Tag Archives: Michigan

A public sector retirement plan for Millennials

According to the Center for Retirement Research, about 52 percent of households are “at risk of not having enough to maintain their living standards in retirement” and that the retirement landscape is making “the outlook for retiring Baby Boomers and Generation Xers far less sanguine than for current retirees.” This growing problem for younger generations is highlighted by the Economic Policy Institute’s finding that almost half of households headed by someone between the ages of 32 and 61 have nothing saved for retirement. A confluence of factors has led to a predicament for millennials as they try to prepare for retirement in a drastically changing job market.

The millennial generation has grown to be an integral part of the workforce, and private sector companies are increasing their efforts to understand what they value most a job. A Deloitte survey reveals that a good work/life balance, opportunities to progress/be leaders, flexibility, and a sense of meaning emerge as the most important factors when evaluating job opportunities. What’s more, millennials are not likely to stick around for a job that doesn’t meet this criteria. The same survey found that if given the choice during the next year, one in four millennials would quit his or her current employer to join a new organization or to do something different.

This flightiness appears to be a characteristic of many young people and to be happening in tandem with, if not contributing to, an increasingly transient job market. This phenomenon, corroborated by other surveys, demonstrates that more and more millennial workers are changing jobs at a higher rate than previous generations. It is not as common to stick with your first or second job until retirement, as it once was for Baby Boomers. The “loyalty challenge” facing companies, paired with changes in technology and culture, has in turn been transforming the landscape of retirement options.

As workers become more transient, companies are forced to provide more portable retirement plan options. During the past two decades, the private sector has done just that by transitioning from offering primarily defined benefit retirement plans to offering more defined contribution plans. This change is to be expected in part because of the flexibility it provides for beneficiaries. Defined contribution plans allow for workers to take their benefits more easily with them from job to job.

The public sector has not quite caught up to this trend. Public sector plans have had much more difficulty staying solvent and much of this is because of the prevalence of defined benefit plans. Mercatus scholars, along with many economists, have long criticized the poor incentive structure of these plans. If these aren’t reason enough for policymakers to offer defined contribution plans in their place, then maybe their changing workforces will.

Much of the debate over growing pension liabilities has focused on whether public sector compensation costs are fair either in comparison to other states or to the private sector. But much less has been said about what is fair across generations.

Most pension reform efforts at the state level target changes in benefits for younger employees while preserving the benefits of older workers. Although this is largely the result of legal and political constraints, such changes have the potential to force younger generations of public-sector workers to shoulder a disproportionate share of the cost of reforms, as their retirement benefits become more uncertain, thus violating a crucial criterion of “intergenerational equity” for pension reform.

Pension experts Robert Novy-Marx and Joshua Rauh reveal in a 2008 study that the intergenerational transfer of pension debt could be quite large. They predict a 50 percent chance of underfunding across the states amounting to more than $750 billion, even before adjusting for risk. In other words, if left alone, the pension bills of today are going to be handed to the generations of tomorrow.

A new Mercatus paper uncovers how similar intergenerational equity issues have developed in the state of Oregon. The author, legal scholar Scott Shepard, writes:

“…the system radically favors (generally older) workers who started before 1996 and 2003, respectively – not just in expected ways, like seniority pay bumps, but in deeply structural ways; earlier-hired employees simply get a significantly better pay-and-benefit package for every minute of their climb up the seniority ladder.”

Oregon’s pension system, along with many other states’ plans, started out offering extremely generous benefits, but as this has grown increasingly unsustainable, the state is being forced to deal with reality and reign in benefits for newer workers.

The unfair retirement landscape that this creates is largely the result of many past poor policy decisions and although this difference in benefits between age groups is far from intentional, how Oregon – and other states in similar positions – responds can be. Changing demographic trends may lend reason for public pension officials to consider moving towards defined contribution plan structures, or at least providing the option.

Shepard strongly urges Oregon to make this shift. He describes a number of benefits; from the perspective of the state, taxpayers, and future generations:

“First, payments must be made when due, rather than being shifted off to future generations. This may seem painful to present taxpayers, but the long-term effect is to ensure a more honest government, in that politicians cannot make promises that their (unrepresented) descendants end up paying for generations later, long after the promisors have reaped the political benefits of making unfunded promises, only to have retired from the scene when payment comes due. This inability to promise now and pay later has a corollary benefit of thwarting the impulse to make extravagant pension promises, as the payments come due immediately, rather than being foisted off on future generations.”

