Jeff Jacoby offers 4 reasons for a sales tax rollback, one based on BHI's work

JEFF JACOBY:

There is some upside to the passage of Question 3. Consumers will have more dollars to spend in Massachusetts. The money doesn't disappear from the state's economy. It goes somewhere else including making retailers along all of the Massachusetts borders a bit more competitive.

Because a lower tax rate will generate economic growth. An analysis by the Beacon Hill Institute at Suffolk University shows that a sales-tax rollback to 3 percent "would create 27,199 private sector jobs, increase annual investment by $73 million, and raise wages by $1.03 billion." Money not confiscated by the public sector would remain in the far more productive private sector, while a sales-tax reduction would give Massachusetts businesses a competitive advantage. And any government jobs eliminated would be more than offset by the creation of new jobs in the private economy

It's time to broaden the debate beyond the diet of fear the public's been served.

House Speaker Robert A. DeLeo to address BHI's 10th Annual Competitiveness Conference

The Honorable House Speaker Robert A. DeLeo will keynote this year's annual conference announcing the release of the institute's 10th annual report on competitiveness.

Published since 2001, the report features an index that measures the ability of all 50 states to establish policies that sustain long-term economic and personal income growth.

9:30 a.m.
Sargent Hall
First Floor Function Hall, Suffolk University Law School
120 Tremont Street
Boston, MA 02108
RVSP - phone: 617-573-8750;
e-mail: compete@beaconhill.org

Sponsored by:
THE BEACON HILL INSTITUTE & THE DEPARTMENT OF ECONOMICS at SUFFOLK UNIVERSITY

Don't look to Europe for employment policies

from the New York Times blog Economix, Casey Mulligan: Progressives point out that the Western European economy has a lot going for it: a productive work force, new technologies, universal health care and access to education. Perhaps they’re right that getting our government more involved in the economy and smoothing out capitalism’s “rough edges” would give Americans some of those things, too.

Those same progressives tell us that expanding unemployment insurance and other government programs is an easy way to raise employment in the United States. But they seem to have forgotten that European policies have likely caused Europe’s employment to be less than ours, not more.

NBER: Recession ended in June 2009

IT'S OFFICIAL: The Great Recession ended in June 2009 according to the National Bureau of Economic Research in Cambridge.

WASHINGTON (AP) — The longest recession the country has endured since the Great Depression ended in June 2009, a group that dates the beginning and end of recessions declared Monday.

The National Bureau of Economic Research, a panel of academic economists based in Cambridge, Mass., said the recession lasted 18 months. It started in December 2007 and ended in June 2009. Previously the longest post World War II downturns were those in 1973-1975 and in 1981-1982. Both of those lasted 16 months.

Mankiw's brilliance

Greg Mankiw nails it

To Obama-administration economists, as well as to many others, the recession that followed the financial crisis of 2008 seemed like a classic case of decline in aggregate demand. Because of the credit crisis, people were not able to obtain loans — for homes, cars, business equipment, or any of the countless other transactions that rely on credit in today's economy. And because people were unable to obtain loans, these sales and purchases couldn't take place, resulting in a significant drop in demand across the economy.

So, inspired by the view that fiscal policy can prop up aggregate demand, Obama's advisors (and their congressional allies) began to design a stimulus plan heavy on direct government spending. A few days before President Obama's inauguration, his economic advisors released a document titled "The Job Impact of the American Recovery and Reinvestment Plan," in which they detailed some of their economic assumptions. They determined that the "government-purchases multiplier" — that is, the multiplier for direct spending — would be 1.57, while the tax-cut multiplier would be 0.99. In other words, every dollar spent by the government would yield $1.57 in aggregate demand, while every dollar in reduced taxes would yield only 99 cents in increased demand. And because 1.57 is larger than 0.99, the Obama team concluded it was better to increase spending than to cut taxes.

Obama and his advisors arrived at these numbers through a standard macroeconometric model of the sort economists have been using for years. Such models take various past relationships among economic variables (inflation and unemployment, for instance) and extrapolate them into the future. In essence, the economy is modeled as a system of equations, each describing how one variable responds to many others. University of Chicago economist (and Nobel laureate) Robert Lucas famously criticized these models for lacking an appreciation of people's changing expectations; many economists, however, still find such models valuable, and have continued to employ them for forecasting and policy analysis.

