Tag Archives: incomes

Unemployment Insurance, Take II

In response to my post earlier this week about unemployment insurance being stimulative, Harry Moroz over at Huffington Post, makes a good point

I had cited evidence showing that—contrary to conventional Keynesian expectations—those with lower net wealth and those with lower incomes actually have lower marginal propensities to consume compared with high-wealth, high-income people.

According to Moroz, I “wholly conflated ‘the poor’ with ‘the unemployed.’ ” Fair enough. Unemployment and low income are not the same. But research by the Center for Labor Market Studies at Northeastern University shows that the correlation is extremely strong (in fact, as Veronique de Rugy has pointed out, the blogosphere has lit up lately with posts about the high unemployment rates among low-income people):


So: low income people are more likely to be unemployed; and according to the Sahm, Shapiro, and Slemrod study, low-income workers seem not to have high marginal propensity to consume. Putting these two facts together, I would be surprised if unemployment insurance were particularly stimulative.   

In my mind, the central argument comes down to three points:

  1. Keynesians will argue that transfer payments to the unemployed will—through the magic of the multiplier—lead to a boost in aggregate demand. I tend not to put a ton of stock in this because many estimates of the multiplier are relatively low and the latest estimates of the multiplier are even lower. Also, as I argued in my last post, I don’t see a lot of evidence to indicate that the unemployed or the poor have really high marginal propensities to consume (and probably no higher than those from whom the revenue is obtained through taxation or borrowing). The bottom line: We can quibble about which estimate is right but it seems that many proponents of stimulus are over-confident in their assessment that fiscal stimulus works. Given the ambiguities in both the theoretical and empirical research, I’d say a little humility is in order.    
  2. Even if we take the Keynesian multiplier arguments at face value, we must acknowledge that there are other forces at work. In the most basic economic model, if you tax work and subsidize non-work, then on the margin you should expect less work. And, indeed, numerous studies have found that increasing the length of potential unemployment benefit duration increases the average length of the unemployment spell. We may not like this result, but as Alan Blinder notes, we have to acknowledge what this is what the research shows. This must be weighed against the Keynesian result in #1 above. 
  3. The final point is a long-term one. Compared with other countries, the U.S. has significantly lower long-term unemployment rates. Moreover, the unemployed in the U.S. tend to remain so for shorter periods than in other countries. At the same time, U.S. unemployment insurance replaces a much smaller fraction of income and does not last as long (see charts below). Numerous studies have found this is no coincidence: the difference in European and U.S. unemployment experiences seems to be due to the relative dynamism of the U.S. labor market. Compared with Europe, we have relatively low taxes on labor, limited regulation of employment, and limited duration of unemployment benefits. I believe that if we really want to decrease the likelihood of unemployment and the length of the average person’s unemployment spell, then the best thing we can do is ensure that ours continues to be a dynamic labor market.  Ironically, extending unemployment benefits may very well make that more difficult. 


Budgeting Tactics for States

Tax Foundation state projects director Joe Henchman writes in today’s Daily Caller about five ideas to help states facing budget shortfalls (that is to say, virtually every state) get back in black:

  • Prioritize appropriations. When the majority-Democratic Arkansas Legislature votes to appropriate money, the money isn’t immediately spent. Instead, each appropriation goes to a legislative committee that ranks them in order of priority. Items are funded only to the extent money is available, forcing debate about how best to allocate limited resources while permitting a wish list if revenue exceeds expectations.
  • Review tax incentive programs. Although many states recognize they have burdensome tax systems, they use targeted incentives for particular industries rather than reducing burdens for everyone. Besides dumping a higher tax burden on everyone else, the jobs created are dependent on the handouts and often vanish when the incentives end. Tax incentive programs also often escape oversight and cost-benefit analysis. Iowa recently recommended elimination of several ineffective tax incentives after a review. Other states should do the same.
  • Broaden sales taxes and use the revenue to lower tax rates. A good sales tax applies to all final goods once and only once. Exempting clothing and groceries may seem like a good idea, but doing so causes year-to-year revenue instability and drives up the rate on everything else. Gross receipts taxes and taxes on business inputs cause distortions that harm economic growth. Adopting a sales tax base of all final products and services would enable both lower rates and more predictable revenue.
  • Reduce reliance on taxes on high-income earners and corporate profits. When deciding in which state to live or locate their business, one of the factors that top earners must weigh is the marginal tax rate they will face in each state. While high statutory tax rates on high incomes may bring a revenue increase in the short term, they can harm long-term economic growth as providers of jobs and capital choose to locate in lower-tax states. With these volatile revenue sources at a minimum, it may be perfect timing to minimize them.
  • Establish rainy day funds and spending restraints. To ride out recessions, states need to build a rainy day fund of 12 to 18 percent of their annual spending. Setting aside 2 to 3 percent of each year’s budget in good times can accomplish that, but those structures need to be in place now or else states will be in this mess again.

Joe discussed state tax policies on C-SPAN earlier this month.

Not Connecting the Dots

Public policy often seems that it should be intuitive. If a state needs more revenue, the easiest way to raise some is to increase taxes (easiest for elected officials, that is). Who has the most money to appropriate? Millionaires, obviously. Connect the dots, and raise taxes on millionaires.

Maryland did just that, but their experiment shows why political common sense and real life common sense are distinctly separate things. From the Wall Street Journal:

We reported in May that after passing a millionaire surtax nearly one-third of Maryland’s millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they’d collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn’t fled the state.

Well, the state comptroller’s office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

Don’t feel sorry for the poor poor millionaires; that’s not the point I’m trying to make. Taxes are a serious driver of out-migration, be it small states like Maine, or more populous states like New Jersey:

New Jersey out‐migrants tend to move to states that have much lower property values (35% lower), property taxes (41% lower) and overall costs of living (17%lower). Destination states also have notably lower average incomes, substantially higher crime rates, higher infant and child mortality; slightly lower school quality, but somewhat warmer winters. Overall, it appears that net out‐migration is due to the high cost of living (especially the high cost of housing and property tax) in New Jersey.

Policy makers and their hangers-on have often regard taxpayers as little more than fiscal sheep, and periodically shear them. But people, unlike sheep, can vote with their wallets and feet. Usually the powers that be see this as something akin to letting the home team down, or not doing one’s “fair share.” The word “selfishness” is also thrown around.

Policies like the levels of taxes, services, and entitlements that a government prescribes are hardly a form of science. Law makers and interest groups would like to portray them as a serious commitments, and not self-interested social experiments. Again from the Journal:

Thanks in part to its soak-the-rich theology, Maryland still has a $2 billion deficit and Montgomery County is $760 million in the red. Governor Martin O’Malley’s office tells us he wants the higher rates to expire “as scheduled at the end of 2010.” But there are bills in both chambers of the legislature to extend the surcharge. The state’s best hope is that politicians in other states are as self-destructive as those in Annapolis.

The “Soak the Rich” phenomenon is a common-sense argument for redistributive policies, but it has significant flaws beyond the simple fact that it doesn’t work. Take a look at this chart of how tax burdens are distributed in Federal taxation. (here, either insert or link to this: http://www.mint.com/blog/wp-content/uploads/2009/11/MINT-TAXES-R4.png)

Libertarians and liberals can mostly agree that there is too much money and influence in politics, but the policy prescriptions each group suggests are dramatically different. Advocates of punishing the rich ignore the simple fact that when a certain group bears so much of the tax burden, they have massive incentives to care about and influence politics. It’s that or leave the country, or just stop making money (by, for instance, not hiring new employees.)

See this graphic (or click below) for a good visual explanation:

Criminalizing Prostitution in Rhode Island

Rhode Island was the only state where prostitution was legal indoors and on private property, but Governor Carcieri signed legislation Tuesday that made the act a misdemeanor crime.

