Category Archives: Entrepreneurship

Intergovernmental grant to gelato maker distorts market competition

Intergovernmental grants are grants that are given to one level of government by another e.g. federal to state/local or state to local. In addition to being used on public works and services they also subsidize the development of private goods. The Community Development Block Grant Program (CDBG) is a federally funded grant program that distributes grants and subsidized loans to local and state governments which then use them or award them to other businesses and non-profits. The grants can be used on a variety of projects. Since 1975 the CDBG program has given over $143 billion ($215 billion adjusted for inflation) to state and local governments. The graph below (click to enlarge) shows the total dollars by year adjusted for inflation (2009 dollars) and the number of entitlement grantees by year. While the total amount of funding has declined over time, it was still $2.8 billion in 2014.

cdbg dollars, grantees

Intergovernmental grant programs like CDBG are based on the incorrect idea that moving money around produces economic development and creates a net-positive amount of jobs. But only productive entrepreneurs who create value for consumers can create jobs. The CDBG program and others like it distort the entrepreneurial process and within-industry competition by giving an artificial advantage to the companies that receive grants. This results in more workers and capital flowing into the grant-receiving business rather than their unsubsidized competitors. For example, Brunswick, ME is giving a $350,000 CDBG to Gelato Fiasco to help the company buy new equipment. Meanwhile, nearby competitors Bohemian Coffeehouse, Little Dog Coffee Shop, and Dairy Queen are not receiving any grant money. Governments at all levels, such as Brunswick’s, should not pick winners and losers via a grant process that ultimately favors some constituents over others.

Some other projects that the CDBG program has helped fund are: a soybean processing plant in Arkansas, a new facility for a farmer’s market in Oregon, solar panels for houses in San Diego, and waterfront housing in Burlington, VT. Like the Gelato Fiasco example, these are all examples of private goods, not public, and the production of such goods is best left to the market. If private investors who are subject to market forces are unwilling to produce a private good then it is probably not a worthwhile venture, as the lack of private investment implies that the expected cost exceeds the expected revenue. Private investors and entrepreneurs want to make a profit and the profit incentive promotes wise investments. Governments don’t confront the same profit incentive and this often leads to wasteful spending.

At its best, a government can create the conditions that encourage economic development and job creation: the enforcement of private property rights, a court system to adjudicate disputes, a police force to maintain law and order, and perhaps some basic infrastructure. The scope of a local government should be limited to these tasks.

Markets Fail and Governments Do Too

We often hear that markets fail when it comes to preserving the environment, so government regulation is needed to protect natural resources from the ravages of capitalism. But what happens when government regulations themselves get in the way of innovative ideas that move us towards a cleaner and more environmentally sustainable future?

This is exactly what happened in Logan City, Utah when the local government built a small hydropower turbine and ran into a nightmare of regulatory red tape that led to large cost overruns and far more time committed to the project than was originally anticipated. In the end, the project was delayed four years and ended up costing twice as much as planned.

This abstract from a recent working paper from the Mercatus Center describes what happened:

In 2004 Logan, Utah, saw the opportunity to place a turbine within the city’s culinary water system. The turbine would reduce excess water pressure and would generate clean, low-cost electricity for the city’s residents. Federal funding was available, and the city qualified for a grant under the American Recovery and Reinvestment Act. Unfortunately, Logan City found that a complex and costly federal nexus of regulatory requirements must be met before any hydropower project can be licensed with the Federal Energy Regulatory Commission. This regulation drove up costs in terms of time and money and, as a result, Logan City is not planning to undertake any similar projects in the future. Other cities have had similar experiences to Logan’s, and we briefly explore these as well. We find that regulation is likely deterring the development of small hydropower potential across the United States, and that reform is warranted.

This wouldn’t be the first time that regulations have led to perverse environmental outcomes. To prevent these problems in the future, agencies need to take better account of the expected costs and benefits of their rules before finalizing them. For example, recent analysis by myself and my colleague Richard Williams shows that agencies only rarely estimate dollar values for both benefits and costs of their regulations.