Offering defined contribution plans for workers can provide a more sustainable option that would prevent this equity issue from worsening.

In addition to the accountability and savings that offering a defined contribution option provides, like we have seen demonstrated in Utah and Michigan, this also has the potential to lead to higher worker satisfaction.

With millennials looking to save money for retirement through more portable means, policymakers will want to offer benefits packages that match these preferences. Private sector workers and some public – including Federal and public university – workers lie at the forefront of those benefiting from the defined contribution trend. Most state public plans, however, still fall behind, which has continuing implications for public plan solvency and intergenerational equity.

Eight years after the financial crisis: lessons from the most fiscally distressed cities

You’d think that eight years after the financial crisis, cities would have recovered. Instead, declining tax revenues following the economic downturn paired with growing liabilities have slowed recovery. Some cities exacerbated their situations with poor policy choices. Much could be learned by studying how city officials manage their finances in response to fiscal crises.

Detroit made history in 2013 when it became the largest city to declare bankruptcy after decades of financial struggle. Other cities like Stockton and San Bernardino in California had their own financial battles that also resulted in bankruptcy. Their policy decisions reflect the most extreme responses to fiscal crises.

You could probably count on both hands how many cities file for bankruptcy each year, but this is not an extremely telling statistic as cities often take many other steps to alleviate budget problems and view bankruptcy as a last resort. When times get tough, city officials often reduce payments into their pension systems, raise taxes – or when that doesn’t seem adequate – find themselves cutting services or laying off public workers.

It turns out that many municipalities weathered the 2008 recession without needing to take such extreme actions. Studying how these cities managed to recover more quickly than cities like Stockton provides interesting insight on what courses of action can help city officials better respond to fiscal distress.

A new Mercatus study examines the types of actions that public officials have taken under fiscal distress and then concludes with recommendations that could help future crises from occurring. Their empirical model finds that increased reserves, lower debt, and better tax structures all significantly improve a city’s fiscal health.

The authors, researchers Evgenia Gorina and Craig Maher, define fiscal distress as:

“the condition of local finances that does not permit the government to provide public services and meet its own operating needs to the extent to which these have been provided and met previously.”

In order to determine whether a city or county government is under fiscal distress, the authors study the actual actions taken by city officials between 2007 and 2012. Their approach is unique because it stands in contrast with previous literature that primarily looks to poorly performing financial indicators to measure fiscal distress. An example of such an indicator would be how much cash a government has on hand relative to its liabilities.

Although financial indicators can tell someone a lot about the fiscal condition of their locality, they are only a snapshot of financial resources on hand and don’t provide information on how previous policy choices got them to their current state. A robust analysis of a city’s financial health would require a deeper look. Looking at policy decisions as well as financial indicators can paint a more complete picture of just how financial resources are being managed.

The figure here displays the types of actions, or “fiscal distress episodes”, that the authors of the study found were the most common among cities in California, Michigan, and Pennsylvania. As expected, you’ll see that bankruptcy occurs much less frequently than other courses of action. The top three most common attempts to meet fundamental operating needs and service requirements during times of fiscal distress include (1) large across-the-board budget cuts or cuts in services, (2) blanket reduction in employee salaries, and (3) unusual tax rate or fee increases.

fiscal-distress-episodes

Another thing that becomes clear from this figure is that public workers and taxpayers appear to be adversely affected by the most common fiscal episodes. Cuts in services, reductions in employee salaries, large tax increases, and layoffs all place much of the distress on these groups. By contrast, actions like fund transfers, deferring capital projects, or late budget enactment don’t directly affect public workers or taxpayers (at least in the short term).

I decided to break down how episodes affected public workers and taxpayers for each state examined in the sample. 91% of California’s municipal fiscal distress episodes directly affected public employees or the provision of public services, while the remaining 9% indirectly affected them. Michigan and Pennsylvania followed with 85% and 66% of episodes, respectively, directly affecting public workers or taxpayers through cuts in services, tax increases, or layoffs.

Many of these actions surely happen in tandem with each other in more distressed cities, but it seems that more often than not, the burden falls heavily on public workers and taxpayers.

