Feb
19

Kentucky’s Budget and Tax “Reform”

Kentucky’s taxing, spending, and borrowing policies are haphazard at best.  At worst, they are working to impoverish average Kentuckians.  In 2012, the poverty rate in Kentucky was 18.6%, well above the national average of 14.9%.  A big reason why Kentucky’s poverty rate is so high is that Kentucky’s employment rate currently ranks 39th among US states.  It is difficult to climb out of poverty without showing up for work.  A mere 56.2% of adult Kentuckians have a job.  What Kentucky needs is a sound budget complete with tax reform that stimulates job growth in the Commonwealth.

On the positive side, Governor Beshear’s tax reform proposal reduces some business taxes, slightly reduces the marginal income tax rate from 6% down to 5.9%, and expands the earned income tax credit. On the margin, these all make work more profitable.  On the negative side, the governor’s tax reform proposals collectively seek to raise Kentucky’s tax burden by $210 million a year.  A whopping $73 million of this money comes from increasing the marriage penalty for married income tax filers.

Rather than simplify the state tax code, the governor’s proposals unduly complicate it.  The business and personal tax cuts are financed by increasing sales taxes on “selected” services.  Extending the sales tax to all services would do a better job of broadening the tax base allowing for further reductions to state income tax rates.  Instead, the governor picked out certain industries to pay fewer taxes such as the horse, beer, wine, and distilled spirits industries, while increasing taxes on other industries such as fitness facilities, home security system providers, landscaping companies, and car repair service providers.  The governor further relies on raiding 51 funds to cover $370 million of spending.  Using one-time money to cover recurring expenses is an act of fiscal desperation.

The proposed $210 million tax increase does not cover the governors proposed increase in state spending.  In Kentucky, oddly, a balanced budget only means the legislature can spend what it collects in taxes plus what it borrows.  The governor has proposed $1.96 billion in new state borrowing over the next biennium.  From 1992-2003 Kentucky borrowed and spent $4.24 billion more than it collected in taxes.  From 2004-2015 they will have borrowed and spent $11.18 billion more than it collected in taxes.  Kentucky already has one of the worst bond ratings in the country.  Adding nearly $2 billion in new debt will increase the percentage of the budget that is needed to service state debt thereby putting further strain on future budgets.

Governor Beshear again chose to ignore proven job creating policies such as becoming a right to work state, or dumping prevailing wage laws.  Doing the latter would save taxpayers more money than the governor proposed in new tax increases.  States that de-emphasize state income taxes and allow workers a right to work without joining closed shop unions have created significantly more jobs in the last decade than have states that punish work and worker choice.

Policy makers have a choice.  They can pursue pro-growth economic policy, or they can continue to pretend that they can borrow and spend their way to wealth.  Unfortunately the governor has chosen the latter.   All Kentuckians will pay as a result.

Permanent link to this article: http://wkubbtcenter.com/2014/02/19/kentuckys-budget-and-tax-reform/

Nov
21

Seven Habits of Highly Effective Economies

Stephen Covey first published The Seven Habits of Highly Effective People in 1989.  My children can name all seven habits because they are drilled into them at their local public school.  More effective people undoubtedly would create a more effective economy.  Below I attempt to apply the seven habits to an effective economy.

Habit 1: Be Proactive

The whole point of this habit is to take personal responsibility for your actions.  It is to realize that one’s own decisions determine the effectiveness of one’s life.  The Victorian concept of deserving and undeserving poor comes to mind.  To be sure, poverty in the US can be caused by illness, accident, age (being born into a poor family), or inability to find work.  Still, it is a concept best applied to people born into Third World countries who, due to no fault of their own, face institutional barriers to becoming wealthy.

Choosing to drop out of school, have children out of wedlock, take illicit drugs, commit crimes, and not show up for work are qualities in no short supply among America’s poor.  These are all active choices people make that directly result in poverty.  Take any two states in the US and you will find if one state has more high school dropouts, out of wedlock births, illicit drug use, and criminal activity, while maintaining a lower employment rate, it will be the poorer of the two.

When citizens take responsibility for their own choices they are being proactive.  Proactive people are highly effective people.  A collection of proactive people produce proactive economies.

Habit 2: Begin with the End in Mind

The idea is to discover one’s values and one’s goals.  Countries that want to be prosperous must think about how that wealth is created.  Economic freedom, for instance, is highly correlated with per capita GDP.  People who save a portion of their income begin with end of prosperity in mind.  People who spend their entire income and then max out their credit cards quickly come to an end with the beginning in mind.

Teaching students that economic freedom and fiscal responsibility are ideals to be valued and sought after help them to set end goals that define how they begin their economic lives.