Another improvement would be for agencies to consider more flexible approaches when regulating. For example, the Occupational Safety and Health Administration recently proposed a rule to reduce silica exposure for workers. The rule requires businesses to consider gas masks or other personal protection equipment only as a last resort. Other methods of controlling silica dust, like enclosing work areas or using sprays and vacuums, should be considered first. These methods are likely to be more burdensome than asking workers to wear a gas mask. The agency should consider offering more flexibility to businesses and workers if it wants to relieve some unnecessary burden in its proposed rule.

Of course it’s true that markets can fail. But it’s important to remember that governments often fail too. Only an approach that considers both market failure and government failure can illuminate the best course of action when addressing a serious social problem like environmental degradation. Furthermore, until regulators start acting more like the experts we expect them to be, government is likely to fail just as much, if not more often, than markets.

The Precautionary Principle vs. Glow in the Dark Plants

http://www.thecroodsmovie.com

In “The Croods,” a box office hit cartoon showing a family of cavemen, the father issues daily warnings to his family that everything new is bad. He explains to his inquisitive daughter that they have survived for so long in their dangerous world by doing exactly the same thing every day and eschewing innovation. In our times, we would call his approach “the precautionary principle.”

The precautionary principle was on display when environmental activists petitioned a startup fundraiser Kickstarter to shut down the Glowing Plant Project, calling it “a new biotech threat coming from Silicon Valley.”  As its name suggests, the project aims to create plants that will glow in the dark using synthetic biology. And while the idea may sound like a fad, it may have practical applications, e.g. living streetlights that would use their own energy to illuminate our cities.

Under pressure, Kickstarter amended its rules to ban startups from rewarding their donors with genetically modified products. The environmental activists further called on the regulators to subject similar projects to independent risk assessments. So far various agencies claimed that the issue is outside their jurisdiction.

The idea of making organisms glow is not new. A few years ago, FDA certified that there was no evidence that the Glofish, produced using similar technology, “pose any more threat to the environment than their unmodified counterparts.” But this will hardly satisfy the environmental groups who believe synthetic biology poses a major threat to conservation and sustainability of biological diversity.

There is logic to the precautionary principle. Innovation can and often does bring new risks. There were no driving related fatalities before the invention of cars and certainly fewer greenhouse gas emissions. And it would take a lightening strike to get a fatal electric shock before the invention of powerful electricity generators. Cars, electricity, vaccines and many other innovations came with substantial risks. But just imagine how riskier and poorer the world would be if we had used a precautionary principle to stifle innovation in those technologies.

My colleague Adam Thierer writes in his recent law review article:

New technologies help society address problems that are associated with older technologies and practices, but also carry risks of their own. A new drug, for example, might cure an old malady while also having side effects. We accept such risks because they typically pale in comparison with the diseases new medicines help to cure. While every technology, new or old, has some risks associated with it, new technologies almost always make us safer, healthier, and smarter, because through constant experimentation we discover better ways of doing things.

He further notes:

The precautionary principle destroys social and economic dynamism. It stifles experimentation and the resulting opportunities for learning and innovation. While some steps to anticipate or to control unforeseen circumstances and “to plan for the worse” are sensible, going overboard with precaution forecloses opportunities and experiences that offer valuable lessons for individuals and society.

So take it from the Croods – if we didn’t take risks and innovate, we’d still be living in caves.

Occupational Licensing Hurts Consumers and Limits Entrepreneurship

This week I’m at U.S. News and World Reports looking at how occupational licensing hurts consumers and acts as an obstacle to new business creation. However, licensing requirements are difficult to repeal because they benefit a vested interest. In California, state policymakers were considering a bill to allow nurse practitioners to practice independently, until heavy lobbying from an organization that represents state doctors successfully resulted in a heavily amended bill.

The current political situation in California reflects the typical dynamic of occupational licensing considerations. The supporters of licensing rules often benefit from licensing because it protects them from competition. With improved technology offering greater information sharing, it is also worth questioning the effectiveness of some licensing rules. Today, the pervasion of free online reviews on nearly every service-based business provides consumers with more information about service quality than any license can convey.

The full article is available here.

