Tag Archives: HT

One Man’s Privilege is Another’s Punishment

When governments bestow privileges on particular firms, they also impose costs on others. A recent CNN report brings this to light (HT, Rob Raffety).

It tells the story of Bill Keith, an entrepreneur who started a small business out of his garage. He installs solar-powered attic fans that pump away hot air and lower cooling bills. The Obama campaign heard about him and sent someone out to meet (vet) him. Soon the campaign, and then the Administration, was featuring Mr. Keith in speeches and other materials. His story was perfect politics: small businessman meets green energy meets financial success.

Mr. Keith’s business soared, peaking at $5 million in revenue in 2009. But more recently he’s run into trouble:

Today, Keith’s solar star appears to be on a collision course with another Obama policy that may put him out of business. The irony is not lost on Keith: A man whose profile and company soared because of the administration’s energy policy [MM: it isn’t clear from the story what policy he actually benefited from, other than the loads of free advertising] is now falling apart because of a new Obama anti-dumping policy involving China.

While 95 percent of Keith’s fans are American-made, he has yet to find a U.S. company that can make the small customized solar panels that make his fans run.

So he has had to turn to—gasp—Chinese suppliers. And that has made him a target of the Administration’s so-called “anti-dumping” policy. Unless he can prove that the panels he buys are not Chinese-made, he faces tariffs as high as 250% (!). This is an effective rate of $270,000.

In response to CNN inquiries a White House spokesperson responded:

[T]hat the tariff “highlights the degree to which solar panel manufacturers have faced unfair competition from countries like China” and the president’s move to impose a tax on Chinese-made goods is a way to establish “a level playing field with China for American businesses and workers.”

There is a reason that economists are nearly unanimous in supporting free trade. Though tariffs such as those on imported solar panels are a privilege for domestic panel manufacturers, they are a burden for domestic consumers such as Mr. Keith. To make matters worse, economic theory and evidence long ago established the point that the costs borne by consumers outweigh the benefits bestowed on producers.

In this case, there is another cost: debasement of the English language. Notice the words used by the spokesperson. In order to establish a “level playing field” we need to tilt the playing field in favor of domestic producers at the expense of foreign producers and domestic consumers. So an uneven playing field is an even playing? Newspeak, much?

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.

Pension News From Around the Country

In California:

LOS ANGELES — Gov. Jerry Brown offered a far-reaching proposal on Thursday to reduce the cost to government of public pension programs, calling for an increase in the retirement age for new employees, higher contributions from workers to their own pensions and the elimination of what he termed abuses that have allowed retirees to inflate their pensions far beyond their annual salaries.

In Kansas:

TOPEKA — Kansas Gov. Sam Brownback and officials of the state’s public pension system aren’t saying publicly whether they favor issuing bonds to help close a close a long-term funding gap.

In Massachusetts:

The state House of Representatives today unanimously approved a plan to tighten the state’s pension provisions and raise the age that lawmakers and public employees are eligible for retirement. The move follows passage of a similar plan by the Senate earlier this fall. Both plans would only affect future hires, not current employees or retirees.

The House version passed today would boost the retirement age from 55 to 57 and could ultimately save $6.4 billion over 30 years, House lawmakers estimate. The Senate version went farther, raising the minimum age for retirement to 60.

In Mississippi:

JACKSON, Miss. (AP) — A group charged with studying the long-term viability of the state pension system is expected to release a formal report in two weeks.

During a meeting Monday, study commission chairman George Schloegel said he thinks several changes may be needed to shore up the Public Employees Retirement System.

The Clarion-Ledger reports…lawmakers alone can make changes, and it’s unclear whether they will make any radical alterations.

In North Carolina:

North Carolina is one state that’s planning to use a high-tech solution to look into the future and the present. The state’s Department of State Treasurer announced Thursday, Oct. 27, it will implement customized analytics software to better protect pensions for 850,000 state and local government employees….According to SAS, the customized software suite North Carolina will be using includes risk and performance measurement models for fixed-income equity, private markets and hedge funds.

And, in Rhode Island:

PROVIDENCE, R.I. — The General Assembly Joint Finance Committees will resume discussion of pension overhaul legislation Tuesday morning with a hearing on parts of the proposal that deal with municipal-run pension plans….Mayors have said they want the ability to make changes similar to what is proposed for state-run plans, such as suspending cost-of-living adjustments.

(here is Emily with more on RI)

Here, again, is Jeff Miron’s estimate of the date at which each state’s debt-to-GDP ratio will exceed 90 percent (the value at which economists believe debt tends to begin to hamper economic growth).