Habit 3: Put First things First

This is the physical manifestation of the first two habits.  For economies these are the public policies that allow them to implement the first two habits.  This begins with educational policy which does not shy away from financial literacy, the importance of savings, and the importance of taking responsibility for ones choices.  Countries that are effective teach their children the value of education, family planning, healthy consumption habits, honesty, integrity, and industriousness.

Governments that run up debt and unfunded pension liabilities are not beginning with the end in mind,  (see Greece and Detroit).  Social safety net programs that refuse to address criminal activity, laziness, drug use, or out of wedlock births do long term damage to those who need the safety net the most.

By focusing government policy on increased consumption today regardless of future consequences, countries doom their citizens to a permanent underclass.

Habit 4: Think Win-Win

There is no habit more imbedded in a free market economy than think win-win.  Free market economies are based on voluntary exchange.  Voluntary exchange, by its very nature, involves two or more parties that believe they are benefiting from a transaction.  If I buy a banana from the store, the store wins by having my money and I win by obtaining a tasty potassium conveyance.

Rent seeking activity is the enemy of win-win.  When countries allow individuals and companies to lobby government officials for special favors or access to others’ wealth they are not engaging in win-win thinking.  While individuals can become wealthier by making wealth or taking wealth from others, a country (absent an offensive war that takes other countries’ wealth) can only become wealthier by creating wealth.

Because trade and exchange are win-win, lowering trade barriers is a key ingredient to being a highly effective economy.

Habit 5: Seek First to Understand, Then to be Understood

Countries that encourage people through the political process to first ask, what’s in it for me don’t possess habit 5.  J.F.K.’s corollary was “Ask not what your country can do for you; ask what you can do for your country.”  Politicians who promise to take other people’s stuff to give it to those who support them do their society a disservice.  By classifying people into categories, based on income, race, ethnicity, gender, or other qualifying characteristics, governments pit one group against another.  They attempt to convince voters that their lives would be better but for people in other groups.

Effective economies are made up of people who see value in everyone – even the bourgeois capitalists.  Venezuela is not an effective economy.

Habit 6: Synergize

This habit encourages people to use the strengths of people through positive teamwork.  Adam Smith refers to this as specialization and division of labor. It is what he concluded in his Inquiry into the Nature and Causes of the Wealth of Nations (1776) as a key determinant of the effectiveness of an economy.

Giving people the autonomy to seek out and use their strengths requires that they have property rights to their work product.  This allows them to specialize and trade with others.  Large amounts of government regulations regarding the production and transfer of goods and serves work to decrease an economies synergies.

Habit 7: Sharpen the Saw

Constant self-improvement makes people more effective over time. Countries that believe that the best is yet to come are effective if they devote their time and resources to improvement in knowledge, technology, infrastructure, and wealth creation.  Countries that disincentivize self- improvement through highly progressive tax codes are not effective economies.  Tax codes should be set up to encourage rather than discourage continuous self-improvement.

Taken together, the same habits that make individuals effective, also work to make economies effective.  What is good for the goose is also good for the gander.  Perhaps it would be worth encouraging the educational establishment to apply the seven habits to macroeconomic policy.  If they did so, we would find our economy to be entirely more effective.

Permanent link to this article: http://wkubbtcenter.com/2013/11/21/seven-habits-of-highly-effective-economies/

Sep
05

Minimum Intelligence: Recent History of the Minimum Wage and Teenage Employment

Between 1955 and July 2013, the employment rate of teenagers aged 16-19 fell from 43.4% to 26.6%.  Rising family incomes surely allowed some youngsters to avoid the workforce altogether and rely on their parents for their material needs and wants.  However, rising incomes is only a small part of the story.

The teenage unemployment rate in 1955 was 11.1%.  Adding together those teenagers with a job to those who wanted a job but could not find one, brought the teenage labor force participation rate to 54.5%.  Last month the teenage unemployment rate stood at 23.7%.  This brings the current teenage labor force participation rate to 50.3%.  While the employment rate among teenagers fell 16.8 percentage points, only 4.3 percentage points (or less than ¼ of the change) was due to fewer teenagers looking for work.

While there may be many causes that have conspired to increase the teenage unemployment rate in the US, one direct source cannot be denied: the increase in the federal minimum wage.  The chart below illustrates the change in the minimum wage since 2002 (in constant 19996 $) along with the change in the youth employment rate. (I note the employment rate because the proponents of increasing the minimum wage argue that more teenagers will seek work if work becomes more rewarding).

The 2007 increase in the minimum wage took a stagnant youth employment rate and placed in on a downward trend.  Only two years after the final round of increases came in 2009 did the emplyment rate stabilize.  In July 2007 (which predates the recesssion which officially began in December of 2007) the minimum wage was increased from $5.15 an hour to $5.85 an hour.  Teen employment fell the first month of implementation and continued to fall.  In July 2008, it was raised to $6.55 an hour;  teenage employment fell by a larger amount than the year before and continued to fall.  In July 2009, the minimum wage hit $7.25 an hour and there was an even larger percentage drop in teen employment even though the recession had  officially ended in June 2009.  What was a recovery for the nation was not one for teenagers as their employment rates did not start increasing until 2011 and still remain lower than where they were at the end of the recession.