The city officials who had to make these hard decisions obviously did so under financially and politically intense circumstances; what many, including researchers like Gorina and Maher, consider to be a fiscal crisis. In fact, 32 percent of the communities across the three states in their sample experienced fiscal distress which, on its own, sheds light on the magnitude of the 2007-2009 recession. A large motivator of Gorina and Maher’s research is to understand what characteristics of the cities who more quickly rebounded from the Great Recession allowed them to prevent hitting fiscal crisis stage in the first place.

They do so by testing the effect of a city’s pre-existing fiscal condition on their likelihood to undergo fiscal distress. After controlling for things like government type, size, and local economic factors, they found that cities that had larger reserves and lower debt tended to weather the recession better relative to other cities. More specifically, declining general revenue balance as a percent of general expenditures and increases in debt as a share of total revenue both increase the odds of fiscal distress for a city.

Additionally, the authors found that cities with a greater reliance on property taxes managed to weather the recession better than governments reliant on other revenue sources. This suggests that revenue structure, not just the amount of revenue raised, is an important determinant of fiscal health.

No city wants to end up like Detroit or Scranton. Policymakers in these cities were forced to make hard choices that were politically unpopular; often harming public employees and taxpayers. Officials can look to Gorina and Maher’s research to understand how they can prevent ending up in such dire situations.

When approaching municipal finances, each city’s unique situation should of course be taken into consideration. This requires looking at each city’s economic history and financial practices, similar to what my colleagues have done for Scranton. Combining each city’s financial context with principles of sound financial management can surely help more cities find and maintain a healthy fiscal path.

What else can the government do for America’s poor?

This year marks the 20th anniversary of the 1996 welfare reforms, which has generated some discussion about poverty in the U.S. I recently spoke to a group of high school students on this topic and about what reforms, if any, should be made to our means-tested welfare programs.

After reading several papers (e.g. here, here and here), the book Hillbilly Elegy, and reflecting on my own experiences I am not convinced the government is capable of doing much more.

History

President Lyndon Johnson declared “War on Poverty” in his 1964 state of the union address. Over the last 50 years there has been some progress but there are still approximately 43 million Americans living in poverty as defined by the U.S. Census Bureau.

Early on it looked as if poverty would be eradicated fairly quickly. In 1964, prior to the “War on Poverty”, the official poverty rate was 20%. It declined rapidly from 1965 to 1972, especially for the most impoverished groups as shown in the figure below (data from Table 1 in Haveman et al. , 2015). (Click to enlarge)

poverty-rate-1965-72

Since 1972 the poverty rate has remained fairly constant. It reached its lowest point in 1973—11.1%—but has since fluctuated between roughly 11% and 15%, largely in accordance with the business cycle. The number of people in poverty has increased, but that is unsurprising considering the relatively flat poverty rate coupled with a growing population.

census-poverty-rate-time-series-2015

Meanwhile, an alternative measure called the supplemental poverty measure (SPM) has declined, but it was still over 15% as of 2013, as shown below.

poverty-rate-time-series

The official poverty measure (OPM) only includes cash and cash benefits in its measure of a person’s resources, while the SPM includes tax credits and non-cash transfers (e.g. food stamps) as part of someone’s resources when determining their poverty status. The SPM also makes adjustments for local cost of living.

For example, the official poverty threshold for a single person under the age of 65 was $12,331 in 2015. But $12,331 can buy more in rural South Carolina than it can in Manhattan, primarily because of housing costs. The SPM takes these differences into account, although I am not sure it should for reasons I won’t get into here.

Regardless of the measure we look at, poverty is still higher than most people would probably expect considering the time and resources that have been expended trying to reduce it. This is especially true in high-poverty areas where poverty rates still exceed 33%.

A county-level map from the Census that uses the official poverty measure shows the distribution of poverty across the 48 contiguous states in 2014. White represents the least amount of poverty (3.2% to 11.4%) and dark pink the most (32.7% to 52.2%).

us-county-poverty-map

The most impoverished counties are in the south, Appalachia and rural west, though there are pockets of high-poverty counties in the plains states, central Michigan and northern Maine.

Why haven’t we made more progress on poverty? And is there more that government can do? I think these questions are intertwined. My answer to the first is it’s complicated and to the second I don’t think so.

