Kentucky Tax Reform

Kentucky Governor Matt Bevin announced that he will wait until after August 15th to call a special session of the Kentucky Legislature to consider tax reform.  The governor stated that he does not have a fixed position on what that reform must entail.  In that light, it would be helpful to compare Kentucky’s current tax structure to other states.

According to 2014 tax data collected at the state level, Kentucky is the 6th most dependent state on income tax revenue as a percentage of state tax collections.  It only trails Oregon, Maryland, Massachusetts, California, and New York in its dependence upon income taxes.  While Kentucky’s top tax bracket is the nineteenth highest in the country, its overstated importance to the state budget has a lot to do with Kentucky’s lower than average state sales and property tax collections.  A reduction in the state income tax rate to 5.75% would place Kentucky’s rate at the US average.

Income Tax        Sales Tax            Property Tax      Increase in Real                Employment to

(Top Bracket)    (State and          (State and          Per Capita GDP                   Population Ratio

Local)                  Local)                 Compounded Annual        (aged 25-54)

Rate (1997-2015)

US          5.75%                  6.89%                     .87%                               1.1%                    77.9%

IL           3.75%                  8.64%                  1.73%                                  .9%                    79.5%

IN          3.23%                  7.00%                    .85%                                1.1%                    80.4%

KY          6.0%                    6.00%                    .72%                                  .5%                    73.6%

MO        6.0%                    7.89%                    .91%                                  .5%                    81.3%

OH         4.997%               7.14%                  1.36%                                1.0%                    78.5%

TN           0%*                   9.46                       .68                                      .8                       75.0%

VA         5.75                     5.63                       .74                                    1.0                       80.4%

WV        6.5%                    6.59                       .49                                    1.1                       69.7%

*5% on capital gains and dividends

Conversely, Kentucky holds the 13th lowest combined state and local sales tax rate and the 14th lowest combined state and local property tax rates.  An increase in the state sales tax from 6% to 6.89% and an increase in state property taxes from .72% to .87% would bring Kentucky in line with US averages.

Regionally, of Kentucky’s seven neighbors, only West Virginia has a higher top income tax bracket than Kentucky.  Only Virginia has a lower sales tax.  Tennessee and West Virginia are the only two Kentucky neighbors with lower property tax rates.  At first glance, Governor Bevin’s desire to reduce the state’s reliance on income tax revenue is consistent with bringing Kentucky in line both with US averages and Kentucky’s neighboring states.

State averages, however, gloss over some key challenges for Kentucky.  Kentucky is drowning in public pension debt   Left unaddressed, unfunded pension liabilities will accelerate the pace at which they will continue to rob money from other state priorities such as education and infrastructure.  Recognizing this, Governor Bevin has stated that the tax reform needs to raise new revenue to help solve the pension crisis.  Republican lawmakers may rightfully balk at tax increases unless they are accompanied by meaningful pension reform.  Past pension promises must be kept, but future promises should only be made in line with future revenues.

Complicating the tax reform picture is that in 2016, among prime working age adults (aged 25-54), Kentucky had the fifth lowest employment to population ratio of any state in the country at 73.6%.  Only Alabama, Mississippi, New Mexico, and West Virginia had a lower percentage of working aged adults hold a job.  It is difficult to collect tax revenue from people who don’t work.  In fact, low employment rates are a drain on state resources.  A key element of tax reform should be to encourage Kentuckians to work.

Rather than just lower Kentucky’s top income tax rate to 5.75%, it would be better to simplify the state income tax code down to two rates: a 5% rate on income up to $75,000 and a 5.75% rate on income over $75,000.  This would lower the penalty to work for middle class Kentuckians while preserving a progressive state income tax.

Kentucky could increase their state sales tax to 7% while also legalizing local option sales taxes – something that the Kentucky League of Cities has been pushing for years.  Raising property taxes faces additional constitutional constraints, but should be on the table if the state is truly engaging in comprehensive tax reform.  Property tax revenues are not as volatile as income or sales tax revenues.