The Economics of Regulation Part 2: Quantifying Regulation

I recently wrote about a new study from economists John Dawson and John Seater that shows that federal regulations have slowed economic growth in the US by an average of 2% per year.  The study was novel and important enough from my perspective that it deserved some detailed coverage.  In this post, which is part two of a three part series (part one here), I go into some detail on the various ways that economists measure regulation.  This will help put into context the measure that Dawson and Seater used, which is the main innovation of their study.  The third part of the series will discuss the endogenous growth model in which they used their new measure of regulation to estimate its effect on economic growth.

From the macroeconomic perspective, the main policy interventions—that is, instruments wielded in a way to change individual or firm behavior—used by governments are taxes and regulations.  Others might include spending/deficit spending and monetary policy in that list, but a large percentage of economics studies on interventions intended to change behavior have focused on taxes, for one simple reason: taxes are relatively easy to quantify.  As a result, we know a lot more about taxes than we do about regulations, even if much of that knowledge is not well implemented.  Economists can calculate changes to marginal tax rates caused by specific policies, and by simultaneously tracking outcomes such as changes in tax revenue and the behavior of taxed and untaxed groups, deduce specific numbers with which to characterize the consequences of those taxation policies.  In short, with taxes, you have specific dollar values or percentages to work with. With regulations, not so much.

In fact, the actual burden of regulation is notoriously hidden, especially when directly compared to taxes that attempt to achieve the same policy objective.  For example, since fuel economy regulations (called Corporate Average Fuel Economy, or CAFE, standards) were first implemented in the 1970s, it has been broadly recognized that the goal of reducing gasoline consumption could be more efficiently achieved through a gasoline tax rather than vehicle design or performance standards.  However, it is much easier for a politician to tell her constituents that she will make auto manufacturers build more fuel-efficient cars than to tell constituents that they now face higher gasoline prices because of a fuel tax.  In econospeak, taxes are salient to voters—remembered as important and costly—whereas regulations are not. Even when comparing taxes to taxes, some, such as property taxes, are apparently more salient than others, such as payroll taxes, as this recent study shows.  If some taxes that workers pay on a regular basis are relatively unnoticed, how much easier is it to hide a tax in the form of a regulation?  Indeed, it is arguably because regulations are uniquely opaque as policy instruments that all presidents since Jimmy Carter have required some form of benefit-cost analysis on new regulations prior to their enactment (note, however, that the average quality of those analyses is astonishingly low).  Of course, it is for these same obfuscatory qualities that politicians seem to prefer regulations to taxes.

Despite the inherent difficulty, scholars have been analyzing the consequences of regulation for decades, leading to a fairly large literature. Studies typically examine the causal effect of a unique regulation or a small collection of related regulations, such as air quality standards stemming from the Clean Air Act.  Compared to the thousands of actual regulations that are in effect, the regulation typically studied is relatively limited in scope, even if its effects can be far-reaching.  Because most studies on regulation focus only on one or perhaps a few specific regulations, there is a lot of room for more research to be done.  Specifically, improved metrics of regulation, especially metrics that can be used either in multi-industry microeconomic studies or in macroeconomic contexts, could help advance our understanding of the overall effect of all regulations.

With that goal in mind, some attempts have been made to more comprehensively measure regulation through the use of surveys and legal studies.  The most famous example is probably the Doing Business index from the World Bank, while perhaps the most widely used in academic studies is the Indicators of Product Market Regulation from the OECD.  Since 2003, the World Bank has produced the Doing Business Index, which combines survey data with observational data into a single number designed to tell how much it would cost to “do business,” e.g. set up a company, get construction permits, get electricity, register property, etc., in set of 185 countries.  The Doing Business index is perhaps most useful for identifying good practices to follow in early to middle stages of economic development, when property rights and other beneficial institutions can be created and strengthened.

The OECD’s Indicators of Product Market Regulation database focuses more narrowly on types of regulation that are more relevant to developed economies.  Specifically, the original OECD data considered only product market and employment protection regulations, both of which are measured at “economy-wide” level—meaning the OECD measured whether those types of regulations existed in a given country, regardless of whether they were applicable to only certain individuals or particular industries.  The OECD later extended the data by adding barriers to entry, public ownership, vertical integration, market structure, and price controls for a small subset of broadly defined industries (gas, electricity, post, telecommunications, passenger air transport, railways, and road freight).  The OECD develops its database by surveying government officials in several countries and aggregating their responses, with weightings, into several indexes.

