Wednesday, December 17, 2014

Commercial Casino Gambling: Hurts Economic Growth & Increases Welfare Spending

State and local governments across the nation are becoming more and more addicted to casino gambling with the number of states permitting commercial casino wagering rising from 11 states in 2000 to 23 in 2012. Commercial casinos are founded and run by private companies on non-Indian land.

In order to win citizen approval of casino gambling, policymakers normally promise improved economic performance, lower tax burdens, and more dollars for education. With tax rates on casino revenues roughly four times the average sales tax rate, it is no surprise state and local policymakers become hooked on casinos.

Between 2000 and 2012, despite assurances from elected and non-elected officials, states with commercial casinos versus states without commercial casinos experienced lower GDP growth, 54.8% versus 62.6%, and inferior job growth, 5.5% compared to 8.7%. Furthermore in 2012, states with commercial casinos shelled out 15.2% of GDP in the form of transfer and welfare payments. This was significantly higher than states without commercial casinos of 13.8%.

And did commercial casinos produce lower tax burdens? No! For the latest year, citizens of the 23 commercial casino states suffered a state and local tax burden as a percent of GDP of 8.6%, while the 28 states and DC with no commercial casinos experienced a lower 8.1% tax burden.

Commercial casino states did, however, spend more on education. In 2012, gambling states spent 5.6% of GDP on education which was above the 5.3% of GDP spent by non-casino states.

Thus, the most recent data show that commercial casinos did not deliver on the promise of economic development and lower taxes. Instead, commercial casinos appear to restrain growth, increase overall tax burdens, and boost welfare and education spending.
Ernie Goss

Saturday, December 13, 2014

A Travelogue in Rural America

This past week I traveled to Sioux Falls, South Dakota to give a continuing education program to the South Dakota Bar Association.  South Dakota lawyers are not required to have continuing education, so those who attend are motivated by the need to provide competent services to their clients, who are often entrepreneurs.  These participants are deeply connected to the reality of doing business in a world where competitive conditions create the parameters of expected behavior.  They need to deliver value to clients who in turn deliver value to their customers.  It is a virtuous cycle.

Our journey to Sioux Falls was so enjoyable because of encounters with people having these value commitments.  We first took a small detour to visit my sister and brother-in-law on their farm in Northwest Iowa.  We traveled off the interstate highway and the typical tourist pathways through rural America. In nearly every town, we find a Casey’s gas station and convenience store run by cheery locals and delivering the products that people need:  gasoline (at a fair price), clean restrooms, coffee, donuts, and other snacks.  I think the employees are cheery because they like being part of a successful team.  Isn’t it always better to work where people are getting their needs met and happily pay the price?  

Other signs of life are also evident in rural America.  Churches were having socials and community events.  The schools had full parking lots and signs with their activities for sports and music.  Local civic clubs were having a fundraiser or a social event around the holidays.  As Charles Murray will tell you in his book Coming Apart (and Alexis de Tocqueville before him will agree), these are signs of cultural prosperity, which have persisted over decades.  Not even televisions, computers, and mass entertainment have been able to extinguish them entirely.

My wife and I paused to imagine the early immigrants to these regions, coming from Scandinavia, Holland, or Germany and bringing their customs from the Old Country along with a willingness to work and to build something together.  They formed families and worked together on farms, which are dotted with their names with “and son” often added as a monument to their legacy of hard work and devotion to growing things from the earth.  Livestock is a big part of the farm ecosystem here, as it permits greater economic rewards through transforming crops into a value-added product (i.e., meat) using home-grown “factories” that consist of cows, sows, ewes, or hens (turkeys and chickens).  The wealth these folks are able to build (and in many cases, it is substantial), was grown little by little, usually with ma, pa, and the young-uns working together. 

And as we know, Nature can be unforgiving.  It does not notice your race, your people and connections, or whether you have “privilege”.  It delivers sun, warmth, wind, rain, hail, snow, and freezing cold equally to everyone.  And everyone has to rise to the challenge.  I admire these people and their accomplishments.  It must have taken a lot of courage to leave the old country and strike out in something new.  But the old country was probably not so great for them.  This one worked out much better.  Liberty produces such wonders.  Once you see the track record of Liberty and what it produces, it is hard to imagine wanting anything else.     