The question for economists now is whether the administration's assumptions, and the model based on them, were correct. After all, if we could be sure their model was right, we would know what to conclude when their stimulus plan was followed by 10% unemployment: The patient was sicker than they thought, and unemployment would surely have been higher still if not for the stimulus. (Indeed, since Obama's advisors do believe their model was right, this is the conclusion they have reached.)

The trouble is, we have no way of knowing for sure if the model was in fact correct.

Corporate executive schools Krugman

Warren Meyer:

Here is my first law of economic growth: When we encourage more investment, and ensure this investment is being channeled to the most productive uses, growth will follow.

For all the talk about fiscal stimulus and jobs creation at the federal and state level, almost no one in government is doing anything about reducing the roadblocks to investment. For example, millions of people are newly unemployed, and in past recessions a large number of these folks have eschewed looking for a new corporate job and have started businesses of their own. Unfortunately, such prospective entrepreneurs will face a tangle of registration, regulatory and licensing hurdles, many of which have been backed by established businesses that want to avoid just this kind of new competition. Even steps like the extension of unemployment benefits tend to discourage such entrepreneurship by increasing the opportunity cost of working for oneself.

Some people never learn.

State taxes do not matter?

Richard W. Rahn at the Cato Institute:

Why is it that some of the states with the biggest fiscal problems have the highest individual state income tax rates, such as New York and California, while some of the states with the least fiscal problems have no state income tax at all?

High-tax advocates will argue that the high-tax states provide much more and better state services, but the empirical evidence does not support the assertion. On average, schools, health and safety, roads, etc. are no better in states with income taxes than those without income taxes.

More importantly, the evidence is very strong that people are moving from high-tax states to lower-tax-rate states — the migration from California to Texas and from New York to Florida being prime examples. (Next year, the combined federal, state and local income tax rate for a citizen of New York City will be well over 50 percent, as contrasted with approximately 38 percent for citizens of Texas and Florida.)

If the citizens of California and New York really thought they were getting their money's worth for all of the extra state taxation, they would not be moving to low-tax states.

The obvious question then is: Where is all the extra money from these state income taxes going? It is going primarily to service debt, and to pay for inflated salaries and employee benefits. It is interesting that the high-tax-rate states also, on average, have much higher per capita debt levels than states without income taxes. (Alaska is an outlier because it has its oil reserve to borrow against and actually gives its citizens a "dividend" each year.)

How business leaders view tax credits

The best take-away is from Todd Dagres, General Partner, Spark Capital:

“I am not a big fan of tax incentives because they are a Band-Aid for an unfavorable tax environment.”

Introducing the Rahn Curve

Dan Mitchell thinks the size of the U.S. government is too large.

The economics of the World Cup

It's big money, really big but host countries aren't the biggest winners when it comes to direct benefits.

"The only direct funding a host country receives from the proceeds of the World Cup are the ticket sales and the predetermined amount promised by FIFA for hosting. In the past host countries have banked on tourism to compensate for the costs of infrastructure and new stadiums."

Mercatus Center: Say goodbye to interstate competition

Veronique de Rugy and Stefanie Haeffele-Balch:

In theory, fiscal federalism is a great tool that holds state and local governments accountable for their policy actions. In practice, it hardly exists. The increasing scope of federal programs and grants has largely eroded its impact on policy decisions by state and local government to the point that tax considerations become almost irrelevant in people’s decisions about where to live.

By removing the natural check that mobility imposes on bad state tax policy, those who favor expanding the scope of federal government activity make it difficult to correct bad state tax policy.

All other things being equal, it remains less costly to live or run a business in a low-tax rate state than in a high-tax rate one. However, when the central government imposes an ever-increasing percentage of each taxpayer’s total tax burden, differences in state taxes become less important. In other words, if your main tax burden is going to be the same wherever you live, why bother even moving to another state, especially if you get to deduct your state taxes from your federal ones? Being able to deduct state taxes from the federal burden obviates any differences between the states.

So say goodbye to Tiebout.