By design, the OECD and Doing Business approaches do a good job of relating obscure macroeconomic data to actual people and businesses.  Consider the chart below, taken from the OECD description of how the Product Market Regulation database is created.  As I wrote last week and as the chart shows, the rather sanitized term “product market regulation” actually consists of several components that are directly relevant to a would-be entrepreneur (such as the opacity of a country’s licenses and permits system and administrative burdens for sole proprietorships) and to a consumer (such as price controls and barriers to foreign direct investment).  You can click on the chart below to see some of the other components that are considered in OECD’s product market regulation indicator.

oecd product regulation tree structure

Still, there are two major shortcomings of the OECD data (shortcomings that are equally applicable to similar indexes produced by the World Bank and others).  First, they cover relatively short time spans.  Changes in regulatory policy often require several years, if not decades, to implement, so the results of these changes may not be reflected in short time frames (to a degree, this can be overcome by measuring regulation for several different countries or different industries, so that results of different policies can be compared across countries or industries).

Second, and in my mind, more importantly, the Doing Business Index is not comprehensive.  Instead, it is focused on a few areas of regulation, and then only on whether regulations exist—not how complex or burdensome they are.  As Dawson and Seater explain:

[M]easures of regulation [such as the Doing Business Index and the OECD Indicators] generally proceed by constructing indices based on binary indicators of whether or not various kinds of regulation exist, assigning a value of 1 to each type of regulation that exists and a 0 to those that do not exist.  The index then is constructed as a weighted sum of all the binary indicators.  Such measures capture the existence of given types of regulation but cannot capture their extent or complexity.

Dawson and Seater go out of their way to mention at least twice that the OECD dataset ignores environmental and occupational health and safety regulations.  Theirs is a good point – in the US, at least, environmental regulations from the EPA alone accounted for about 15% of all restrictions published in federal regulations in 2010, and that percentage has consistently grown for the past decade, as can be seen in the graph below (created using data from RegData).  Occupational health and safety regulations take up a significant portion of the regulatory code as well.

env regs as percentage of total

In contrast, one could measure all federal regulations, not just a few select types.  But then the process requires some usage of the actual legal texts containing regulations.  There have been a few attempts to create all-inclusive time series measures of regulation based on the voluminous legal documents detailing regulatory activity at the federal level.   For the most part, studies have relied on the Federal Register, the government’s daily journal of newly proposed and final regulations.  For example, many scholars have counted pages in the Federal Register to test for the existence of the midnight regulations phenomenon—the observation that the administrations of outgoing presidents seem to produce abnormally large numbers of regulations during the lame-duck period

There are problems with using the Federal Register to measure regulation (I say this despite having used it in some of my own papers).  First and foremost, the Federal Register includes deregulatory activity.  When a regulatory agency eliminates words, paragraphs, or even entire chapters from the CFR, the agency has to notify the public of the changes.  The agency does this by printing a notice of proposed rulemaking in the Federal Register that explains the agencies intentions.  Then, once the public has had adequate time to comment on the agencies proposed actions, the agency has to publish a final rule in the Federal Register—another set of pages that detail the final actions the agency is taking.  Obviously, if one is counting pages published in the Federal Register and using that as a proxy for the growth of regulation, deregulatory activity that produces positive page counts would lead to incorrect measurements.  

Furthermore, pages published in the Federal Register may be a biased measure because the number of pages associated with individual rulemakings has increased over time as acts of Congress or executive orders have required more analyses. In his Ten-Thousand Commandments series, Wayne Crews mitigates this drawback to some degree by focusing only on pages devoted to final rules.  The Ten-Thousand Commandments series keeps track of both the annual number of final regulations published in the Federal Register and the annual number of Federal Register pages devoted to final regulations.

Dawson and Seater instead rely on the Code of Federal Regulations, another set of legal documents related to federal regulationsActually, the CFR would be better described as the books that contain the actual text of regulations in effect each year.  When a regulatory agency creates new regulations, or alters existing regulations, those changes are reflected in the next publication of the CFR.  Dawson and Seater collected data on the total number of pages in the CFR in each year from 1949 to 2005. I’ve graphed their data below.

dawson and seater cfr pages

*Dawson and Seater exclude Titles 1 – 3 and 32 from their total page counts because they argue that those Titles do not contain regulation, so comparing this graph with page count graphs produced elsewhere will show some discrepancies.