After enjoying a great meal made by my sister (who inherited cooking genes from my mother, who at 91 still dazzles us with her skills) and admiring their beautiful herd of cattle (a product of 40-plus years of excellence),  we journeyed on to Sioux Falls, reaching the city just after dark.  For those fans of “It’s a Wonderful Life”, I think of Sioux Falls as another version of Bedford Falls.  It is architecturally fascinating and at Christmas time the lights add a warm ambiance to a wintery environment. 

Before dinner at our favorite spot (Minerva’s, which I highly recommend), we shopped some of the downtown stores that were open late on Thursday night for Christmas shoppers. Mrs. Murphy’s Irish Gift Store on Phillips Street is run by expatriates (well, Mrs. Murphy is actually English, but we’ll keep that a secret).  They focus on imported goods from their mother country.  I loved everything there and managed to acquire a very fashionable hand-made Irish tweed hat as well as other gift items.  The Murphys exemplify innovation and entrepreneurial spirit in offering gifts that they select to honor the old ways of creativity and craftsmanship.  If you want your Christmas presents to come from a craftsman’s hands, not merely from some factory, call them.  They offer free shipping, too. 

But entrepreneurial challenges do not make for an easy life. The Murphys were working late to serve their customers, but the Swedish gift shop down the street was going out of business.  Not everyone who dares to offer ethnic-oriented goods will have the world beating a path to their door.  But through persistence and engagement, connecting personally with the needs of their customers and bringing something new to the marketplace, the Murphys seem to be doing just fine.  God bless them and help them to prosper (wait- isn’t there an Irish blessing for that – a plaque for sale, perhaps!?!).  And what’s not to love about hand-made Irish hats, socks, sweaters, porcelain, and such things in a mass-produced world!  What a country that embraces diversity and allows it to thrive in the marketplace! 

When the world is losing its bearings, political leaders are talking nonsense, and young people are hoodwinked into protesting without giving much thought to the parameters of what they find to be unjust, it is a relief to find a haven where people simply structure their affairs based on the realities of meeting demands through honest trade.  Political classes may pander to the interests of one group of citizens against another, corrupted by money contributed by special interests, but these folks seem to focus on what matters to their customers, which ultimately inures to the benefit of all. Have you ever noticed that where government is most active in redistributing, the claims of injustice are loudest, but where government is getting out of the way and letting people trade, they seem most happy and contented?  Perhaps there are lessons to be learned here.

As it turns out, free markets and property rights work pretty well when we give them a chance.  I wish that the rest of America could witness these truths and the beauty they can produce.  How about booking a vacation (or a field trip) to rural America? 


Thursday, November 13, 2014

Fun with FinCEN: Regulating the Unlawful

I am currently doing some research for an upcoming program on regulating payment networks. Financial institutions have been assigned duties under the Bank Secrecy Act to know their customers and to monitor and report suspicious financial behavior.  Unlike a neighborhood watch association, in which membership is voluntary, these institutions are effectively being deputized by the government to perform gatekeeping and monitoring functions.  And if they don’t do their jobs property, they could be kicked out of the neighborhood!

Snooping banks may threaten our liberty, I suppose.  But perhaps this form of monitoring is less intrusive than having the government watching you directly.  (Hey, wait a minute, they may be doing that, too!)  And neutralizing threats from criminals and terrorist organizations likely enhances our wellbeing more than a snooping banker.  Frankly, I don’t worry about these privacy concerns so much.  In fact, I have told my banker that he knows more about me than my doctor and probably even my priest.  (Maybe that means I am going to confession too infrequently.)  

The current state of legal  conflict regarding the possession and distribution of marijuana presents some additional dilemmas for financial institutions and others who deal with persons or entities engaged in such distribution.  While laws have  been change to removed criminal sanctions in some states and localities, federal law continues to criminalize this activity.  The Controlled Substances Act, coupled with other laws such as those involving aiding and abetting criminal activity, mean that marijuana continues its status as a dangerous controlled substance that creates a risk for civil and criminal penalties not only to those who distribute, but also to those who aid them. 