Date                    Teenage Employment Rate

June 2007           35.0                                                  June 2010           25.1

July 2007            34.7                                                  July 2010            25.5

June 2008           32.8                                                  July 2011            25.2

July 2008            32.1                                                 July 2012            26.7

June 2009           29.0                                                  July 2013            26.6

July 2009            28.6

Slight job gains for teenagers have only materialized because the minimum wage has stopped increasing.  Those who are now pushing for a $10.10 federal minimum wage would drive teenagers out of employment even faster than was done with the last minimum wage increase.  As noted above, the higher the minimum wage goes relative to the teenager skill set, the greater the loss of employment for teenagers.

Annectdotally, I was working a minimum wage job at a small movie theater when the minimum wage went from $3.80 to $4.25 in 1991.  The immediate impact of the increase was felt by the employees of our theater.  Management fired some of my fellow teens.  Those that remained had to work harder.  In addition to starting the movies in the projection booth, I now had to work the conession stand before and between movies.   My hourly wage increased, but so did the amount of work that was expected of me.  The other thing that happened is that we immediately increased the price of concession items to pass the labor cost onto movie watchers.  Higher unemployment, harder work, and increased inflation are my first hand memories of that joyous day when the government intervened in the life of this teenager to make it better.  Too bad for the teens who lost their job or who now had to pay more to see a movie.  Some say that was a small price to pay for “progress”.   I am not among them.

Permanent link to this article: http://wkubbtcenter.com/2013/09/05/minimum-intelligence-recent-history-of-the-minimum-wage-and-teenage-employment/

Aug
30

Pain and Gain: The Economic Principle, not the Movie

What’s not to like about increasing living standards for everyone?  Most people agree that economic growth is good because it allows people to have better access to food, clothing, shelter, health care, education, entertainment, and other nicer stuff.  A few don’t like economic growth because they mistakenly believe growth is bad for the environment or bad for the soul, though even the Amish are beginning to embrace non-agrarian businesses in search of a higher standard of living.

What is the best way to increase one’s standard of living in the short term?  Work.  Long term? Gain skills that are in demand and then work to use them.  As Peggy Noonan notes today, work is good for both the soul and the pocketbook.  Monday is Labor Day where we give many people the day off of work to honor their productivity throughout the year.  The problem is that the US labor force participation rate is the lowest it has been in 34 years. A smaller percentage of people in the US are actually working than at any point in a generation.

It is one thing if people don’t think they need to work because they feel they already have everything they want.  However, this is not the case with the majority of Americans.  Not only do many want their standard of living increased, they feel that such an increase is owed to them regardless of whether they work more or gain more desired skills. Some suggest we are entitled to cheese puffs, a house, all you can consume health care, and a college degree whether or not an able bodied person works, or bothers to study.

Yesterday, across the nation, fast food workers went on strike for higher wages.  They demanded more pay for no more work or no new skills.  Politicians are often sympathetic to the cry of people who want more without doing more.  Minimum wage laws try to circumvent the laws of supply and demand by mandating higher wages for low skilled work.  The result of higher minimum wages is a teenage employment rate that has fallen from 38% in 2003 to 26.6% last month.  Employers don’t hire employees whose marginal productivity is less than the wage they are forced to pay.  Now we have a generation of kids with no labor market experience and no sense of work related purpose.

The Affordable Health Care Act mandates that people be given health benefits without any increase in work or skill set.  Try as they might, politicians cannot over-rule supply and demand.  Employer responses have been to cut wages, lay off workers, and cut the number of hours worked by part time workers.  The goal of better access to health care for all is laudable.  Taking short cuts that do not involve increased work and or job skills will never be sustainable.

Can we have a better life with greater ability to pay for our needs and wants?  Sure.  Will we be able to achieve this while working less?  Don’t count on it.  No Pain, no Gain.  It is as true in life as it is in the gym.

Permanent link to this article: http://wkubbtcenter.com/2013/08/30/pain-and-gain-the-economic-principle-not-the-movie/

Jun
17

Job creation, not more taxes, will spur Ky. prosperity

The following appeared in the May 27th edition of the Lexington Herald Leader.  It was written as a response to Jason Bailey’s May 4th  editorial in the same paper.

Jason Bailey, director of the Kentucky Center for Economic Policy and a member of the Governor’s Blue Ribbon Tax Reform Commission, argued that the Bluegrass state needs to take “bold revenue action” to fund increased government spending.  Bailey is correct that Kentucky’s fiscal house is not in order. He also is correct that the commonwealth’s tax code could stand some improvement. Unfortunately, his policy prescription of higher taxes and more government spending will only make matters worse for the average Kentuckian.