Perhaps the most significant advantage of the CFR over counting pages in the Federal Register is that it allows for decreases in regulations. However, using the CFR arguably has several advantages over indexes like the OECD product market regulation index and the World Bank Doing Business index.  First, using the CFR captures all federal regulation, not just a select few types.  Dawson and Seater point out:

Incomplete coverage leads to two problems: (1) omitted variables bias, and, in any time series study, (2) divergence between the time series behavior of subsets of regulation on the one hand and of total regulation on the other.

In other words, ignoring potentially important variables (such as environmental regulations) can cause estimates of the effect of regulation to be wrong.

Second, the number of pages in the CFR may reflect the complexity of regulations to some degree.  In contrast, the index metrics of regulation typically only consider whether a regulation exists—a binary variable equal to 1 or 0, with nothing in between.  Third, the CFR offers a long time series – almost three times as long as the OECD index, although it is shorter than the Federal Register time series.

Of course, there are downsides to using the CFR.  For one, it is possible that legal drafting standards and language norms have changed over the 57 years, which could introduce bias to their measure (Dawson and Seater brush this concern aside, but not convincingly in my opinion).  Second, the CFR is limited to only one country—the United States—whereas the OECD and World Bank products cover many countries.  Data on multiple countries (or multiple industries within a country, like RegData offers) allow comparisons of real-world outcomes and how they respond to different regulatory treatments.  In contrast, Dawson and Seater are limited to constructing a “counterfactual” economy – one that their model predicts would exist had regulations stayed at the level they were in 1949.  In my next post, I’ll go into more detail on the model they use to do this.

The Economics of Regulation Part 1: A New Study Shows That Regulatory Accumulation Hurts the Economy

In June, John Dawson and John Seater, economists at Appalachian State University and North Carolina State University, respectively, published a potentially important study (ungated version here) in the Journal of Economic Growth that shows the effects of regulatory accumulation on the US economy.  Several others have already summarized the study’s results (two examples here and here) with respect to how the accumulation of federal regulation caused substantial reductions in the growth rate of GDP.  So, while the results are important, I won’t dwell on them here.  The short summary is this: using a new measure of federal regulation in an endogenous growth model, Dawson and Seater find that, on average, federal regulation reduced economic growth in the US by about 2% annually in the period from 1949 to 2005.  Considering that economic growth is an exponential process, an average reduction of 2% over 57 years makes a big difference.  A relevant excerpt tells just how big of a difference:

 We can convert the reduction in output caused by regulation to more tangible terms by computing the dollar value of the loss involved.  […] In 2011, nominal GDP was $15.1 trillion.  Had regulation remained at its 1949 level, current GDP would have been about $53.9 trillion, an increase of $38.8 trillion.  With about 140 million households and 300 million people, an annual loss of $38.8 trillion converts to about $277,100 per household and $129,300 per person.

These are large numbers, but in fact they aren’t much different from what a bevy of previous studies have found about the effects of regulation.  The key differences between this study and most previous studies are the method of measuring regulation and the model used to estimate regulation’s effect on economic growth and total factor productivity.

In a multi-part series, I will focus on the tools that allowed Dawson and Seater to produce this study: 1. A new time series measure of total federal regulation, and 2. Models of endogenous growth.  My next post will go into detail on Dawson and Seater’s new time series measure of regulation, and compares it to other metrics that have been used.  Then I’ll follow up with a post discussing endogenous growth models, which consider that policy decisions can affect the accumulation of knowledge and the rates of innovation and entrepreneurship in an economy, and through these mechanisms affect economic growth.

Why should you care about something as obscure as a “time series measure of regulation” and “endogenous growth theory?”  Regulations—a form of law that lawyers call administrative law—create a hidden tax.  When the Department of Transportation creates new regulations that mandate that cars must become more fuel efficient, all cars become more expensive, in the same way that a tax on cars would make them more expensive.  Even worse, the accumulation of regulations over time stifle innovation, hinder entrepreneurship, and create unintended consequences by altering the prices of everyday purchases and activities.  For an example of hindering entrepreneurship, occupational licensing requirements in 17 states make it illegal for someone to braid hair for a living without first being licensed, a process which, in Pennsylvania at least, requires 300 hours of training, at least a 10th grade education, and passing a practical and a theory exam. Oh, and after you’ve paid for all that training, you still have to pay for a license.