So, what’s a bank to do when approached by a customer who is connected to marijuana distribution in a state that has effectively legalized this activity under state law?  The most risk averse advice would be to turn him away and/or turn him in.  Guidance issued early this year by the Financial Crimes Enforcement Network (FinCen) and by the U.S. Department of Justice (DOJ) leave the financial services industry in a bit of a quandary if they want to do business with a person or entity engaging in legal activities from the perspective of state law, but illegal activities under federal law.    On one hand, FinCEN has provided guidance regarding how a bank may comply with ongoing reporting obligations under the Bank Secrecy Act.  On the other hand, the DOJ has also announced that all the laws that could be applied to such a banking relationship with a known distributor of marijuana continue to be on the books.  However, it has also announed that the DOJ will likely to exercise prosecutorial discretion in enforcing these laws assuming the customer is not doing things that trigger enforcement priorities, like distributing the drugs to other states, to minors, around school zones, or as a ruse to support other criminal activities.  And the banks are supposed to conduct due diligence to be sure the customer is not doing these things.   

If I was a banker (or like Kramer, who once testified that he always wanted to be a banker), I would not like these competing signals one bit. They expect too much of bankers, who are great people and all, but not clairvoyant.  Bankers should be good at taking deposits and evaluating credit risks when they make loans.  It seems a stretch to assume they are also proficient at evaluating whether (a) a customer engaging in legal activity under state law is also engaged in illegal activities, and (b) whether the DOJ will continue to exercise discretion not to prosecute them for providing services to such a customer.  The former kind of discernment could perhaps be learned, but the latter is admittedly an exercise in predicting the unknowable. (Even Secretary Rumsfeld knew better than to try this.  This candor is surely missed.)

FinCen has come up with some interesting “red flags” to alert bankers to concerns with their customers, and here is my favorite:  “A customer seeks to conceal or disguise involvement in marijuana-related business activity.  For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.” 

Of course, a red flag is not equivalent to a problem.  Your client may be a consulting firm that promotes Willie Nelson concerts.  And what exactly do they mean by “cash that smells like marijuana”?  Is that a figure of speech?  Or should the bank employees be trained by attending a Willie Nelson concert?  I am not quite sure these regulators or the DOJ have thought this through, not to mention the folks who voted for greater access to a drug with a known propensity to make its users stupider.  But that is another story.

Thursday, November 06, 2014

Ruminations on the Minimum Wage: Pulling out the lowest rung on the ladder of progress?

On November 4, Nebraskans overwhelmingly voted in favor of Initiative 425, which will increase the current $7.25 minimum wage to $8 by January 1, 2015, and then to $9 by January 1, 2016.  Supporters of this initiative touted the need to boost income for working families.  Perhaps this law will do that for some workers, but few heads of households rely solely on a job that pays only minimum wage.  Most workers have advanced skills and accordingly they receive more than minimum wage based on the market demand for their skill sets, not based on a legal prescription of their worth. 


But lots of young people start out in jobs that don’t require many skills, but pave the way for future growth.  Many of us in the Midwest may recall getting up early in the summer to “walk beans”, which, contrary to rumors by city folks, did not involve a leash.  It was hard work, usually supervised by the farmer who owned the bean field, requiring the removal of invasive weeds from the desirable crop.  We started early because the sun got hot and the work got more difficult later in the day.  But that meant walking through dew-soaked plants, getting wet and sticky, attracting a fair share of bugs, and sometimes even getting a minor injury from an errant hoe or corn knife.   We muddled through with our friends, sometimes having a good time while experiencing the discipline of perseverance, as well as the satisfaction of looking back at the field free from weeds.  In a few weeks, the farmer would know if you were following instructions, as those who cut off his weeds in a haphazard manner often saw them grow back.  The skillful and diligent, on the other hand, removed the root and left a clean field behind. 


What has become of walking beans today?  Few, if any, do this work.  The same is true of other jobs kids used to do.  For example, my colleague told me of growing up in Texas and earning $.50/hour (that’s fifty cents, not dollars) washing cars at the service station or the car dealership.  Other jobs like this included service station attendants, which are rare as hen’s teeth today.  And what about human pin setters in the bowling alley? 


All of these jobs allowed young people an opportunity to get their start in the world of work.  They did not require an advanced degree or technical training.  They provided an opportunity to generate some spending money, while at the same time teaching us punctuality, cooperation, and diligence.  And most importantly, we learned that the real world had real expectations that we had to meet in order to succeed.  None of us expected to stay at those jobs, and in fact their difficulty provided a powerful incentive to stay in school and make something of ourselves.  But I am profoundly grateful for those formative opportunities available to us low-skilled but eager workers.    