The Spending Seesaw

by VINCENT FULMER

In tough economic times it is all the more important for consumers to distinguish between items they “must have and those they “would like to have.” One cannot be postponed: The other most certainly can wait.

The problem is that all too many consumers do not take the time or trouble to ask themselves “Do I really need this? Can I just as well postpone it or do without?” The choice is often difficult because the options are not always clear. The problem is muddied and magnified when all of the economic experts and most government entities urge consumers to spend themselves silly to help the economy recover. The problem is deepened by desperate merchants who engage in complex price discounting, noisy up-grades, confusing introductory offers and exaggerated advertising claims—the dark side of merchandising.

Thorstein Veblin, the economist, wrote extensively about the phenomenon of “conspicuous consumption” as to pervasive practice by consumers. Will Rogers complained that “Too many people spend money they haven’t earned, to buy things they don’t’ want, to impress people they don’t like.” Where is Andy Rooney of 60 Minutes when we need him?

What inescapably dooms the rational decision to purchase an item is the universal consumer memory lapse about income taxation. Almost everyone assumes that the price tag shown on an item is the actual cost to the purchaser. Nothing could be further from the truth. What the purchaser sees is not what he or she gets! When income is taxed before the consumer makes a purchase, the consumer has already paid a price for the dollars he or she is about to spend.

The actual cost, then, is not 100% of the price tag but more like 120% of the price tag shown for anything, for everybody. Add two extra cost items that add to the bad news:

1. Sales taxes might apply, depending upon local or state laws or the item purchased. These generally range from 5% to 8% of the price tag.
2. Finance charges if the consumer buys on credit or otherwise borrows to get the money to make the purchase.

How does it look for consumers to pay 130% or 140% of the price shown? It ought to feel good because most consumers are doing it. Isn’t it high time for consumers to do a better job of distinguishing between must have and would like? Isn’t it time for consumers to spend less and save more if they can? Alas, consumers are an irrational, disorganized lot to begin with, and an unpredictable prop for the economy.

Now, businesses face a similar challenge and a responsibility to distinguish between things they must have to conduct their operations and the things they would like to have—in order to remain competitive. But businesses have three powerful advantages consumers almost never have.

1. Businesses typically have a basic choice between incurring a current operating expense or investing in assets like equipment and inventory to save on current and future operating expense, or to grow the business. Consumers rarely have such options. The tax laws allow businesses to spread their investment cost over a number of years, but not consumers.

2. Businesses are allowed to deduct the current year cost of an expense from their revenue before arriving at their profit—which is then taxed at lower rates than consumer income. Generally speaking, businesses spend on their needs with less costly before tax dollars; and unlike consumers, businesses are not noted for irresponsible, carefree or casual spending, or impose buying—despite all of the current concern about executive compensation.

3. Unlike consumers, businesses can also pass along some or all of their expense increase to customers, in the form of price increases. When times are tough, it is more difficult or impossible to do so. But well-managed businesses are able to use highly skilled professional resources to help them contain and control expenses.

In addition, for a variety of justifiable reasons, the interest charged on consumer borrowing is roughly double the interest charged on business loans. Time payment, or consumer credit card purchases on consumer durables—kitchen appliances, TV’s, home furnishings and the like cost the equivalent of 20% per year. Business loans are typically in the range of 10%.

Home buying interest rates might seem like a glaring expectation. But they are not. Because of the traditionally long periods used in mortgage financing, the published rate of 5% on a 30-year mortgage seems low enough. But the 5% translates into three to four times itself when the period of the loan is normalized to a ten-year payoff.

Businesses account for roughly 25% of the nation’s spending, consumers roughly 50% and government roughly 25%. The fiscal sedative/stimulus spending debate in the government sector is a subject of hourly public debate and needs no further elaboration here. At its core government spending is a must have versus would like seesaw, no less than the challenge in the private sector.

One does not have to be an economic genius or policy maker to know that business investment spending is the most direct and effective way to stimulate the economy and create jobs. That is where the jobs are. That is where employment opportunities are created, now and for the future. What can all of us in America do to encourage business to invest?


The author is an economist and consultant to early stage companies in New England.