And for an example of unintended consequences: Transportation Security Administration procedures in airports obviously slow down travel.  So now you have to leave work or home 30 minutes or even an hour earlier than you would have otherwise, and you lose the chance to spend another hour with your family or finishing some important project.  Furthermore, because of increased travel times when flying, some people choose to drive instead of fly.  Because driving involves a higher risk of accident and death than does flying, this shift, caused by regulation, of travelers from plane to car actually causes people to die (statistically speaking), as this paper showed.

Economists have realized the accumulation of regulation must be causing serious problems in the economy.  As a result, they have been trying to measure regulation in different ways, in order to include regulation in their models and better study its impact.  One famous measure of regulation, which I’ll discuss in more detail in my next post, is the OECD’s index of Product Market Regulation.  That rather sanitized term, “product market regulation,” actually consists of several components that are directly relevant to a would-be entrepreneur (such as the opacity of a country’s licenses and permits system and administrative burdens for sole proprietorships) and to a consumer (such as price controls, which can lead to shortages like we often see after hurricanes where anti-price gouging laws exist, and barriers to foreign direct investment, which could prevent multinational firms like Toyota from building a new facility and creating new jobs in a country).  But as you’ll see in the next post, that OECD measure (and many other measures) of regulation miss a lot of regulations that also directly affect every individual and business.  In any science, correct measurement is a necessary first step to empirical hypothesis testing.

Dawson and Seater have contributed a new measure of regulation that improves upon previously existing ones in many ways, although it also has its drawbacks.  And because their new measure of regulation offers many more years of observations than most other measures, it can be used in an endogenous growth model to estimate how regulation has affected the growth of the US economy.  Again, in endogenous growth models, policy decisions (such as how much regulation to create) affect economic growth if they affect the rates of accumulation of knowledge, innovation, and entrepreneurship. It’s by using their measure in an endogenous growth model that Dawson and Seater were able to estimate that individuals in the US would have been $129,300 richer if regulations had stayed at their 1949 level.  I’ll explain a bit more about endogenous growth theory in a second follow-up post.  But first things first—my next post will go into detail on measures of regulation and Dawson and Seater’s innovation.

Rhode Island to unionize daycare workers

Last week, the Rhode Island legislature passed a law to permit daycare workers who receive any subsidies from the state to either form a union, or join an existing union such as the SEIU. While they would not be eligible for state pensions or health benefits, and not permitted to strike, the law allows workers to collectively bargain over subsidies, training and professional development and “other economic matters.”

Daycare workers represent a target population for unions. A new law in Minnesota permits daycare workers to unionize so home providers can advocate for higher subsidy payments from the state. In New York in 2010, Governor Paterson pushed for daycare workers to pay union dues to the teachers’ unions in his 2011 budget proposal.

With Rhode Island in the mix, 17 states now permit or strongly encourage daycare workers to unionize. In the rush to unionize private business owners, the ostensible benefits – a voice in the legislature to lobby for higher state subsidies – are touted – and the costs are ignored For example, in Massachusetts, if a private daycare owner accepts clients who pay with state daycare vouchers, the daycare provider must be represented by a union and pay dues. These dues are skimmed off of the state subsidy for low-income parents which is paid directly to the daycare provider. To avoid unionization, the provider would have to turn away low-income families who receive state subsidies for childcare.

The SEIU claims unionization will improve the quality of childcare and offers economic justice for workers. But, the most dramatic result seems to be this:  where daycare workers unionize, the SEIU immediately gains a windfall of new dues transferred from a program meant to help low-income families pay for daycare, (to the tune of $28 million in Michigan, where similar legislation was recently passed).

As James Shrek writes in National Review, one of the more remarkable things about this effort is that it represents a new strategy by unions. The target group for unionization are private individuals or business owners who are also the recipients of government benefits. For instance, at one point in Michigan, a parent receiving Medicaid to care for a disabled child could receive SEIU representation. Some parents found the only result was a reduction in their monthly Medicaid payments and no representation, effectively, “forcing disadvantaged families to pay union dues out of their government benefits.”