The Associated Press reports:

State lawmakers inadvertently opened the loophole in 1980 when they passed legislation trying to crack down on prostitutes and their customers creating havoc in the West End of Providence. They adopted a law targeting those who sold sex in public, but it was silent on indoor prostitution. Judges would later rule the change had the effect of legalizing paid sex in private.

That legal gap allowed dozens of suspected brothels to operate in the state’s cities and suburbs, including many thinly disguised as Asian spas advertising services such as body rubs and table showers in a weekly newspaper. Until recently, police had struggled to prosecute those involved in the trade.

In 2003, a state judge dismissed charges against prostitutes working just blocks from City Hall. Their lawyer admitted the women offered sex for cash, but he said it didn’t matter because indoor prostitution was legal.

Now, parts of Nevada are now the only counties in the United States where prostitution is legal. In an ABC News report, psychologist Scott Hampton said:

Prostitution, whether it’s high-end or any other form, is really just an expression of men’s beliefs that women are disposable sexual objects or men’s property.

Though public policy in the United States has come down strongly against the world’s oldest profession, Steven Levitt and Stephen Dubner write in their new book SuperFreakonomics that some prostitutes are happy with their career choice and make high incomes.

In his book Sex for Sale, Ronald John Weitzer writes that the majority of Americans are not in favor of liberalizing the nation’s prostitution laws, which are determined at the state and local levels. However, some academics suggest that legalization could make the trade safer, particularly in countries that have the highest HIV/AIDS rates.  Furthermore, legalization would end the need for police to spend their resources on preventing prostitution.

The Fiscal New Year in New Jersey and IOUs in California

New Jersey begins its fiscal year today. FY 2010 will usher in a host of new taxes on cigarettes, alcohol, incomes, and insurance premiums. Here is the Star Ledger‘s rundown of what those hikes will look like for taxpayers.

California is issuing IOUs to its creditors and is now the state with the worst credit rating in the country, according to the Financial Times.

Experiments in Democracy

A Wall Street Journal editorial discusses the severity of the budget crises in three states: California, New Jersey, and New York.  While all states are suffering decreased revenues this fiscal year, the problems in these states have been especially severe, resulting in possible downgrades for California’s bonds which are already the lowest-rated in the country.

The Journal states:

A decade ago all three states were among America’s most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

During booms in the business cycle, high tax rates accompanied by an increased level of government services are palatable to taxpayers, but as these three cases exhibit, high-tax policies can quickly become unsustainable as incomes fall.

Eileen’s last post explains that state and municipal policy makers including Rudolph Giuliani are currently discussing reforms toward greater fiscal responsibility in order to promote prosperity in their localities, but these reforms are going to be difficult to enact for states that are already deeply indebted.

A great asset of the American federal system is that policy variation across the states allows citizens and law makers to observe how various fiscal policies function in the real world.  As described by the authors of the newly published 2009 edition of Rich States, Poor States, constituents do in fact “vote with their feet” by moving to states with policies that fit their desires.  This year’s index demonstrates that states in the South and West are generally gaining domestic population from the Northeast where taxes and government involvement in the economy are generally higher.

Unfortunately, the same experimentation at the federal level carries much greater costs.  Until now, federal aid has allowed for irresponsible fiscal policies to continue at the state level, but this policy may be coming to an end.  If the federal debt and deficit approach the unsustainable levels that states such as California, New Jersey, and New York have reached, no entity will be able to bail it out.  Additionally, economic policies at the federal level do not provide the same sort of natural experiment within the country and carry a higher risk of severe negative consequences.

The article continues:

At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.

While government systems can never incorporate the feedback mechanisms of the market, the federalist system allows for a sort of competition between states and localities in which competition allows successful programs to thrive and spread. However, this system only works when unsuccessful local policies are not subsidized by the federal government and when authority is sufficiently devolved to allow states to differentiate their policies from one another’s.