Real reform requires tough choices, but real reform is needed.  Kentucky’s state finances are not currently on a sustainable path.  Kentucky needs to grow its economy, get its adults back to work, invest in tomorrow’s workers and infrastructure, and reform its outdated public pensions.  Hopefully the legislature can pull that all off between August 15th and Octoberfest so that we can properly celebrate their accomplishment.

Permanent link to this article: http://new.wkubbtcenter.com/2017/06/07/kentucky-tax-reform/


Where have Kentucky’s Workers Gone?

Nationally, the percentage of adults with a job has fallen from 63.3% in January 2007 to 59.6% in January 2016.  This phenomenon has largely been explained by three factors.  Students are going to school longer (without working their way through school). More people are retiring even as life expectancies are increasing.  Finally, more people are dropping out of the workforce due to disability.

Where does Kentucky fit into this story?  In 2015, Kentucky had the fifth lowest employment/population ratio of any state.  Looking only at the employment rate of adults aged 25-54 (as to exclude issues of schooling and retirement), reveals that Kentucky has the second lowest employment rate of prime age working adults in the country.  It is only ahead of West Virginia.  Between 2007 and 2015, Kentucky lost the sixth highest percentage of its prime age workers from employment rolls.  The employment situation in Kentucky is bleak, and getting worse.

As for the education story, Kentucky ranks 33rd in the percentage of its 18-24 year olds who are enrolled in postsecondary education.  While that number is below average, it doesn’t explain why Kentucky’s employment rate is so low.  Education related lack of employment in Kentucky has more to do with older Kentuckians’ lack of education than younger Kentuckians’ college enrollment. Kentucky’s below average college graduation rates mean that many of those currently enrolled in college will never graduate and therefore will not bring new meaningful skills to the labor force.

Overall, Kentucky has the sixth lowest level of education.  This is important because employment rates are more closely tied to educational attainment than are unemployment rates. In January 2016, the employment/population ratio was the following:

Less than high school degree     42.8%

High school degree                       54.7%

Some College                                 63.7%

College degree                               71.9%

So Kentucky’s low employment/population ratio has little to do with young Kentuckians postponing work for college and much more to do with Kentuckians not finishing college.

As for the retirement picture, Kentucky has one of the lowest average retirement ages in the country.  This is aided by a low cost of living, the state tax deductibility of $41,000 of retirement earnings, and generous public employee defined pensions that allow people to retire long before their sixty-second birthday.  A Kentucky teacher in the Kentucky Teacher’s Retirement System can retire with benefits after working 27 years regardless of age.  Teachers who begin teaching out of college at age 22 can retire as early as age 49 collecting pay and health benefits from state coffers.

Unsurprisingly, Kentucky’s unfunded pension liability is now over $36 billion.  Bloomberg described KERS, the pension plan for state employees, as the worst funded public pension in the country.  It is almost comical that a state with only 213,564 state workers in their retirement plan has 147,452 retirees drawing a pension.  It is even stranger when one realizes that Kentucky is a state with the fifth lowest life expectancy (75.2 years).  It is not that retirees in Kentucky are living a long time, it is that they retire at very young ages.  Early retirement helps to explain a portion of Kentucky’s low employment rate.

Of the three national factors driving down adult employment, by far the most significant for Kentucky is the increase in disability rolls.  Kentucky has the highest disability rate in country.  At the same time, Kentucky has the lowest employment rate in the country for people who dropped out of high school and are considered to have a disability.  That is, Kentuckians are the most disabled population in the country, and the least likely to work if they are disabled and uneducated.  Kentucky’s disability crisis is robbing laborers from the workforce, lowering tax revenue to state coffers, and increasing state expenditures for the jobless.

In summary, the factors driving down adult employment in the US are magnified in Kentucky.  Government policies that encourage early retirement and increase the success of disability claims are draining Kentucky’s workforce at a record pace.  Kentucky’s failure to educate its population with college or technical school degrees further accelerates the disappearance of the Kentucky worker.  Left unchecked, it won’t be long until there are no workers left to pay off Kentucky’s mountain of public debt and unfunded pensions.