As Shrek notes, the Minnesota law, which authorizes AFSCME to unionize in-home daycare providers, also potentially covers short-term summer camps, and grandparents watching their grandkids, or “relative care.”

Shrek asks, does this tactic represent a sign of desperation on the part of unions who are actively seeking new members to the point of organizing, “unions of one”? With a growing number of states joining the trend, it is worth watching how these laws affect those people and families that the unions are claiming to help.

 

 

 

 

Nevada’s new film tax credits to benefit casinos

Until recently, Nevada was one of a handful of states that did not offer film companies tax incentives. With the passage of Senate Bill 165 last month qualified film producers are eligible for transferable film credits valued at 20 percent of production costs. Lawmakers were in part persuaded by testimony (offered by film maker Nicholas Cage) that such credits would result in a film boom for Nevada. Some features of the credits: they are limited to $20 million a year. Productions that shoot 60 percent of their work in Nevada and spend between $500,000 and $40 million may earn a credit for 15 percent to 19 percent of total in-state, qualified expenses. Each production is capped at $6 million in credits.

Nevada does not tax individual or corporate income. The credits may be applied to payroll taxes, casino taxes and insurance premium taxes. Gasoline, cigarette, liquor, sales, live entertainment and property taxes aren’t eligible.

Part of the value of Nevada’s credits to film companies is that they are transferable. The credits can be sold by film companies to other Nevada businesses, such as casinos, becoming, “the coin of the realm.”

The Las Vegas Sun News explains how the new program will help generate a niche financial industry of brokers to help parties buy and sell credits. For example, a film company with a $1 million production and 15 percent credit is awarded $150,000 by the state of Nevada. If the film company only pays $50,000 in payroll taxes, that leaves $100,000 in credits on the table. This credit can then be sold at discount (let’s say 80 percent of the value of the remaining credit) to an interested buyer. Thus, a casino with a $100,000 tax liability can buy a tax credit from the film company at a price of $80,000.

The legislature promises to study the effectiveness of the program after a five-year trial period.

 

A Hidden Opportunity Cost of Regulatory Compliance: Management Time

At the federal level, regulators in many agencies attempt to estimate the impacts that new regulations would have on businesses, even if the average quality of these analyses is typically poor.  But these impact analyses rarely consider a conceivably major cost: the opportunity cost of business owners or managers who have to spend their time dealing with regulations.

One of the simplest costs that regulators consider, for example, is paperwork: how much more paperwork will be imposed on businesses as a result of a new regulation?  Indeed, the paperwork burden is sometimes the primary cost considered in these analyses, as was the case in this rule proposed by the Department of Labor towards the end of 2011.  This proposal addresses requirements for affirmative action and non-discrimination that apply to federal contractors, proposing, among other things, to “strengthen the affirmative action provisions, detailing specific actions a contractor must take to satisfy its obligations. [The proposal] would also increase the contractor’s data collection obligations, and establish a utilization goal for individuals with disabilities to assist in measuring the effectiveness of the contractor’s affirmative action efforts.”

Just consider one part of the summary of that proposed rule: “increase the contractor’s data collection obligations.” If you read on in the Federal Register notice (search for the term “12866” to get to the analysis section), you’ll find that the Dept. of Labor assumed that contractors have people in place to perform the increased data collection obligations. So for the analysis, the Dept. of Labor simply added some paperwork time to each contractor, and calculated how much the extra employee time would cost each contractor.

But here’s the catch.  What if the contractor has to hire a new employee to handle this?  The costs of searching for a new employee can be substantial.  A recent post in the St. Louis Business Journal featured Steve Baden, president of Royal Banks of Missouri, discussing the difficulties in finding and hiring a compliance officer – an employee whose job it is to oversee regulatory compliance, which certainly includes vast amounts of paperwork.  Baden said that the process of hiring a compliance officer took him “a year of interviews to find someone qualified and cost [him] six figures.”