Past efforts

The inability to reduce the official poverty rate below 10% doesn’t appear to be due to a lack of money. The figure below shows real per capita expenditures—sum of federal, state and local—on the top 84 (top line) and the top 10 (bottom line) means-tested welfare poverty programs since 1970. It is from Haveman et al. (2015).

real-expend-per-capita-on-poverty-programs

There has been substantial growth in both since the largest drop in poverty occurred in the late 1960s. If money was the primary issue one would expect better results over time.

So if the amount of money is not the issue what is? It could be that even though we are spending money, we aren’t spending it on the right things. The chart below shows real per capita spending on several different programs and is also from Haveman et al. (2015).

expend-per-cap-non-medicaid-pov-programs

Spending on direct cash-assistance programs—Aid for Families with Dependent Children (AFDC) and Temporary Assistance for Needy Families (TANF)—has fallen over time, while spending on programs designed to encourage work—Earned Income Tax Credit (EITC)—and on non-cash benefits like food stamps and housing aid increased.

In the mid-1970s welfare programs began shifting from primarily cash aid (AFDC, TANF) to work-based aid (EITC). Today the EITC and food stamps are the core programs of the anti-poverty effort.

It’s impossible to know whether this shift has resulted in more or less poverty than what would have occurred without it. We cannot reconstruct the counterfactual without going back in time. But many people think that more direct cash aid, in the spirit of AFDC, is what’s needed.

The difference today is that instead of means-tested direct cash aid, many are calling for a universal basic income or UBI. A UBI would provide each citizen, from Bill Gates to the poorest single mother, with a monthly cash payment, no strings attached. Prominent supporters of a UBI include libertarian-leaning Charles Murray and people on the left such as Matt Bruenig and Elizabeth Stoker.

Universal Basic Income?

The details of each UBI plan vary, but the basic appeal is the same: It would reduce the welfare bureaucracy, simplify the process for receiving aid, increase the incentive to work at the margin since it doesn’t phase out, treat low-income people like adults capable of making their own decisions and mechanically decrease poverty by giving people extra cash.

A similar proposal is a negative income tax (NIT), first popularized by Milton Friedman. The current EITC is a negative income tax conditional on work, since it is refundable i.e. eligible people receive the difference between their EITC and the taxes they owe. The NIT has its own problems, discussed in the link above, but it still has its supporters.

In theory I like a UBI. Economists in general tend to favor cash benefits over in-kind programs like vouchers and food stamps due to their simplicity and larger effects on recipient satisfaction or utility. In reality, however, a UBI of even $5,000 is very expensive and there are public choice considerations that many UBI supporters ignore, or at least downplay, that are real problems.

The political process can quickly turn an affordable UBI into an unaffordable one. It seems reasonable to expect that politicians trying to win elections will make UBI increases part of their platform, with each trying to outdo the other. There is little that can be done, short of a constitutional amendment (and even those can be changed), to ensure that political forces don’t alter the amount, recipient criteria or add additional programs on top of the UBI.

I think the history of the income tax demonstrates that a relatively low, simple UBI would quickly morph into a monstrosity. In 1913 there were 7 income tax brackets that applied to all taxpayers, and a worker needed to make more than $20K (equivalent to $487,733 in 2016) before he reached the second bracket of 2% (!). By 1927 there were 23 brackets and the second one, at 3%, kicked in at $4K ($55,500 in 2016) instead of $20K. And of course we are all aware of the current tax code’s problems. To chart a different course for the UBI is, in my opinion, a work of fantasy.

Final thoughts

Because of politics, I think an increase in the EITC (and reducing its error rate), for both working parents and single adults, coupled with criminal justice reform that reduces the number of non-violent felons—who have a hard time finding employment upon release—are preferable to a UBI.

I also support the abolition of the minimum wage, which harms the job prospects of low-skilled workers. If we are going to tie anti-poverty programs to work in order to encourage movement towards self-sufficiency, then we should make it as easy as possible to obtain paid employment. Eliminating the minimum wage and subsidizing income through the EITC is a fairer, more efficient way to reduce poverty.

Additionally, if a minimum standard of living is something that is supported by society than all of society should share the burden via tax-funded welfare programs. It is not philanthropic to force business owners to help the poor on behalf of the rest of us.

More economic growth would also help. Capitalism is responsible for lifting billions of people out of dire poverty in developing countries and the poverty rate in the U.S. falls during economic expansions (see previous poverty rate figures). Unfortunately, growth has been slow over the last 8 years and neither presidential candidate’s policies inspire much hope.

