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Wednesday, February 18, 2015

High Wage Jobs Move to Right-to-Work States, Union-Shop States Lose Manufacturing Jobs

Just last month, Mercedes-Benz announced that, in order to become more cost-competitive, it was moving its U.S. headquarters from New Jersey, a union-shop state, to Georgia, a right-to-work state.

Right-to-work laws, as authorized by the 1947 Taft-Hartley Act and passed by Georgia, prohibit unions and employers from entering into agreements that require employees to join a union and pay union dues in order to get or keep a job. Twenty-four states have enacted right-to-work laws. The remaining 26 states and DC are union-shop states that require an employee to become a member of the union in order to retain a job.

Union leaders maintain the objective of right-to-work laws is to sow dissension among workers and weaken the labor movement. Proponents of right-to-work laws assert that as a matter of economic freedom, workers should not be required to join a union and that this freedom supports greater economic growth among right-to-work states. Economic data from 2000 to 2013 show right-to-work states did expand economic growth, as measured by non-inflation-adjusted GDP, by 70.7 percent compared to 59.3 percent for union-shop states.

During this same period of time, right-to-work states expanded manufacturing wages and salaries by a median 7.7 percent, while union-shop states experienced a median 3.0 percent decline in manufacturing wages and salaries. In fact, 16 of the 26 union-shop states suffered a decline in manufacturing wages and salaries, while only 6 of the 24 right-to-work states experienced a decrease. Furthermore, the share of manufacturing jobs held by union-shop states fell from 55.1 percent to 53.9 percent over the thirteen year period. But the union-shop states' share of the nation's high-wage heavy manufacturing jobs sank by an even larger three percentage points.

Data show high wage manufacturing industries, normally dominated by unions, such as steel and automobile, are moving to and expanding in right-to-work states. With manufacturing firms becoming increasingly mobile, the pressure to pass right-to-work laws will grow in the years ahead. I expect Missouri to be the next state to leave the union-shop coalition.

Ernie Goss

Tuesday, January 06, 2015

Taxing the Sick?


Yesterday’s online version of the New York Times includes an article by Robert Pear, “Health Care Fixes Backed By Harvard’s Experts Now Roil Its Faculty” (January 5, 2015), http://www.nytimes.com/2015/01/06/us/health-care-fixes-backed-by-harvards-experts-now-roil-its-faculty.html?_r=0 . It seems that Harvard faculty are miffed that the Affordable Care Act is starting to adversely affect them.  Like other employers, Harvard is passing costs on to its employees in the form of additional cost-sharing requirements for medical treatment.  Some of those employees think those extra costs are tantamount to a pay cut.  Indeed!  (And how do employers feel if they don't pass those costs along?  A profit cut!?!  I think they are starting to get it.) 

Jerry Green, a professor of economics and former provost, is quoted as saying that the higher out-of-pocket costs “[Are] equivalent to taxing the sick[.]”  Further, he opined, “I don’t think there’s any government in the world that would tax the sick.”  This takes me back to my law school days with the late Professor Francis Allen.  One of my really smart classmates said something like this once.  I cannot remember the content, but I remember the response.  Professor Allen smiled and said, “Oh, really, Mr. Fishman?  Now you don’t mean that.”  (I have lost track of Mr. Fishman, but he is probably an investment banker or ruling a small island somewhere.) 

One expects students, who are unlearned and inexperienced, to make rookie mistakes.  But an economics professor at Harvard?  I don’t think Professor Green has been paying attention to the content of the ACA.  Among other things, it includes an excise tax imposed on medical devices, which became effective in 2013.  If you make and sell a medical device (like a hip implant used to treat degenerative disease), you must pay 2.3 percent of the selling price to the federal government.  (If you don’t believe me, see  http://www.irs.gov/uac/Newsroom/Medical-Device-Excise-Tax ). Given the inelastic demand for such devices, it is highly likely that at least some of those taxes are passed on through higher costs to the sick people (perhaps indirectly through their insurers) who need those devices. Taxing the sick is indeed part of the ACA in other ways, too.  It makes it more difficult to deduct health care costs you incur (arguably another form of taxing the sick).  And try not buying insurance -- you will likely pay a penalty tax for not doing this, and this tax applies whether or not you are sick.