Management time is expensive.  Business owners are the entrepreneurs that help create economic growth through innovation.  When they have to spend their time searching for compliance officers or filling out paper work, they are not spending their time finding new ways to improve their businesses or starting new ones.  This is a real cost of regulation, and one of the reasons that the accumulation of regulations can stifle an economy.

Furthermore, any employee’s time—whether it’s a new employee or one who already worked for the contractor—is also valuable time.  When Steve Baden has to hire a full-time compliance officer in order to navigate the paperwork maze created by regulations, that individual hired to ensure compliance will not do some other productive activity with her time.  How valuable is it to society to have highly skilled individuals spending their time collecting data or filling out paperwork to show compliance with regulations?  Time used on regulatory compliance is necessarily not time used elsewhere. Without the million-plus restrictions created by federal regulations, countless compliance officers would be gainfully employed in roles that create better value in the economy.

One of my mentors once stated that he could create jobs by hiring people to trim his lawn with toenail clippers (warning: links to a Penn & Teller episode, and they do not refrain from using vulgar language).  But that’s probably not the most productive use of their time.  The fact that an action creates jobs does not mean the skills and efforts of individuals are used in the best possible way, nor does it mean that there is necessarily a net gain in jobs.  The creation of a regulatory compliance job may be offset by elimination of one or more jobs elsewhere because of increased operating costs.

Don’t make us drive these cattle over the cliff

First a brief note: I am now blogging at the American Spectator on economic issues. I invite you to visit the inaugural posts. Last week, I covered the fiscal cliff. Like many others, I also marvel at the audacity of the pork contained therein.

Lately the headlines have given me a flashback to 1990 and those first undergrad economics classes. And not just econ but also U.S. history and the American experience with price floors and ceilings. In this post I’ll discuss the floors.

As I note at The Spectacle one of the matters settled by the American Taxpayer Relief Act is the extension of dairy price supports from the 2008 farm bill. Now, Congress won’t be “forced to charge $8 gallon for milk.” To me, nothing screams government price-fixing more than this threat aimed to scare small children and the parents who buy their food.

Chris Edwards explains how America’s dairy subsidy programs work in Milk Madness. Since the 1930’s the federal government  has set the minimum price to be charged for dairy. A misguided idea from the start, the point of the program was to ensure that dairy farmers weren’t hurt by falling prices during the Great Depression. When market prices fall below the government set price the government agrees to buy up any excess butter, dry milk or cheese that is produced. Thusly, dairy prices are kept artificially high which stimulates more demand.

According to Edwards’ study, the OECD found that U.S. dairy policies create a 26 percent “implicit tax” on milk, a regressive tax that affects low-income families in particular. Taxpayers pay to keep food prices artificially high, generate waste, and prevent local farmers from entering a caretlized market.

Now for the cows. The recession revealed that the nation has an oversupply of them. The New York Times reports that rapid expansion in the U.S. dairy market driven by increased global demand for milk products came to a sudden halt in 2008. Farmers were left with cows that needed to be milked regardless of the slump in world prices. The excess dry milk was then sold to the government but only at a price that was set above what the market demanded.

In other words, in a world without price supports, farmers could have sold the milk for less at market and consumers would have enjoyed cheaper butter, cheese and baby formula. Instead, the government stepped in, bought $91 million in milk powder so the farmer could get an above-market price and keep supporting an excess of milk cows. Rather than downsize the dairy based on market signals (and sell part of the herd to other dairy farmers, or the butcher) farmers take the subsidy and keep one too many cows pumping out more milk than is demanded.

It turns out auctioning a herd is not something all farmers are anxious to do. Some may look for additional governmental assistance to keep their cattle fed in spite of dropping prices, increased feed costs, and bad weather. To be sure eliminating farm subsidies would produce a temporary shock (a windfall for farmers and sticker shock for consumers), but in the long run as markets adjust everyone benefits.Dairy cows in the sale ring at the Warragul cattle sales, Victoria, [2]

New Zealand did it. Thirty years later and costs are lower for consumers, farmers are thrivingenvironmental practices have improved, and organic farming is growing. While politicians and the farm lobby may continue pushing for inefficient agricultural policy in spite of the nation’s fiscal path,as Robert Samuelson at Real Clear Politics writes, “If we can’t kill farm subsidies, what can we kill?”