According to the Federation of Tax Administrators, Kentucky ranked No. 13 in 2011 for tax burden as a percentage of personal income of any state government in the country.  Of Kentucky’s neighboring states, only West Virginia ranked higher. Virginia, Tennessee and Missouri all ranked in the bottom 10 states for tax burden as a percentage of personal income.  If the commonwealth’s tax burden already is at the high end of the national average, why is Bailey suggesting that Kentucky’s problem is a lack of revenue?

In 2011, Kentucky ranked No. 9 for state government spending as a percentage of gross state product (GSP). The only neighboring state to rank higher was West Virginia. Illinois, Indiana, Tennessee and Virginia all ranked among the 10 lowest-spending states.  By advocating for higher taxes and more government spending in Kentucky, Bailey appears to have West Virginia envy: If only Kentucky were more like West Virginia, our problems would be solved.

In 2012, Kentucky had the third-highest state debt as a percentage of GSP of any state. Illinois was our only neighbor in the top half of states for debt-to-GSP ratio.  And it gets worse. In 2011, Kentucky ranked seventh for unfunded public pension liability of any state. Unpaid promises today become tomorrow’s debt.  In summary, the problem plaguing Kentucky is that it is spending too much, not too little.

Does the commonwealth have a tax problem? Yes, but not in the way Bailey thinks.  Tax revenues already are high relative to incomes in our state. Increasing taxes further will only chase more jobs from the commonwealth.  In 2010, Kentucky ranked No. 43 for employment-to-population ratio of any state. Only seven states in the country (including West Virginia) showed up for work less than Kentuckians. Higher income taxes would only further discourage work in the commonwealth.

Kentucky’s relatively small labor force compared to its population tells us that the income tax base is not very broad. It requires high rates to generate revenues.  These high rates cause jobs to move elsewhere, making it even harder for Kentuckians to find gainful employment. The governor’s tax commission was wise to suggest lowering income-tax rates, but should have gone further in its proposed rate decrease.  Also, only 11 states have a more centralized tax policy than Kentucky.

Real growth-inducing reform would decentralize taxing and spending out of Frankfort, reduce tax revenue, spending and debt relative to Kentucky’s income, and shift the remaining tax burden from a narrow tax on workers to a broader tax on consumers. Only then will Kentucky be truly fiscally competitive with surrounding states.  In short, Bailey suggests that an increased dose of fiscal poison will cure ailing commonwealth finances when, in fact, what is needed is a strong dose of fiscal responsibility, decentralization and job-spurring tax reform.

Kentucky cannot tax, borrow and spend its way to the promised land, but it can work and save its way to prosperity — if only state leaders would let it.

Permanent link to this article: http://wkubbtcenter.com/2013/06/17/631/

Apr
11

The King the Milk, and the Honey (The first draft)

Once upon a time, there lived a king.  His kingdom was the richest on earth.  It overflowed with milk and honey, yet there was discontentment among some of the king’s subjects.

One day a group of the king’s subjects paid a visit to the king. Thinking himself to be both wise and just, he allowed his subjects an audience to air their grievances.

“Oh king,” they said, “surely a king as wise and as just as you would fix the great injustice that has overcome our kingdom if only you knew that it existed.”  The king insisted that in fact he was both wise and just and would do whatever he could to stamp out injustice in his kingdom.

“Oh king,” the petitioners continued,” there is a great inequality that has spread through your fair land.  Some of your subjects can only afford to drink milk from the cow while others are able to pasteurize and homogenize it.  Some subjects are even able afford to have some of the fat removed from their milk  As a result, these subjects are less obese and are able to fair better in our sporting games.  They hold honor among their neighbors only because they have access to purified skim milk.”

“Still others are even able to afford to add chocolate powder to their milk.  Chocolate carries antioxidants and fights depression, so those who have access to this milk enhancement live happier lives than the rest of your subjects.  The injustice isn’t even confined to milk.” They went on.  “Some of your subjects are left to eat raw honey while others are able to afford pasteurized honey in cute bear shaped bottles.”

The king, who lived a rather isolated existence, was appalled to learn of the great inequality that had overcome his fair kingdom.  After all, the king regularly drank pasteurized skim chocolate milk and ate pasteurized honey.  What kind of king would he be if he couldn’t provide the same standard of living to his subjects as he was able to afford himself at their expense?

The king called together his royal advisors and asked them how to alleviate the injustice.

“Redistribution”, said the advisors.  “Take chocolate milk and pasteurized honey from those who have it and give it to those who do not.”

The king did exactly as he was told.  He took from those who had the ability to purify, skim, and chocolate their milk and gave their milk to those who could only afford whole milk straight from the cow.  Next the king gathered up all the bear bottles of honey and divided them equally throughout his kingdom.  At that moment in time, there was no inequality.  The king was very pleased with himself.  He gave his advisors a raise.