In fact, a good way for the government to help the poor is to reduce regulation and lower the corporate tax rate, which would help economic growth and increase wages.

Despite the relatively high official poverty rate in the U.S., poor people here live better than just about anywhere else in the world. Extreme poverty—think Haiti—doesn’t exist in the U.S. On a consumption rather than income basis, there’s evidence that the absolute poverty rate has fallen to about 4%.

Given the way government functions I don’t think there is much left for it to do. Its lack of local knowledge and resulting blunt, one size fits all solutions, coupled with its general inefficiency, makes it incapable of helping the unique cases that fall through the current social safety net.

Any additional progress will need to come from the bottom up and I will discuss this more in a future post.

Municipalities in fiscal distress: state-based laws and remedies

The Great Recession of 2008 “stress tested” many policies and institutions including the effectiveness of laws meant to handle municipal fiscal crises. In new Mercatus research professor Eric Scorsone of Michigan State University assess the range and type of legal remedies offered by states to help local governments in financial trouble.

“Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches,” begins with some brief context. Most municipal fiscal laws trace their lineage through the 1975 New York City fiscal crisis, the Great Depression and the 19th century railroad bankruptcies. Writing in 1935, attorney Edward Dimock articulated three pieces to addressing municipal insolvency:  1) oversight of the municipality’s financial management 2) stop individual creditors from undermining the distressed entity and 3) put together a plan of adjustment for meeting the creditor’s needs.

These general parameters are at work in state laws today. The details vary. Some states are passive and others much more “hands-on” in dealing with local financial troubles. Scorsone documents these approach with a focus on the “triggers” states use to identify a crisis, the remedies permitted (e.g. can a municipality amend a collective bargaining agreement?), and the exit strategies offered. Maine has the most “Spartan” of fiscal triggers. A Maine municipality that fails to redistribute state taxes, or misses a bond payment triggers the state government’s attention. Michigan also has very strong municipal distress laws which create, “almost a form of quasi-bankruptcy” allowing the state emergency manager to break existing contracts. Texas and Tennessee, by contrast, are relatively hands-off.

How well these laws work is a live issue in many places, including Pennsylvania. In 1987 the state passed Act 47 to identify distressed municipalities. While Act 47 appears to have diagnosed dozens of faltering local governments, the law has proven ineffective in helping municipalities right course. Many cities have remained on the distressed list for 20 years. Recent legislation proposes to allow a municipality that can’t “exit Act 47” the option of disincorporating. Is there a middle ground? As the PA State Association of Town Supervisors put it, “If we can’t address the labor issues, if we can’t address the mandates, if we can’t address the tax exempt properties, we go nowhere.”

Municipalities end up in distress for a complex set of reasons: self-inflicted policy and governance failures, uncontrollable social and economic shifts, and external shocks. Unwinding the effects of decades of interlocking problems isn’t a neat and easy undertaking. The purpose of the paper isn’t to evaluate the effectiveness various approaches to helping municipalities out of distress, it is instead a much-needed guide to help navigate and compare the states’ legal frameworks in which municipal leaders make decisions.

 

 

 

What would a business-cycle balanced budget rule look like in Illinois?

A few years ago, I testified before the U.S. House Judiciary Committee. I’d been invited to talk about the design of a federal balanced budget amendment and much of my testimony drew on the lessons offered from state experience. Since 49 of the 50 states have such requirements, and since these requirements vary from state to state, I noted that federal lawmakers could learn from the state laboratory.

The best requirement, I argued, would have the following characteristics:

  1. Require balance over some period longer than a year. This effectively disarms the strongest argument against a balanced budget amendment: namely, that it would force belt-tightening in the middle of a recession. In contrast, if budgets need to balance over a longer time period, then Congress is free to run deficits in particular years as long as they are countered by surpluses in others.
  2. Allow Congress some time to come into compliance. You don’t have to be a Keynesian to worry that a 45 percent reduction in the deficit overnight might be a shock to the system.
  3. Minimize the gamesmanship associated with revenue estimation: Across the country, states with balanced budget requirements have to estimate revenue throughout the year (I’m a member of Virginia’s Joint Advisory Board of Economists and our responsibility is to pass judgment on the validity of these estimates). But this invites all sorts of questions: what model to use for the economy, should revenue be scored dynamically or statically, etc. One way to sidestep all of these questions is to make the requirement retrospective: require that spending this year not exceed revenue from years past.