The excise tax on medical devices could be among the provisions targeted by the new Congress.  Even Democrats like Al Franken are not so sure about this tax, perhaps because some of the medical device manufacturers affected by the tax are located in Minnesota.  (For a mainstream editorial pointing out that ironic opposition, but persisting in supporting this tax purely for revenue reasons, see http://www.usatoday.com/story/opinion/2015/01/04/obamacare-medical-device-tax-repeal-congress-editorials-debates/21261737/ .)  Apparently, the industry may not be able to pass on all of those costs to the sick, but must bear some of them on its own.  (Innovation may be an unintended casualty of this kind of incremental cost burden - but that is a subject for another discussion.)

William F. Buckley once famously stated that he “would sooner be governed by the first two thousand names in the Boston telephone directory than by the two thousand members of the faculty of Harvard.”  And that probably goes for other faculties, too, including my own.  Idealism can cloud one’s judgment, though we should expect more from the learned souls entrusted to educating our young people.  It is puzzling why that expectation is so often unrealized from the academic world.  And sadly, even our elected officials are prone to make similar mistakes.  Only an informed citizenry can bring them back to reality.

Grand statements that healthcare is a human right or a free good sound utopian and so affirming, but the rest of us understand the harsh reality that it is another service for which payment is necessary.  Despite its many flaws, the Affordable Care Act was also not entirely wrong when it incentivized insurance products in which personal responsibility for costs bears an increasingly greater role.  For those who take that responsibility seriously and can afford to bear those costs, financial tools like HSAs can help.  I explore this (and other tax dimensions of the ACA) in my recent article, “Health Accounts/Arrangements:  An Expanding Role Under the Affordable Care Act?” (available at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2519268).  

Remember, if there is a cost incurred, someone will pay it, and it might even be you.  Bear that in mind as our new Congress and state legislatures get underway in 2015.  Happy 2015.

EAM

Monday, January 05, 2015

Increasing Income Inequality: No Diploma, Births to Unmarried Women, and Higher Taxes Boost Inequality


Over the past two decades, U.S. income inequality, as measured by the Gini Coefficient (GC), has risen dramatically. This has resulted in a parade of politicians calling for taxing high income workers more heavily as a remedy.

However, data from the states undermine this simplistic strategy. In 2011, states with the least income inequality were: Utah with the least, followed by Alaska, Wyoming, New Hampshire, and Iowa. The five states, including DC, with the greatest income inequality were: District of Columbia with the highest followed, by New York, Connecticut, Massachusetts and Louisiana. Importantly, three of the states with the least income inequality, Alaska, Wyoming and New Hampshire had no income tax.

Furthermore, the latest tax rankings (1=highest taxes) from the National Tax Foundation show that the states with the least inequality with (tax rankings) were: Utah (28), Alaska (49), Wyoming (50), and Iowa (29). The states with the greatest degree of income inequality had rankings of: DC (20), New York (1), Connecticut (3), Massachusetts (11) and Louisiana (46). Thus, all of the states with greatest inequality, except for Louisiana, had state and local tax burdens in the top half of all states. Additionally, all of the states with the least income inequality ranked in the bottom half of states in terms of state and local tax burdens.

In order to sort out the factors that contribute to income inequality, Gini Coefficients are statistically modeled against other state population characteristics. It was found that statistically speaking, only the percent of the state population without a high school diploma and percent of births to unmarried women contributed to income inequality. Higher state and local tax burdens did boost income inequality, but the impact was not statistically significant.

Ernie Goss



SUMMARY OUTPUT Jan-15
Dependent = Gini Coefficient
Regression Statistics
Multiple R 0.680028052
R Square 0.462438152
Adjusted R Square 0.415693644
Standard Error 0.015968877
Observations 51

ANOVA
df SS MS F Significance F
Regression 4 0.010090945 0.002522736 9.892887243 7.3394E-06
Residual 46 0.011730232 0.000255005
Total 50 0.021821176

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.3731 0.0202 18.5149 0.0000 0.3325 0.4136
No diploma 0.1822 0.0888 2.0521 0.0459 0.0035 0.3609
Non-English speaker 0.0451 0.0248 1.8164 0.0758 -0.0049 0.0951
% unmarried mothers 0.1133 0.0422 2.6885 0.0100 0.0285 0.1982
Taxes as % GDP 0.0558 0.1910 0.2922 0.7715 -0.3287 0.4403

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? 

EAM

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.
 
 
EAM

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.

 

EAM