A little while later another group of subjects petitioned the king.  “Oh king”, they declared, “our kingdom is producing less milk and honey than before.  This recession is hurting those of your subjects most who are least able to afford milk and honey.   The land is plagued with unemployed people.  Some cannot find jobs while others refuse to look for them.  Those who used to be our most productive dairy farmers and bee keepers are producing less milk and honey.  Something must be done to speed up your kingdom’s economy or surely we will all starve.”

The king called together his royal advisors and asked them how to alleviate economic decline.

“Run a budget deficit to stimulate demand in the economy” they answered.  The king did as he was told and borrowed large amounts of money from the kingdom to his west.  With the borrowed money he imported milk and honey from abroad and distributed it to those most in need. He gave an extra share to those who had lost their job in the domestic milk and honey industries.  The subjects’ bellies were again full of milk and honey.  The king was pleased with himself.  He gave his advisors another raise.

A little while later another group of subjects petitioned the king. “Oh king”, they declared, “you must fix the problem that has besieged the economy of your kingdom.  Our milk and honey producers are having trouble financing upgrades to their capital.  They used to borrow money from the kingdom to the west, but now they have no money to lend because they have lent it to you.  Without new replacement capital milk and honey production will continue to fall.  Fewer people will have access to homogenized and pasteurized milk.  Furthermore, the interest payments you are making to the western kingdom have replaced spending on roads and education in your fair kingdom.  Milk and honey producers are having a hard time finding skilled craftsmen to work for them.  They also have a hard time getting their products to market over the pot-hole filled roads.  If you don’t do something about the burden of the public debt surely we will all starve.”

The king called together his roayl advisors and asked them how to alleviate the burden of the debt.

“Print money to finance the debt and promise to pay government workers big pensions later so they will work for less money up front”, replied his advisors.  The king did as he was told and ran the royal printing presses.  As a result, king was able to pay off his debt to the western kingdom, spend more on infrastructure and education, and afford to buy even more imported milk and honey for those most in need.  The king was very pleased with himself.  He printed off another big raise to give to his advisors.

Shortly thereafter, another group of subjects petitioned the king.  “Oh king”, they declared, “the western kingdom was none too pleased to be paid back with worthless currency and they have begun to increase their standing army.  We fear that we may be invaded.”  While they were with the king another group of subjects approached.  “Great king,” they began, “the rampant money printing has led to hyperinflation.  Prices are rising so fast we cannot afford to buy milk and honey.”

The king called together his royal advisors and asked them how to alleviate the burden of inflation.

“Price controls”, they replied.  The king did as he was told.  He mandated that milk and honey prices stop rising.  He visited a local market to find that his knights had successfully implemented the policy.  The king also raised the minimum wage for milk and honey workers.  Across his kingdom prices and wages were fixed so all could afford ample milk and honey.  The king was once again happy.  He gave his advisors extra vacation days.

A little while later another group of subjects petitioned the king.  “Oh wise and benevolent king”, they started, “for the first time in your prosperous kingdom’s history there are massive shortages of milk and honey.  Store shelves are bare.  People have to turn to the black market to get even a little milk or honey.  This underground economy has caused a general disregard for the rule of law by your subjects.  People are suckling straight from their neighbors’ cows in the middle of the night and breaking open hives to steal honey.  The knights are unwilling or unable to keep order.   We hear they are worried that their promised pensions will only be paid with worthless currency.  Even black market milk and honey suppliers are now refusing payment in currency.  They demand a barter of other goods or services in exchange for milk and honey.”

The king called together his royal advisors and asked them how to alleviate the shortages and lawlessness.

“More government regulations”, they replied. The king obliged and outlawed the consumption of unpurified milk to increase the demand for pasteurization and homogenization.  He then outlawed skim and chocolate milk because standardization of production would improve efficiency.  He banned purified honey because it isn’t as healthy as raw honey and he could free up honey pasteurizers to help pasteurize milk.  Everyone now would consume the same pasteurized whole white milk and eat unpasteurized honey.   “Inequality is surely cured”, he thought.  Everyone will eat the same honey and drink the same milk.  The king was pleased that throughout all the troubles nature and happenstance could impose; he had still made his kingdom the most just in the land.  He decided to throw a feast to honor his advisors.

During preparations for the feast, the royal cooks advised the king that there would be only whole white milk and unpasteurized honey at the banquet.  “A king has to have chocolate and cute bear shaped honey jars!” screamed the king.  “After all, I have worked very hard to make my kingdom the most just in the land.  I should be rewarded for my service to humanity.”

The king ordered that milk and honey producers be conscripted to provide skim chocolate milk and pasteurized honey for his feast. The feast went on as planned.  The king was very happy to eat his fill of pasteurized honey and drink his fill of skim chocolate milk.  That was until a group of subjects interrupted the dinner.