Michigan Republican Justin Amash has proposed an amendment along these lines. It would be phased-in over 9 years and from there on out would stipulate that outlays “not exceed the average annual revenue collected in the three prior years, adjusting in proportion to changes in population and inflation.” Because it requires balance over three years rather than one, Amash calls it the “business cycle balanced budget amendment.”

Writing in Time, GMU’s Alex Tabarrok points to Sweden’s positive experience with a similar rule. And economists Glenn Hubbard and Tim Kane also endorse such a rule in their book, Balance.

Now, some Illinois state lawmakers have put together a proposal for a state rule that appears to be largely based on this model. It requires:

Appropriations for a fiscal year shall not exceed the average annual revenue collected for the 3 prior years, adjusting in proportion to changes in population and inflation.

(Unlike the Amash plan, however, the Illinois plan is not phased in over a number of years. Rather, it takes effect immediately upon passage of the bill.)

To see how it might work in a state, I decided to take the Amash Amendment for a test drive, using Illinois data. The solid blue line in the figure below charts Illinois’s actual general revenue from 1990 to 2012 in billions of current dollars. The dashed blue line phases in an Amash-type “business cycle” balanced budget rule. Once fully phased-in, it would limit spending to the average revenue of the three previous years, with an adjustment for inflation and population growth.

BCBBA

Notice three things:

  1. From 1990 to 2002, and from 2004 to 2007, the rule would have kept Illinois spending in line with Illinois revenue, and would have even allowed the state to run surpluses.
  2. In lean years (like 2008) when revenue levels off, the limit actually continues to rise. That’s because it is based on a longer time trend. This means that it wouldn’t require the sort of draconian budget cuts that balanced budget critics often fear. The accumulated surpluses from previous years could also be used to soften the blow.
  3. Lastly, note the (9 percent) revenue uptick from 2011 to 2012. The amendment would prudently make legislators wait a few years before they can go out and spend that money.

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.

 

 

 

 

Civil Disobedience and Detroit’s financial manager

Michigan’s Governor Rick Synder may be greeted by protestors when he arrives for a meeting today on Detroit’s financial condition. His recent appointment of Kevyn Orr as the city’s emergency financial manager has angered many of Detroit’s residents who are afraid he has powers that are far too sweeping and is thereby destroying local control. The purpose of the financial manager law is to help the city stave off bankruptcy and allows the emergency manager the ability to renegotiate labor contracts and potentially sell city assets. The last recession has worsened the already-struggling city’s financial outlook. Detroit has a $327 million budget deficit and $14 billion in long-term debt and has shown very little willingness to make the kind of structural changes it needs in order to stay solvent.

Detroit’s problems are acute. The city’s population has fallen from 1.8 million to 700,000, giving the city, “a look and feel that rivals post World War II Europe.” But as Public Sector Inc’s Steve Eide writes, the real problem is that local leaders have proven unable to deal with fiscal realities for far too long. His chart shows the consequences. The gap between estimated revenues and expenditures over time is striking. In sum, Detroit overestimates its revenues and underestimates its spending, by a lot, when it plans for the budget. That is a governance and administration crisis and one that the state has decided needs outside intervention to set straight.

Standard & Poors likes the appointment and has upgraded Detroit’s credit rating outlook to “stable.”

Implications of an emergency fiscal manager for Detroit

Reuters reports that an emergency financial manager might provide Detroit with a path toward bankruptcy. This week I’m at US News writing on how an emergency financial manager might help the city renegotiate the obligations that it cannot afford to pay:

An emergency financial manager will have a greater incentive than elected city officials to improve Detroit’s financial standing. For any Michigan politician, Detroit’s municipal employees make up an important group of voters. However, their political influence is more concentrated at the city level, and as an interest group they have diminished power at the state level. Because the emergency financial manager will be responsible to the governor and state legislature, he or she will not face the pressures to appease city employees that local policymakers confront.

This Week in Economic Freedom

It’s been a promising week for supporters of freer markets as several states and municipalities have taken steps toward deregulation and consumer choice. Here’s a roundup of some new developments:

1. Washington state is making headlines by being the first state (and first place globally) to legalize recreational marijuana. This policy change comes after recent polls indicate that most Americans favor legalizing marijuana. Of course what remains to be seen  is how the federal government will respond to this change in state law. The U.S. Attorney General’s office has issued a letter stating that marijuana remains illegal under federal law in these states and under the Obama administration the office has aggressively prosecuted medical marijuana dispensaries that are legal under states’ laws.