Today we substitute capital in order to eliminate many of those low-skilled jobs.  My nephew, Matt, uses a giant mechanical sprayer to apply herbicides that kill weeds in the soybeans more effectively than high school kids, and at a fraction of the labor cost.  Better living through chemistry?  Perhaps. Likewise, mechanical washers have replaced those kids washing cars, which don’t require so much supervision.  And Brunswick made mechanical pinsetters, changing the labor market there.  (My antitrust students told of their adventures in an old-fashioned bowling alley, where it was customary at the end of the game to fill the holes of a bowling ball with dollar bills and roll it to the pinsetters.  Doesn’t that sound more delightful than just shrugging while the machine trudges on?)


So what does all this have to do with the minimum wage?  Humans sometimes innovate purely for thrills.  But more often, innovation is driven by the realization of cost savings.  As wage costs go up, it makes sense to substitute capital when it is more cost effective.  That is not all bad, as it surely creates new jobs in the sector that manufactures and services the capital improvement.  But those jobs are not usually the same kind of entry level jobs, but instead require considerable training and perhaps advanced degrees.  That is all quite wonderful, really, because it allows us humans to do more interesting things than walk beans or wash cars or set pins with our time.  But there are also consequences, particularly for the least-skilled, the young and inexperienced, who don’t get the same opportunity to start out in the world of work, and thus must scrap and scrape even harder to develop marketable skills.  And they must also do this without the formative experiences teaching them basic skills, like punctuality, dedication, and perseverance.  (Schools are ill equipped to do this for many reasons – and that can be the subject of another blog.)


This is a real problem.  Consider this inconvenient truth:  public school graduation rates in Nebraska average 78 percent.   Of course, this average masks significant variation, as some rural schools manage to graduate nearly all students, while urban ones do much worse.  Where are the dropouts going to become gainfully employed?  Will we have enough low-skilled jobs to match their skill sets, and to allow them to start building upward?  (And of course, some of the graduates are in equally bad shape, given low learning outcomes.)  These young people don’t yet have skill sets to build the capital that is replacing those low-skilled labor jobs.  How will they get them if they cannot get on the ladder of upward mobility? 


If we continue to raise the minimum wage, it stands to reason that we will further reduce the number of low-skilled jobs available, as capital continues to substitute for labor.  Will we soon be speaking to a synthesized voice saying, “Welcome to McDonald’s, may I take your order, please?”  Some may welcome this, but I would rather interact with that cheery young person and know that he or she is getting a start in the world of work.  And someday, she may be running that store -- or running for the Senate.  (Congratulations to Iowa Senator-elect Joni Ernst, who once worked in fast food on her way to better things.) 


Sure, there may be some winners from a legal edict to raise wages. But there are always unintended consequences to enacting laws that disrupt market forces.  Those who love making speeches and touting their big-hearted concerns for their fellow man often don’t contemplate the negative impacts on the very people they profess to care about.  There is real value to having a low rung on the ladder of the world of work that can be reached by anyone with ambition and the will to succeed.  Unfortunately, those people are most likely to be hurt by the initiative when the lowest rung is raised beyond their reach.  Perhaps those 40% of Nebraskans who voted no may be the ones who really cared for these people after all.




Thursday, October 16, 2014

Kansas Cuts Taxes and Expands the Economy: Earnings Growth Soars Past U.S. and Neighbors Since Passage

In 2012, Kansas Governor Brownback pushed the Legislature to whack individual tax rates by 25%, to repeal the tax on sole proprietorships, and to increase the standard deduction. In 2013, the Legislature cut taxes again. Since passage in 2012, how has the Kansas economy responded to these dramatic tax cuts?

Post Tax-Cut Earnings: Since QIV, 2012, Kansas grew its personal income by 2.92%, which was higher than the U.S. gain of 2.85%, and was greater than the growth experienced by each state bordering Kansas, except Colorado. Additionally, in terms of average weekly earnings, Kansas experienced an increase of 4.82%, which was almost four times that of the U.S., more than four times that of Missouri, approximately seven times that of Nebraska, and nearly four times that of Oklahoma. Of Kansas' neighbors, only Colorado with 4.82% average weekly wage growth outperformed Kansas.