Word had gotten out to the king’s subjects that he was enslaving their kinsman to provide skim chocolate milk and pasteurized honey for himself while he let his royal subjects starve.  They formed an allegiance with the disgruntled western king and had come to overthrow the unjust king.

The king was in disbelief.  How could they depose him?  He had given his royal subjects everything they asked for.  After all, he was both wise and just.  He had solved the great problem of inequality.  Surely the next king would not be either as wise or as just.

How does the story end?  You be the judge.  Here are your options:

  1. The new king uses the same east coast economic advisors as the previous king and the people continue to starve while the politically connected have access to skim chocolate milk and cute bear shaped honey.
  2. The new king becomes a puppet for the western king who wishes to enslave his subjects
  3. The new king changes advisors, lowers government regulations, maintains a stable currency, runs no debt, and allows people to prosper from their hard work.

Permanent link to this article: http://wkubbtcenter.com/2013/04/11/the-king-the-milk-and-the-honey-the-first-draft/

Mar
27

Kentucky’s Pension “Reform”

“What has been will be again, what has been done will done again; there is nothing new under the sun.”

-          Ecclesiastes 1:9

Kentucky’s unfunded pension liability was increasing rapidly.  Reform was needed.  In 2008, Kentucky “reformed” their pension system.  The reform said that by 2025 Kentucky should begin fully funding that year’s newly created pension liability.  State legislators considered the problem solved.  Their reform was to keep digging the pension hole for another 17 years.  Keep digging they did.

Kentucky dug so quickly that it now has the second lowest bond rating in the country (only ahead of delinquent and incompetent Illinois). Unfunded liability piled up to $34-$37 billion (most conservative estimate).  By 2012, Kentucky’s pensions were less than 50% funded.  Bond rating agencies made it painfully clear that Kentucky should address their pension problem.

Yesterday the state of Kentucky passed a new pension reform bill.  As one Kentucky state legislator put it,

“This is indeed one of the greatest policy achievements of this body and this General Assembly in recent memory,” said Senate Majority Leader Damon Thayer, a Georgetown Republican and sponsor of SB 2.

What a low bar the legislature has for success.

Kentucky needs to increase funding to its state pensions by $500 million per year just to stop adding more unfunded liability to the pension system.  The new reform adds just $100 million of new revenue (partly accomplished by a $36 million reduction in money going to the state’s roads).  I wasn’t a math major, but $100 million does not equal the $500 million needed to stop digging a deeper hole much less increase the solvency of state pensions.

Never mind that the state needs to increase its funding of its retiree health plan by $600 million a year to stop increasing unfunded liability in that system.  To wit, the state needs an extra $1.1 billion per year to stop increasing unfunded health and pension liability in the state, and their solution was to raise $100 million a year in new revenue?  So they solved less than 10% of the problem and this is the greatest piece of legislation the legislature has passed in years?  It may be the case, but only because that is relative to all the other completely stupid things the legislature has done.

On the bright side, the reform said that Kentucky should stop digging unfunded liability in its state employee pension system in 2015.  That is better than 2025, but it means Kentucky will continue to dig its pension hole deeper for now.

The pension reform did not even mention or change the Kentucky Teachers Retirement System.  KTRS has over $11 billion of unfunded liability.  Only California, Illinois, Ohio, Texas, Pennsylvania, Michigan, New Jersey, and Colorado have more unfunded teacher pension liability and they are all much bigger states.  Kentucky’s pension plan for teachers is less than 57% funded.  It is one of, if not the, worst teacher pension plans in the country in terms of unfunded liability and it didn’t even warrant a mention in the pension reform bill.

New state workers in Kentucky are moved to a hybrid retirement plan.  Rather than have a defined benefit plan, they are guaranteed a 4% rate of return on their defined pension contribution.  Where does one guarantee a 4% return on investments these days?  Not in US government bonds.

Where will Kentucky get the revenue it needs to meet its pension liability in 2015 and beyond?  Expect another large tax increase or big cuts to education spending on the horizon.  Since 2008 Kentucky has cut spending on higher education by 26% in real dollars.  That is just a start.

Is the pension crisis in Kentucky solved? Hardly; do state politicians consider it solved?  Absolutely; that’s what they also thought in 2008.  There is nothing new under the sun.

Permanent link to this article: http://wkubbtcenter.com/2013/03/27/kentuckys-pension-reform/

Feb
28

Political Game Theory: Why no one likes what comes out of Washington

The field of Public Choice extends the study of economics to governments.  It assumes that people in government behave the same as do people in the private sector.  By behave the same, they (according to Steven Horwitz) mean that people have intentions, use information, respond to incentives, and act in accordance to institutional rules set before them.  The problem is not that people in government have inherently bad intentions, it is that they lack information due to the absence of price signals; they lack proper incentives due to their inability to be the residual claimant for efficiency increases; and they serve institutions that serve their own needs at the expense of the public.  As a result, governments are neither efficient nor fair.