 

Unlike the calculations that the states themselves use, Miron’s calculations use the more-realistic discount rate assumptions of Novy-Marx and Rauh.

(HT to the National Association of State Budget Officers for their extremely helpful “state budget press clips”)

Economic Freedom, Economic Growth, and Freedom in the 50 States

Today, Mercatus released a new edition of William Ruger and Jason Sorens’s Freedom in the 50 States. To my knowledge, it is the most-comprehensive analysis of freedom at the state level, covering both economic freedoms and personal freedoms. The authors explain their study in this pretty awesome video:

Vero offers some interesting analysis over at The Corner.

The timing is excellent, as the World Bank recently released a new study of the impact of economic freedom on economic performance (HT to Robert Lawson). They conclude:   

Reviewing the economic performance—good and bad— of more than 100 countries over the past 30 years, this paper finds new empirical evidence supporting the idea that economic freedom and civil and political liberties are the root causes of why some countries achieve and sustain better economic outcomes. For instance, a one unit change in the initial level of economic freedom between two countries (on a scale of 1 to 10) is associated with an almost 1 percentage point differential in their average long-run economic growth rates.

To put the numbers in perspective, what if, in 1975 (the first year for which they have data), the US level of economic freedom had been 1 unit lower? This would have put us in the neighborhood of Canada or Panama at the time. Then, other things being equal, the World Bank study suggests that we’d expect today’s economy to be about 30 percent smaller than it actually is. What if we’d had 1 unit less freedom in 1945? Then we’d expect today’s economy to be about half its current size.   

 As I have mentioned elsewhere, state-level studies corroborate the international evidence on the importance of economic freedom. I hope decision makers at the state level are reading Ruger and Sorens’s new study.

State and Local Economic Development Programs

Fairfax County’s Economic Development Authority has opened a new office in Los Angeles. Their aim is to lure Californians who are fed up with the Golden State’s web of taxes and regulations. 

It is true, of course, that California’s business climate is abysmal. According to Sorens and Ruger, California is number 44 in terms of fiscal freedom (with 50 being the least-free), and 46 in terms of regulatory freedom. Other indices come to the same conclusion. Kail Padgitt of the Tax Foundation, for example, evaluated states based on their business tax climate and California came in at #49.

Virginia, by contrast, does decently well in both reports. By Sorens and Ruger’s measure, the state is the 13th most-economically-free in the nation and by Padgitt’s, its business tax climate is the 12th-best.

Given the important link between taxes and economic prosperity—see studies by Agostini and Tulayasathien (2003); Mark, McGuire, and Papke (2000); Harden and Hoyt (2003); and Gupta and Hofmann (2003) or reviews by Helen Ladd (1998) or Padgitt (2010)—it might seem only natural for Virginia to highlight its relatively low-tax environment. 

The irony, however, is that taxpayer-funded projects like an economic development office located 2,285 miles away from the county make it more-difficult for Fairfax to maintain its competitive tax rates. More expensive than the office itself are the handful of subsidies and tax expenditures that the state and the county offer to businesses that relocate or that meet special criteria (these subsidies include the option for the state to dole out “discretionary, deal-closing” benefits).

Proponents of economic development programs will no doubt contend that these expenses pay for themselves. But the economic literature is far from conclusive on that score.

Some studies find that targeted incentives lead to employment growth in the industries they target.

But others find evidence to suggest that these results are exaggerated. Examining 366 Ohio firms, for example, Gabe and Kraybill (2002) found that incentives have large effects on announced employment growth but modest or even negative effects on actual employment growth.

According to a recent Wall Street Journal article, some states and localities have begun to notice this discrepancy. John Garcia, the economic development director in my hometown of Albuquerque recently announced that the city was trying to collect nearly half a million dollars in property tax abatements that were given to a call center that relocated and then closed shortly thereafter.

But the real question is not whether these types of incentives are a good deal for the firms that receive them (one would think they would be!), but rather are they a good deal for the state at-large?

In a case study examining Virginia giveaways, Alwang, Peterson, and Mills (2001) draw attention to the fact that “most economic development events involve winners and losers.” For example, other firms may have to pay higher costs for purchased inputs. They found that the benefits doled out to one firm cost others more than $1 million, annually.  

Sweet deals can also crowd-out legitimate government expenditures on true public goods. Burstein and Rolnick (1996), write:

[W]hen competition takes the form of preferential treatment for specific businesses, it misallocates private resources and causes state and local governments to provide too few public goods.