Post Tax-Cut Job Performance: Between the last quarter of 2012 and August 2014, the U.S. and each of Kansas' neighbors, except Nebraska, experienced higher job growth than Kansas. However, much of Kansas' lower job growth can be explained by the fact that during this period, Kansas reduced state and local government jobs by 1.4% while all of Kansas' neighbors and the combined 50 U.S. states increased state and local government employment. In terms of unemployment, Kansas' August 2014 joblessness rate was 4.9% compared to rates of 6.1% for the U.S., 5.1% for Colorado, 6.3% for Missouri, 3.6% for Nebraska, and 4.7% for Oklahoma.

Kansas job and income data since the tax cut show that, except for Colorado, the state economy has outperformed, by a wide margin, that of each of its neighbors and the U.S. To remain competitive, expect Kansas' neighbors to reduce state and local taxes in the years ahead.
Ernie Goss

Thursday, September 25, 2014

Raising Minimum Wage Impact: Employee Hours Worked Will Be Reduced

The current popular rant among many non-economists is that opposition to raising the minimum wage is equivalent to opposition to worker rights. Those who are more intellectually curious will find there is no theoretical basis for this conclusion and empirical studies have come down on both sides of the argument--i.e. increasing the minimum wage is beneficial to workers, or boosting the minimum wage is harmful to workers.

Total wages in a state are the product of the number of hours worked and the hourly wage rate. Raising the minimum wage may diminish the number of hours worked to the point that total state wages shrink instead of expanding.

There are currently 24 U.S. states and DC that have a minimum wage above the federal level, and 27 states with a minimum wage that is at or below the federal minimum hourly wage of $7.25. Since the beginning of the economic recovery in 2009 extending through 2013, the states with minimum wages above the federal level, compared to states with minimum wages at or below the federal minimum, experienced, on average: 3.1% lower gross domestic product growth (GDP), 0.3% lower job growth, and 0.2% higher welfare payments.

On the other hand, these same high minimum wage states experienced a 0.4% lower increase in the median poverty rate than states with minimum wages at or below $7.25. Furthermore, Washington, the state with the highest minimum wage in the nation at $9.32, underperformed the 27 low minimum wage states in GDP and job growth during the recovery period, but did experience a slower growth in its poverty rate.

This analysis is certainly not definitive and does not control for other important factors influencing a state's economy. But it does at least question the popular notion, or "accepted science" that raising the minimum wage is necessarily a winner for the state economy.
Ernie Goss

Wednesday, August 20, 2014

Lew Says "Be a Patriot, Pay More Taxes" Support Government, Not Shareholders

Last month, Jack Lew, sounding more like a Sunday school teacher than the U.S. Secretary of Treasury, called on U.S. corporations to be patriotic, and reject the corporate, legal tactic labeled "inversion."

Using this device, U.S.-based, multinational companies slice their tax bills by merging with a foreign company and reorganizing in a country with a lower tax rate. For example, many U.S. corporations can reorganize in Great Britain and cut their income tax burdens in half.

Instead of pleading for corporations to financially support the government at the expense of shareholders, U.S. policymakers should undertake two steps.

First, allow U.S. corporations to repatriate foreign earnings at a competitive tax rate. A recent analysis by the Wall Street Journal concluded 60 large corporations are parking over $160 billion of income overseas to avoid paying U.S. corporate taxes. Thus, shrinking the U.S. corporate tax rate to 20% on repatriated earnings could potentially raise $32 billion in taxes.

Second, the U.S. should decrease the tax rate on domestic earnings to 25% and chop deductions/subsidies to favored businesses. In 2013 for example, Walmart experienced a combined state and local income tax rate of 40% and Exxon-Mobil paid a combined tax rate of 42.7%. On the other hand, General Electric and U.S. Geothermal, taking advantage of various federal energy subsidies, braved income tax rates of 5.1% and 0.0%, respectively.

Commenting on inversion, President Obama, the former constitutional lawyer turned legal vigilante declared that, "I don't care if its legal, it's wrong." The President should lower the rhetoric, cut the corporate tax rate, and reduce deductions/subsidies. These actions would encourage corporations to do what is legal, ethical, and consistent with U.S. economic interests.
Ernie Goss