Take the sequester.  Left and right leaning economists alike think the sequester is an inefficient way to reduce government spending.  They also agree that entitlements reform is the real key to fiscal sanity.  Alan Simpson and Erskine Bowles can even create a bipartisan approach to budget control, but no one listens to them. While reasonable people can agree upon facts, interest groups manipulate facts to spin an economic story that suits their political or economic interests.

The progressive Center for American Progress claims the sequester will harm communities across America.  To them, any reduction in the rate of increased government spending is, by definition, a bad idea.  Even if they won’t admit it, all leftists aren’t equal.  Some are smarter than others.  At the liberal Brookings Institute, Bill Frenzel notes that a bad sequester is worlds better than no budge deal at all.

Even the right has areas of concern regarding the sequester.  When it comes to military cuts, the conservative  Heritage Foundation claims the cuts will make the US less safe, while the libertarian Cato Institute argues otherwise.  In any event, even the sequester’s supporters acknowledge that it is only worth doing because Congress and the President aren’t competent at reaching efficient and fair solutions to the nation’s budget woes.

Another example of inefficient outcomes that resulted from political game theory is the Affordable Health Care Act.  The Government Accountability Office now admits that Obamacare adds $6.2 Trillion to the long term deficit in their rosiest projection.  Forbes Magazine calls it the last American entitlement.  With states opting in an out of the Medicaid expansion, mandates for employers to cover more procedures for more employees, and undefined cost control measures, the complex Affordable Health Care Act cannot possibly be deemed as efficient.

Fewer Americans are now getting their insurance from their employer – a trend likely to continue given the incentives in Obamacare.   A single payer Canadian or Australian health care system is more efficient than what the US will have under Obamacare.  So, too, would be a privatized health care system that gives every American money In their own health savings account from birth and then lets people make their own choices.  That’s right, the liberal nirvana and the conservative heaven are both more efficient (and fair) than what the political process as wrought on the American Public.

The list goes on.  Can the federal government efficiently administer student or home loans?  Half of student loan holders are now deffering payments.  Student loan debt is nearing $1 trillion.  The default rate on student loans is now higher than that for car and credit card loans.  The federal government now insures over 80% of home loans as well while losing billions of dollars a year doing so.  It turns out that the offspring of political decision making is most often poorly, or altogether, unplanned.

When my wife and I named our youngest son we both knew for certain what each of us wanted to name him.  The problem was that we had strong, but different, preferences.  In the end, the compromise was to assign the kid with the fourth or fifth best option from each person’s list, and we are forever irritated with his name (at least I am, which means my strong preference should have won in a world of fairness).

If sensible compromise is difficult in loving households, how much harder must it be in heavily partisan government?  No wonder nothing sensible ever comes out of Washington.

“In my many years I have come to a conclusion that one useless man is a shame, two is a law firm, and three or more is a congress.” – JOHN ADAMS

Permanent link to this article: http://wkubbtcenter.com/2013/02/28/political-game-theory-why-no-one-likes-what-comes-out-of-washington/

Feb
22

A Sequester of Competence

The world did not end in December 2012.  The Mayans were wrong.  So too were those who prognosticated that the Fiscal Cliff would end the world as we know it on January 1st 2013.  But wait, we are supposed to believe that the four horsemen of the apocalypse will begin their ride on March 1st if the sequester is allowed to come to fruition.

In 2012, the federal government spent $3.5 trillion dollars and ran a budget deficit of $1.151 trillion.  If the sequester moves forward, (using 2012 numbers because Congress refuses to pass a 2013 budget), the federal government will only spend roughly $1.07 trillion more than it collects in taxes.  There are many interest groups, government officials, leftist economists, and media outlets who think it absolutely irresponsible to only spend and borrow $1.07 trillion you don’t have when you could spend and borrow $1.151 trillion you don’t have.  However, this cannot possibly pass the common sense test.

A $85.4 billion reduction in a three and a half trillion dollar budget amounts to a 2% cut in spending.  That doesn’t mean that 2013 spending will be 2% lower than in 2012 even if the sequester is enacted.  The continuing resolution that currently funds the federal government in absence of a budget ends on March 27th. It already increased federal spending from 2012.  In addition, fiscal year 2013 does not end until September 30th 2013 so there is yet room to increase spending again.  Who knows how many “super storm” handouts Congress yet has up their sleeve?