BHI offers testimony on debt restructuring bill before Senate committee

At the request of Chairman Mark Montigny, the Beacon Hill Institute at Suffolk University offered testimony on "An act relative to debt restructuring," this morning at 11:30 a.m. in Room A-1 of the State House in Boston.

Good afternoon, I am Paul Bachman and I am the Director of Research at the Beacon Hill Institute at Suffolk University. I would like to thank the members of the Senate Committee on Bonding, Capital Expenditure and State Assets for opportunity to testify today and, in particular, Sen. Mark Montigny, chairman.

House Bill No. 4617 would authorize the state treasurer to restructure some $573.7 million dollars in state bonds. Given the current budget problems facing the legislature, restructuring is an attractive option. While the restructuring may serve the best interest of the Commonwealth in the current fiscal year, the state's outstanding debt obligations could become problematic in the medium and long term, particularly in light of the state's current high debt burden relative to other states.

Massachusetts Current Debt Burden

Massachusetts carries one of the highest government debt burdens of all 50 states. The Patrick administration's "FY 2010 Capital Budget & Investment Plan" includes a debt affordability analysis. The report section titled "Existing Debt Burden" cites a 2007 U.S. Census Bureau study that ranked Massachusetts third in the nation in outstanding debt and first in the nation in debt per capita. The report also cites numerous debt measurements by Moody's Investor Services and Standards & Poor's that ranks Massachusetts first in tax-supported debt per capita; second in net tax-supported debt as a percentage of personal income; fourth in total net tax-supported debt and fifth in total gross tax-supported debt.

The A&F report attempts to mitigate these sobering statistics by noting that these figures include certain debt issued by entities other than the Commonwealth for which the Commonwealth is not liable such as the Massachusetts School Building Authority (MSBA). The report also notes that the numbers exclude local debt, which can be substantial in other states that have "stronger county governments and other political subdivisions that issue debt to finance capital improvements." The report observes that "it is safe to assume that Massachusetts would likely rank lower when measuring debt as a percentage of personal income or per capita if both state and local debt were taken into account."

Unfortunately, the numbers do not support this safe assumption. The Beacon Hill Institute used U.S. Census Bureau data for FY 2007 to compare the debt burden of Massachusetts to other states using data for both state and local government. At $89.6 billion in FY 2007, Massachusetts state and local debt represented 28% of state personal income compared to an average of 20% for all states. Massachusetts ranked third, behind Alaska at 35.6% and New York at 28.4%. This outstanding debt represents $13,792 per capita, nearly double the $7,990 average for all states, putting us in second place, again behind Alaska.

The A & F report is technically correct that the Commonwealth is not liable for a portion of the debt, which is issued by entities, such as the $4.6 billion in MSBA debt. In fact, the newly created Massachusetts Department of Transportation holds a large portion of this debt, including debt from the MBTA and Massachusetts Transportation Authority. Moreover, the MBTA debt of $6.2 billion for FY 2009 is no longer subject to the statutory bond cap.

However, it is naive to suggest that the state would not ultimately bear at least partial responsibility for the debts of the MSBA or other agencies in the event of a change in status. I am reminded of the Special Investment Vehicles, or SIVs used by banks to remove risky assets from their balance sheets, which eventually wound up back on the balance sheets of many banks. More recently, European Union member states joined the International Monetary Fund to bailout Greece in spite of the fact that Germany and other European states were not liable for this debt.

Thus, I do not think we can rest comfortably with the notion that the Commonwealth is "not liable" for the debts of these entities. Moreover, I think the debt of these agencies should be included in any future debt affordability analysis.

The Beacon Hill Institute's Competitive Index includes a subindex that measures the state's bond rating against other states. The index has shown that Massachusetts consistently ranks between 22^nd and 28^th over the past five years. The Commonwealth's middle- of-the-pack bond rating doesn't impinge on the state's ability to remain competitive, that is to say to put in place policies that promote economic growth and sustain high levels of income for its citizens. Massachusetts, thanks to the strength of its high tech, finance and human resources sectors, tops our latest ranking. Nonetheless, our index does show that Massachusetts has room to improve (or stay near the top) and our bond rating is one thing we can control to some extent.