Permanent link to this article: http://new.wkubbtcenter.com/2016/03/03/where-have-kentucky%e2%80%99s-workers-gone/


The Macro Economy, Education, and Race in Employment

Which racial group in the US has the highest employment rate for 16-24 year olds with a college degree (recent college graduates)?  Which racial group in the US has the lowest employment rate for people aged 25 and over with a college degree?  The answers may surprise you.

In her August 7th 2015 article on the racial gap in the economic recovery in The Atlantic, Gillian White concludes,

“It’s also important to consider why this stubborn gap persists in the first place. Perhaps most troubling is the fact is that discrepancies in unemployment haven’t improved much over time, despite the fact that younger generations of minorities are graduating from college at higher rates. The stubbornness of the unemployment gap points to other issues—such as systemic discrimination and racial biases—that existed long before the recession and its sluggish, unequal recovery.”

Well yes, we should consider what causes employment gaps to exist and do something about them.  Empirically, is racial discrimination the dominant cause of joblessness amongst American adults?  Is it the current state of the macro economy that is impairing working rates?  Or are employment gaps between races a reflection of an education/skills gap?  If policy makers are going to design policies to improve employment rates for people, or subgroups of people, it is fundamentally important to know why those gaps exist.

The following table, compiled from data from the U.S. Bureau of Labor Statistics, provides the employment/population ratio by educational attainment for four racial/ethnic groups in the US.   The employment/population ratio is the percentage of adults with a job.  The number in parenthesis indicates the gain in employment to each group from an added level of education.

July 2015Employment/ Population Ratio Age 25+

                                           (Gain in employment due to next higher level of education)                                                                                                                                                                                                                

Race/Ethnicity                 < High School    High School        Some College    BA or Higher

White                                43.6                     53.8 (10.3)         62.8 (9.0)            71.4 (8.6)

African-American           29.9                     53.6 (23.7)         63.8 (10.2)         73.5 (9.7)

Asian                                 39.7                     51.7 (12.0)         66.9 (15.2)         71.7 (4.8)

Hispanic                            54.9                     65.8 (10.9)         70.5 ( 4.7)           76.4 (5.9)

There are some basic, but very important, takeaways from this chart.  The first is that the power of increased educational attainment dwarfs the power of the macro economy.  If the national unemployment rate increases from 5% to 10% (a massive recession) that will only correspond to roughly a three percentage point decline in employment.  Finishing high school for every racial group improves employment by over ten percentage points.  So a high school degree is three times as powerful as the macro economy at finding an individual a job.

The gains from education do not stop there.  Higher educational attainment results in higher employment rates for all racial/ethnic groups.  While every group’s job prospects improve with education, no group’s employment is more helped by education than African Americans.  African Americans with a college degree are more likely to be employed than Whites, or Asians.  Hispanics with a college degree have even higher employment rates.  Of college graduates, Whites have the lowest employment rate of any race.

A look at the next chart reveals that for recent college graduates, African Americans have the highest employment rate of any group.  The unemployment rate for older African American college graduates is barely distinguishable from other groups.  With a 3.1 percentage unemployment rate (compared to a national average of 5.3%), it is hard to argue that labor market discrimination is the largest determinant of employment in America.

July 2015 employment to population ratios by educational attainment and race

                                                          Bachelor’s Degree or Higher

                                           Age 16-24                                       Age 25+

                                           Employed                         Employed           Unemployed

White                                89.2                                   71.4                     2.8

African American            90.9                                   73.5                     3.1

Asian                                 87.1                                   71.7                     2.7

Hispanic                            84.9                                   76.4                     4.0

In truth, the only educational attainment level where African Americans trail all other groups for employment is for high school dropouts.  But in that category it is not even close.  Less than a third of African American high school dropouts have a job as an adult.  That is a big problem, both for society, and for the individuals and communities who have to deal with mass joblessness.  Could it be that racism is to blame for this one statistical outlier?  Why is the evidence of racial labor force disparity only found for high school dropouts?