2. In Michigan right to work legislation looks poised to pass. The change would make it legal for employers to pay workers who choose not to be union members. James Sherck explains the political calculus behind this potential policy change:

Republicans have large majorities in both houses of the state legislature. Until now, however, Governor Rick Snyder has insisted right to work was not on his agenda. But today he changed his tune and called for the legislature to pass the bill — Snyder’s support removes the last obstacle to right to work passing in Michigan.

How did this happen? For one, unions badly miscalculated. They tried to amend the state constitution to preemptively ban right to work and attempted to elevate union contracts above state law. Michigan voters roundly rejected the proposal, but the debate put the issue on the public’s agenda.

Unsurprisingly, Michigan unions strongly oppose this change and are currently rallying against this potential change.

3. In Washington, DC City Council took two steps toward greater economic freedom. On Tuesday, the DC Council passed legislation allowing Uber, a popular sedan service which customers use their cell phones to book, to continue operating in the city. The new legislation legalizes “digital dispatch” and permits this new type of service that fits between taxis and traditional car services. Uber still faces legal challenges in San Francisco, Boston, Toronto, New York, and Chicago. Also on Tuesday, DC joined its neighbors Maryland and Virginia with legal Sunday liquor sales. As is so often the case with regulation,  many liquor store owners supported the status quo of mandatory Sunday closings. Store owners testified that they appreciated the mandatory day off and worried that the policy change would allow competitors to cut into the profits of stores that choose to close on Sunday.

Tax Holidays in the Dog Days of August

In what has become a common practice in about a dozen and a half states, August is the month for the sales tax holiday. Whether the goal is to encourage consumer spending or ostensibly offer tax relief to families, the three-day holiday waives sales tax on certain purchases – typically school supplies and clothing. Here’s a chart listing the states and the once-a-year exemptions they offer.

What exactly do sales tax holidays accomplish? Some claims:

  • They save consumers money.
  • They increase consumer spending on both tax-free and taxed items. On net, the result is more revenue in what the National Retail Federation calls a “win/win/win” for consumers, retailers and governments.
  • A weekend tax break keeps spending in the local economy. According to Bloomberg BNA Ohio and Michigan first experimented with a tax holiday on cars in 1980. New York picked up the weekend tax holiday in 1997 to entice borough residents to keep their clothes shopping dollars in NYC rather than cross the border to New Jersey’s malls.
  • It is a way for politicians to make good on tax relief without making permanent changes to the code.
The Tax Foundation claims that tax holidays only shift consumer spending and any savings in tax may be offset by higher retail prices. In addition, the “gimmick-y” exemption leads to arbitrary decisions (e.g. backpacks are exempt but briefcases are not – see Virginia). Basically, the one-time break is a way for politicians to crow about tax relief while avoiding more substantive reforms to the code such as broadening the base and lowering the rate of tax.
A 2009 econometric study, The Fiscal Impact of Sales Tax Holidays, by Adam Cole of the University of Michigan finds that sales tax holidays induce “timing behavior” in consumers. There is a reduction in sales and use tax collections by 4.18 percent in the month of the tax holiday. Half of this reduction is attributed to consumers timing their purchases to coincide with the tax-free weekend. Though there is no evidence that this leads to a large substitution of purchases during the rest of the calendar year.
Cole raises two interesting issues for researchers to consider. Do tax holidays produce cross-jurisidictional shopping effects? Secondly, because of their short duration, do tax holidays allow retailers to evade taxes by attributing earlier sales to the holiday weekend?

Marwell and McGranahan (2010) provide another set of questions to consider for those who over-sell the benefits of back-to-school bargains for family budgets. In their working paper, “The Effect of Sales Tax Holidays on Household Consumption Patterns“, the authors ask: Who’s shopping and what are they buying? Their preliminary findings suggest it is primarily upper income households and they are mainly purchasing clothes.

On a purely anecdotal note, I calculate that if our family went shopping during Virginia’s August 3-5 tax holiday we would have saved about $9.00 on backpacks and school shoes. To avoid the back-t0-school crowds we purchased those items at Tysons Corner the weekend before. If that’s the premium for efficient mall shopping, we paid it gladly.