The Economic Impact

In isolation, House No. 4617 would have very little, if any impact on the state's ability to issue bonds or to the state economy. However, the bill would allow the legislature and put off unpleasant budgetary decisions in hopes that the extra time will allow the state budget deficit to shrink with a growing economy. A persistent and large budget deficit may tempt the Legislature to use debt restructuring again and again.

Bear in mind that outside factors come into play: 1) federal fiscal policy and 2) a demographic shift. FY 2012 may prove just as challenging as FY 2011 as federal stimulus money dries up and the 2001 and 2003 federal tax cuts expire. Tighter monetary policy, almost a sure thing given the very loose current policy, could also restrain economic growth.

In the longer term, the state cannot push into the future the payment of its relatively high debts indefinitely. Repeated debt restructuring could risk future downgrades to its bond rating and take place in an environment of higher interest rates in the bond market. Also, debt servicing costs would rise and begin to consume an increasing portion of state resources, inhibiting the state's ability to deliver services in the future.

Notes:
Governor Deval Patrick's Five Year Capital Investment Plan FY2010 - FY2014 "Existing Debt Burden" Administration and Finance (2009) http://www.mass.gov/bb/cap/fy2009/exec/hdebtafford_5.htm (accessed May 3, 2010).
² Massachusetts School Building Authority Annual Report 2008 – 2009 http://www.massschoolbuildings.org/uploadedFiles/Pressroom/Newsletters/2208.2009_Annual_Report.pdf (accessed May 3, 2010).
³ Massachusetts Department of Transportation, "Stakeholder Briefing," (October 2009) http://www.eot.state.ma.us/downloads/90_DayReport/briefing100609.pdf (accessed May 3, 2010).

Is it something we said?

Massachusetts ranks 47th according to Chief Executive magazine.

Details here.

Government failure: Too many vaccines on the shelf

SWINE FLU FOLLIES:

WASHINGTON, May 3 (Reuters) - The United States still has 71 million doses of H1N1 swine flu vaccine that have not been used, but it is not yet time to throw them out, the federal government said on Monday.

States and other providers should hang on to the vaccine and continue to offer them to people until drug companies can start distributing seasonal vaccine for the coming influenza season in the autumn, said Health and Human Services Department spokesman Bill Hall.

Senator Chuck Grassley, the ranking Republican on the Senate Finance committee, released a letter on Monday that he sent to HHS secretary Kathleen Sebelius asking her how much vaccine was left over and when it would expire...

Sebelius said last month that 162 million doses were produced and distributed, but only 90 million actually got into people's arms or noses.

Full article here.

Amazing

How else could we say it?

MANDEL: "We all know that state and local government finances are a mess. This chart helps explain why."

Chart is here.

Key paragraph:

Now, I’m not anti-government, by any means. But this trend is disturbing. In times of crisis and economic struggle, government workers should not be getting bigger pay increases than the private sector. The domestic private sector has really been struggling for a decade, both in terms of job and pay. But the public sector kept paying higher compensation.

The arithmetic is very clear. State and local governments can’t keep funding higher wages and better benefits for their workers, while the private sector struggles. As a wise man once said, you can’t wring blood from a stone. And you can’t ask troubled taxpayers to pony up bigger pay gains for government workers than they are getting themselves.

Hat tip to Marginal Revolution.

Proposition 13 is not a good target for California's failures

The time to blame Proposition 13 for California's status as a failed state has long passed. The public understands this; the ruling elite refuses to believe it in the slightest.

Is it possible that California's pro-13 majority, denounced for decades as shortsighted and greedy, is actually on to something? The reason people refuse to believe that California's taxpayers keep too much money and its tax collectors don't get enough is, as Brown now says, that there's "so little confidence in state government."

The core of that distrust is the belief that California's public sector suffers not from the lack of money but from the failure to use the ample funds it does receive efficiently and beneficially. There's no shortage of facts about the revenue and spending sides of government, California-style, to justify that suspicion.

California, in the first place, is not a state with low taxes. It's not even a state with especially low property taxes. In 2007, the year of the most recent Census Bureau data comparing state finances, California's state and local governments levied $1,141 in property taxes per capita, less — but only 11% less — than the corresponding average, $1,288, for the 49 other states and the District of Columbia.