Saving Flint

According to a recent article in the British Telegraph, Flint, Michigan once had 79,000 workers for General Motors and now has 8,000. The population of the city has fallen from 200,000 to 100,000. The unemployment rate is 20%. Young people are leaving in droves in search of jobs and better prospects elsewhere. Large parts of the city are emptying out, leaving at least 4,000 abandoned homes. Although the city has demolished 1,000 of them, 3,000 remain standing. Whole neighborhoods are crumbling rapidly.

So what to do? The normal political response is to take public actions to “save” places like Flint.  The urban renewal programs 50 years ago were designed to arrest the decay of older American cities such as St. Louis and Detroit – typically built in the nineteenth century and with decaying housing stock and outmoded land use patterns based originally on streetcar systems of transportation. Many federal billions were spent in futile efforts to reverse the market verdict, reflecting a refusal to accept that these old city neighborhoods were outmoded and their highest value economic use was as cheap housing for poor people. A “slum” was a pejorative term in those days for old housing – in many cases not all that bad structurally – that people with lower incomes could afford. But for American politicians, every part of every city should be thriving. If not, the government had to do something.

Reflecting the failures of past programs to “revitalize” the inner cities, the Brookings Institution now identifies 50 cities, most of them in the industrial “rust belt,” that need to shrink significantly to survive. After decades of failed efforts to halt downward economic forces, there has been a new acceptance that some American cities simply must get smaller. Facing its dire problems, city planners in Flint have finally come to accept this. The current economic crisis and the large number of foreclosures emphasize the need to rethink urban strategies that automatically assumed upward growth for every city.

One Brookings study proposes that the government adopt a program of “land banks” – government would acquire the land in old declining neighborhoods and then turn it over for redevelopment. It sounds unfortunately like of the thinking that was on exhibit in New Haven, Connecticut, leading to the Kelo Supreme Court case.

A much better approach would be to leave redevelopment to be determined in the market by the collective actions of property owners in a neighborhood area and land developers. Property owners could be facilitated in organizing a collective land bargaining association that would then solicit developer bids for the whole neighborhood. If a high enough bid was forthcoming, and if a large supermajority of property owners – say, 80 percent – voted to accept the offer, the neighborhood would be turned over to the private developer. A whole new neighborhood land uses compatible with present day market economics would result. It is possible that in places like Flint, a few neighborhoods might even be turned back to urban farming of high value local products. Whatever the result, market forces rather than urban planners would decide.

The Super Bowl as Economic Remedy

It seems obvious that when a city is chosen to host a major event — political convention, Super Bowl, Olympics — this provides a natural economic boost to the city’s economy. If any city is deserving of such a boost it is New Orleans, which will be hosting the 2013 Super Bowl for the first time since Hurricane Katrina. (It will be the 10th time the city has been the site of the championship.)

And like many governments that find themselves chosen for a major sporting event, the Louisiana legislature is deciding if it should spend $85 million in Superdome upgrades. However, the boost is largely symbolic: while New Orleanians may feel a sense of pride over the selection, and the stadium will get another make over, economic gains are very likely to be fleeting and possibly negative.

Much academic work has been done assessing the impact of sporting events on regional economies. The findings generally show little lasting impact on host cities. Robert Baade finds the primary beneficiaries of taxpayer subsidies for stadiums are team owners, and players, not local residents.

That has not stopped cities from competing for the honor. 

University of Maryland economist Dennis Coates, writing in The American, finds since 1990 Major League Baseball has opened 19 new stadiums, the NFL opened 17, and the NBA over 20. These projects are highly subsidized on the federal, state and local levels, with the public bearing as much as 63 percent of the cost.  Coates and fellow economist Brad Humphreys find in an analysis of  of wages between 1969 and the 1990s in metro areas where these stadiums reside is that incomes actually decreased.

Why? Consumer spending on sports replaces consumption of other kinds of entertainment, and the spending patrons undertake has a relatively small multiplier effect in real the local economy. Athletes get the income boost. And to top it off, increased local subsidies to the franchise redirect tax revenues from other use, making the local economy less efficient.

While local and state governments might like to think otherwise, being chosen as a host city may be as much an economic drain as a publicity boon.