a few states have taken action towards tightening up and/or clarifying their municipal bankruptcy laws.

Rhode Island passed legislation earlier this year that:

takes the decision to file for receivership out of the hands of the community and gives it to the state Department of Revenue. It also replaces the existing state budget review commission system, set up in the 1990s, with a new three-step process of increasing oversight

Just last week, California Governor Jerry Brown signed legislation that changes how cities file for bankruptcy:

After the law takes effect in 90 days, municipalities in the most-populous state will have to submit to a neutral review of their finances, or demonstrate a fiscal emergency, before seeking Chapter 9 bankruptcy protection in federal court.

Given that future municipal bankruptcies are imminent, legislative actions aimed at tightening up and clarifying the current bankruptcy laws may be beneficial. However, Chapter 9 should not be seen as the solution or as an easy way out of a tough situation. As Michael Viscount and Josh Klein rightly argue:

Chapter 9 is a tool for a municipality to restructure its finances in an orderly fashion — but it is not a substitute for political will, which is required to tackle the difficult fiscal problems surrounding us…. Municipal bankruptcy will not eliminate any of the hard choices that must be made to restructure governmental obligations successfully.

Waiting until a municipality is on the brink of bankruptcy is fiscally irresponsible. Politicians and policy makers need to stop waiting until it is too late and begin taking the necessary steps towards creating policy environments that promote fiscal stability.

 

 

 

Local Governments in the United States

From an article in Stateline:

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

The authors of this article look at the number of local governments in each state relative to its population, finding that the average for the United States is 3,451 people per unit of local government. North Dakota (249), South Dakota (411), and Nebraska (687) were on low end of the spectrum whereas Hawaii (71,595), Maryland (22,553) and Virginia (15,658) where on the high end.

Illinois, in particular, finds itself in an interesting situation in this data. Although the state has only 1,835 people per unit of local government, its total number of local governments (6,944) is far greater than any other state. To put this into perspective, Pennsylvania (4,871) and Texas (4,835) rank second and third, respectively, for states with the highest number of local governments.

So what explains the proliferation of local governments in Illinois? One likely cause is a debt loophole in the state’s constitution. Specifically, the 1870 Illinois Constitution limited the amount of debt that a unit of local government could issue but allowed localities a dodge: the special district. In other words, each unit of local government was allowed to get around its legal debt limit via the creation of a special district. Since that time, the state has created 3,249 special districts. This phenomenon of special district creation as tool for expanded fiscal reach is investigated by Bennett and DiLorenzo in their book, Underground Government.

Does Illinois’s situation suggest the need for consolidation? If so, what is the optimal number of governments for a state to have and how is this determined? It’s not necessarily obvious at first glance: what are these governments, how did they arise, what do they do, and how do they finance their operations?

The concept of consolidating governments to increase efficiency has been the root of much debate in public policy. However, as Ostrom, Tiebout, and Warren argue,

It would be a mistake to conclude that public organizations are of an inappropriate size until the informal mechanisms, which might permit larger or smaller political communities, are investigated.

Thus, when debating over whether or not consolidation will increase efficiency, it’s necessary to understand the institutional environment in which the units of local government were created as well as the underlying informal mechanisms connecting them.

Are Indices of “Business Climate” Useful?

In a recent paper titled “How Friendly To Entrepreneurs Are “Business Friendly” Policies? Some Preliminary Results,” Joshua Hall and I closely examine six national indices that are often used as indicators of how “business friendly” a state is relative to its neighbors. We find that many of these indices are not useful in explaining the variation in entrepreneurial activity among the 50 US states.

In fact, of the three indices that were statistically significant in our regression analysis, only one index had the empirical relationship that we had predicted. This means that not only were many of the indices not useful but some of them suggest that states that are more business friendly have lower levels of entrepreneurial activity.

The overall results of our research are, therefore, a bit puzzling. Why would a “good” business climate be associated with less entrepreneurial activity?  One possible explanation is that because of the way the Kauffman Index of Entrepreneurial Activity is measured it picks up a lot of necessity entrepreneurship (i.e. people who self employ because of a lack of other opportunities). It may also be the case that some measures of how conducive a state’s policies are to businesses many not actually be good measures of whether they are conducive to entrepreneurship.

Our paper is not, however, meant to show that the indices we examined are necessarily bad indices. In fact, after researching each of them it is clear that they do contain very useful economic data. Moreover, it is clear that many of these business climate indices are popular tools in the policy arena and thus it would be useful for future research to further examine the relationship between these indices and entrepreneurship.

 

 

Fitch Downgrades Cook County’s Bond Rating Because of Pension Liabilities

Fitch Ratings downgraded the general obligation bond rating of Cook County, Illinois, from AA to AA- earlier this week. Moody’s similar downgrade last June makes this Cook County’s second downgrade of the year.

It is of no surprise that the county’s pension liabilities were cited as an important factor in the downgrade. Cook County’s local governments currently face more than $108 billion in outstanding debt, almost a quarter of which can be attributed to unfunded pension liabilities.

This problem is further compounded by the fact that the City of Chicago has its own unfunded pension liability of $48.8 billion or $42,000 per capita.

Illinois’s pension problems, however, run much deeper than Cook County. Illinois’s FY 2012 operating budget reports that the state’s pension system is 45 percent funded with total unfunded liabilities amounting to $75.7 billion.

Although, in recent research, Eileen Norcross and I find that when using discount rates that reflect the risk of public pension liabilities, Illinois’s unfunded pension liabilities amount to $173 billion and the funded ratio across systems drops to 36 percent in FY 2010.

By 2018, Illinois pension system will require a tripling of the state’s annual contributions from $6 billion to $17.5 billion. Therefore, without serious structural reform, it is likely that Illinois’s pension liabilities will lead to additional rating downgrades in the future.