If we broaden the view to look at all taxes (property, income, sales and excise taxes) paid to state and local governments by individuals and corporations, California's governments received $4,731 per resident, 14% more than the $4,160 average outside California. Only eight states and the District of Columbia had a higher per capita tax burden.

Not only is California a high-tax state, it is even more conspicuously a high-revenue state. Things that aren't taxes, such as fees for government services, often have a high degree of "taxiness," as Stephen Colbert might say. The Golden State, routinely described as desperately short of funds because of Proposition 13, brought in $12,776 per capita in governmental income from all sources — taxes, fees, federal aid, charges for government-administered insurance and revenue from government-owned utilities — in 2007. Only three states and the District of Columbia received more.

On revising state constitutions, the shorter the better?

An interesting post at Marginal Revolution:

Using public choice economics, how might we redesign the Constitution of California? Lawmakers from both parties have proposed this idea, plus there were (failed) attempts to call a new constitutional convention through a referendum. Did you know that the operative constitution from 1879 is the third longest in the world, after Alabama and India?

I see a few options on the table:

1. Eliminate the 2/3 legislative majority required to pass a new budget.

2. Eliminate popular referenda.

3. Move closer to a Swiss-like "veto only" system for referenda.

4. Eliminate the power of referenda to authorize state-level expenditures.

5. Cap state-level expenditures.

6. Regulate state treatment of pensions more strictly, to encourage fiscal responsibility.

7. Amend the constitution to make it harder to...amend the constitution.

As Tyler notes California has the third longest constitution in the world. Reformers should aim for shorter, distinct Constitutions that affirm limited government. I think California needs to eliminate popular referenda that mandate the legislature to spend on specific programs.

Wall Street Journal on Obama's new PLA rule

WALL STREET JOURNAL: "We'd list more but newsprint is expensive."

Only 15% of the nation's construction workers are unionized, so from now on the other 85% will have to forgo federal work for having exercised their right to not join a union. This is a raw display of political favoritism, and at the expense of an industry experiencing 27% unemployment. "This is nothing but a sop to the White House's big donors," says Brett McMahon, vice president at Miller & Long Concrete Construction, a nonunion contractor. "We've seen this so many times now, and how many times does it have the union label? Every time."

It's also a rotten deal for taxpayers. White House economist Jared Bernstein blogged that these agreements "significantly enhance the economy and efficiency of Federal Construction projects." In fact, the carve-outs put an end to open, competitive federal bidding, which means higher project costs. They also mean taxpayers must finance the benefits and work rules of union members.

Mr. Bernstein could check all this with the Department of Veterans Affairs, which last year commissioned an independent study showing the Obama project labor agreements would likely raise the VA's construction costs for hospitals by as much as 9% in three of five markets—Denver, New Orleans and Orlando. In two others, New York and San Francisco, the study predicted a mixture of small cost increases and small cost savings.

The study reported "strong evidence to suggest that the result of a PLA [project labor agreement] that dictates work rules, double benefits, team structure and activities on non-union type contractors will be that production costs will increase—given these union-related requirements." It also rebutted a favorite liberal argument that such agreements lead to less labor strife, noting that there are "many examples for projects where there have been strikes but also no strikes—unrelated to whether or not a PLA is in place."

The Veterans study mirrors academic work showing that project labor agreements raise the costs of construction by 10% to 20%. The Beacon Hill Institute at Boston's Suffolk University in 2006 investigated the costs of building 126 Boston-area schools. It found project labor agreements raised winning bids for school construction projects by 12% and actual construction costs by 14%.

Boston's Big Dig, Seattle's Safeco field, Los Angeles's Eastside Reservoir project, the San Francisco airport, Detroit's Comerica Park—all were built under PLAs marked by embarrassing cost overruns...

Recent Beacon Hill Institute publications on Project Labor Agreements:

BHI Survey: Overwhelming majority of state voters oppose a key feature of Project Labor Agreements

Cato Journal: Why PLAs are not in the public interest

Project Labor Agreements on Federal Construction Projects: A Costly Solution in Search of a Problem

Cow tax and tax administration in Massachusetts

Move afoot to repeal the cow tax in Massachusetts.

“For me to go out and count every chicken that is moving or standing still is a lot of work,” said Ms. Dumont.