In 2008 the federal government spent $2.983 trillion.  By 2012 it spent over $3.5 trillion.  In just four years, annual federal spending rose 17%.  Even if the sequester amounted to a hard 2% reduction in government spending, federal government spending would still have risen 15% in just five years.  For those who are historically challenged, you might not remember that in 2000, federal government spending was “merely” $1.789 trillion.  Yes, the size of the federal government more than doubled in just 12 years.   This wasn’t because of high inflation.  Inflation, as measured by the CPI, accounts for only 1/3 of the increase.

Between 2000 and 2012, federal government spending as a percentage of GDP increased from 18.2% to 22.8% (down from the recession peak of 25.2% in 2009).  The sequester, fully enacted, would only lower government spending as a percentage of GDP to 22.2%.   How did we possibly survive with federal government spending “only” being 18.2% of GDP?  Between 2000 and 2012, US GDP (in chained 2005 dollars) rose from $11.2 trillion to $13.6 trillion.  The US has $2.4 trillion a year more in real purchasing power than it did in 2000 even after a decade of sluggish growth.

Is it that richer people need bigger governments?  Is it that richer people want bigger governments?  Or is it that Americans discovered(with a vengeance) that they can have the benefits of bigger government without the costs of higher taxes if they just pass the burden of today’s spending onto tomorrow’s generation of taxpayers?  Would people want bigger government if they themselves had to directly pay for it?

The costs of bigger government are real, if sometimes hidden.  Less dynamic economies and slower economic growth accompany bigger government.  If unemployment increases in the near future politicians will quickly blame the sequester for slowing down growth.  The truth is that bigger, more intrusive government has already succeeded in doing that for us.  A reduction in federal government spending and the federal deficit are a small step toward the US regaining a sound economic footing.

There are better ways to cut spending than the sequester.  Across the board cuts don’t prioritize spending.  The fact that the President and Congress chose to forgo sensible cuts for potentially dangerous ones is a testament to the fact that they long ago stopped being competent.

Permanent link to this article: http://wkubbtcenter.com/2013/02/22/a-sequester-of-competence/

Feb
11

Economic Hail Maries

Now that American rules football is over for the season, and the Pope has resigned, people may fear for a drought of Hail Maries.  No worries.  Politicians who have enacted growth retarding economic policies continue to supply economic Hail Maries.  Even then, they don’t always know which end zone to aim for.

To combat runaway inflation, Argentina recently froze food prices.  Everyone knows that Argentina cooks their official inflation statistics.  The IMF has threatened to kick Argentina out of the IMF for it.  Maybe Argentina’s president believes that inflation comes from evil food producers and not her printing press.  Next up in Argentina: food shortages.

After running his economy into the ground, the once rich country of Venezuela this weekend massively devalued their currency by a third.  Even after that devaluation, Venezuela’s currency is still overvalued vs. the US dollar.  Venezuelans will find the purchase of imported food and manufactured goods much more expensive.  How will their nationalized grocery stores cope with this price increase?  They have already experienced food shortages.

Closer to home, Illinois Governor Pat Quinn announced that he will seek to raise the minimum wage in Illinois to a national high of $10 an hour.  Illinois has had its credit rating lowered to the lowest of any state in the nation for good reason.  Illinois is run so poorly it isn’t (and can’t) pay its bills, much less its unfunded pension liability.  What is Governor Quinn’s solution?  Increase labor costs in the state to help scare off the private sector – that which wasn’t scared off by the governor’s massive income tax hike.

A further look into the unemployment rate for American youth aged 16-19 reveals that in January it was 23.4%.  For blacks aged 16-19, the national unemployment rate was 37.8%.  Given that In December, Illinois’ unemployment rate was 8.7%, almost a full percentage point higher than the national average of 7.8%, it is safe to assume that the youth and black youth unemployment rates in Illinois are even higher than the national average.  Increasing the minimum wage in Illinois is a desperate political Hail Mary which will only make it harder for Illinois’ youth to get a job.  Then again, given the state of Chicago’s public schools and the state’s unfunded pension liability, it can be argued that few Illinois politicians actually care about the financial health of future generations.

If Illinois were to raise their minimum wage to $10 an hour a number of things would happen.  The first is that the youth unemployment rate would increase.  Teenagers don’t have massive job skills.  As a result, they don’t all generate $10 an hour worth of benefit for prospective employers.  A minimum wage increase will mean that even more teenagers will lose the opportunity to save for college, learn the discipline of showing up for work, and gain human capital on the job.

This all reminds me of a joke: Cristina Fernandez de Kirchner, Hugo Chavez, and Pat Quinn walk into a bar.  Upon seeing the price of a drink Madam Kirchner mandates that the price never be raised, Mr. Chavez insists on nationalization of the bar, and Mr. Quinn insists that this can all be done while paying the bartenders more with money from the next generation of drinkers.

Was the joke supposed to be funny?  Are people in Argentina, Venezuela, and Illinois laughing?

Permanent link to this article: http://wkubbtcenter.com/2013/02/11/economic-hail-maries/

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