Furthermore, cost-benefit analyses of economic development deals rarely account for the so-called rent-seeking losses that such deals inevitably invite: firms will sink millions of dollars into societally useless activities—lobbying and ingratiating themselves to the politicians—in an effort to win these privileges. The money they spend on smart and expensive lobbyists, lawyers, and accountants would be better spent developing new products and services that actually provide value to customers. These losses are hard to measure but that does not mean that they don’t exist.

In my view, states and localities should aggressively compete with one another over businesses. And part of that competition should involve figuring out ways to provide public goods at the lowest possible tax and regulatory cost. But this cost should be low for everyone, not just for the politically-connect firms.

HT to my colleague, Dan Rothschild, for directing me to the news about Fairfax County.

State and Local Governments: Real Wage Gains from 2000 to 2009

We see that healthcare and social assistance generated $210 billion in real wage gains from 2000 to 2009 (all in 2009 dollars). Next biggest was state and local government, which generated $151 billion in real wage gains. (The exact numbers change a lot if I change the end dates, but the pattern stays the same).

On the other hand, the big losers were manufacturing (-$245 billion), information (-$56 billion), retail trade (-$24 billion), and transportation and warehousing (-$6 billion).

That is Mike Mandel. Here is the data:

 HT to Arnold Kling.

The Rubber Meets the Road

Detroit can learn from Indianapolis, claims a new article in the Next American City:

Although you might not guess it today, Detroit and Indianapolis once had much in common. Thirty years ago, both cities suffered from decreased economic activity, severe unemployment, violence, white flight and racial tensions. But Indianapolis, the nation’s 13th most populous city, has since recovered from those challenges, which were spawned by deindustrialization and suburban job growth…

What accounts for the drastic disparity in these two cities’ fortunes? Many politicians and members of the business community suggest that public-private partnerships — deals in which the government partners with the private sector to deliver a necessary service that it cannot afford, or which it wishes to provide more efficiently — have allowed Indianapolis to prosper. City governments can form PPPs to support small-scale projects, and may also lease the operation of their own assets, but if they want to forge a PPP to back a larger initiative, like a massive infrastructure project, they need legislative support from the state. Indiana law permits the formation of PPPs for infrastructure projects; Michigan law does not…

The timing is critical: in addition to money from Obama’s stimulus package, Michigan stands to receive a meaningful cash injection from the transportation reauthorization act, which is up for renewal this year and which provides funding to states for transportation and infrastructure-related projects. Yet, even with public funds, the state won’t have the money necessary to develop the many modes of transport it needs, says Carnrike, who points out that Michigan has the capacity to develop air, roads, and water-related infrastructure. By collaborating with private companies, Michigan stands a chance at creating the infrastructure crucial to its economic recovery.

More about PPPs from the Reason Foundation here and here.

HT to Planetizen.

Detroit Isn't Dying

Having gone to grad school in southeast Michigan, I’ve been surprised by the continued prognostications that the state and, specifically, Detroit are dying or dead. There are too many things going for the area, from the international airport, to the transport links with Canada, to the University of Michigan, to declare the area a wasteland and just walk away. And I’ll even be so bold as to predict that in thirty years’ time we’ll be reading stories about the “Michigan Miracle” and the rebirth of Detroit and the state’s economy, testaments to the power of entrepreneurship and creativity.

The Financial Times’ motor industry correspondent John Reed has a great take on the present and future Motor City:

Detroit may be the archetypal down-and-out rust-belt city, but to call it “dying” masks a more complex reality. Greater Detroit still has three to four million residents, a world-class university next door in Ann Arbor and the bone structure of a great city, as a car-industry consultant with the ear of a poet put it over lunch one day. Why, then, the relentless focus on its failings? Nearly everyone you meet is either weary or angry at seeing their home town made the butt of jokes on late-night television and the subject of anguished political commentary. But no one denies that the region’s property market is abysmal, its finances a mess and its industrial base shrinking at an alarming rate.

Instead, Michiganders, despite being self-deprecating to a fault, make a point their countrymen won’t want to hear: Detroit is no longer the nation’s worst-case scenario, but on its leading edge, the proverbial canary in the coal mine. “It’s like the rest of the country is getting to where Detroit has been,” said Peter De Lorenzo, who writes the acerbic and very funny Autoextremist.com blog. That means that smug mock-horror is no longer the appropriate reaction to the frozen corpse. Instead, get ready for a shock of recognition.

The whole thing is worth a read. HT to Katherine Mangu-Ward.