The story of high unemployment rates for African Americans is one of failed institutions.  Public schools charged with educating African American students, are not, on the whole, getting the job done.  Neither, perhaps, are African American households where the institution of marriage is in rapid decline.  A full 72% of African American children are born to single parents.  An article needs to be written about problems in education and family culture long before we decide that it must be racial discrimination in labor markets that is holding people back from employment.

What about the claim that it is the poor economic recovery that is to blame for joblessness?  Between December 2007 and July 2015, the national employment/population ratio has fallen by 3.4 percentage points from 62.7 to 59.3.  Again, finishing a high school degree is approximately three times a powerful at improving joblessness as would be an improving economy, except, that in this case, the economic “recovery” actually saw a decrease in employment.  The macro economy currently is pretty pathetic at increasing employment.

Change in Employment/Population Ratio December 2007 to July 2015 Age 25+

< High School    High School        Some College    BA or Higher

White                                    .8                       -6.2                    -6.3                      -5.0

African-American           -4.2                       -5.5                    -7.5                      -7.3

Asian                                 -5.2                      -10.7                      -.8                      -2.8

Hispanic                            -3.2                      -4.2                      -5.1                      -4.1

White high school dropouts are the only racial/educational attainment subcategory to increase its employment/population ratio between December 2007 and July 2015.  The current economic recovery has helped white high school dropouts’ employment prospects, but no one else’s.

Ms. White is right about one thing.  For people with at least some college education President Obama’s “recovery” has hurt African Americans job prospects more than any other racial group.  For those with a high school degree or less education, Asian Americans have seen the biggest decline in employment since 2007.

Riddle: If the average employment rate for the country fell by 3.4 points, how is it that 12 of the 16 categories above fell by even more?  The answer is that the overall decline in emplolyment would have been greater but for the influx of Hispanic workers whose employment rates are the highest of any racial group in America.

In summary, educational attainment matters a lot for employment.  It matters much more than the state of the macro economy or discriminatory labor markets (at least in 21st Century America).  When people bring skills to the labor market that are in demand, they easily find employment.  It is difficult to locate large numbers of unemployed engineers or nurses, regardless of race.  When skills are absent, so too are job prospects.  The increasingly global economy does not lack for a supply of unskilled labor.    As such, the education/skill premium for employment is dramatic in the US.  The real problem worth addressing is how to prevent individuals or groups from dooming their employment prospects by dropping out of high school, and ensuring that publicly funded education achieves its stated goals of leaving no child behind.

Permanent link to this article: http://new.wkubbtcenter.com/2015/08/12/the-macro-economy-education-and-race-in-employment/


Kentucky’s Labor Market Ranks 49th

A recent CNBC report found that Kentucky was the 36th most business friendly state in the US.  Looking behind the numbers we find that they ranked Kentucky’s labor market second worst in the country.  The health of a labor market in their study is a reflection of the education level of the work force, the number of available employees in the state, the retention of college educated workers, output per job, worker training, and whether or not a state was right to work (which Kentucky is not).

A Massive Loss of Kentucky Employment

An uneducated look at the employment picture in Kentucky may suggest that the employment situation has improved since 2007.  The unemployment rate in June 2015, 5.1%, was lower than it was in June 2007 in Kentucky, 5.3%.  What the unemployment picture fails to appreciate is the massive decline in Kentucky’s labor force participation rate.

Year                    KY Labor Force  Kentucky            Kentucky            # of Employed # of Adult

                            Participation     Employment     Unemployment               Kentuckians      Kentuckians

                            Rate                    Rate                    Rate

June 2007           62.0                     58.7                     5.3%                    1,919,497              3,271,781

June 2015           57.5                     54.6                     5.1%                    1,878,549              3,442,854

Source: US Bureau of Labor Statistics

Between 2007 and 2015 Kentucky added 171,073 adults to its population while simultaneously having 40,948 fewer adults employed.  In other words, Kentucky has 212,021 more jobless adults than it did in 2007. That is greater than 10% of the entire Kentucky labor force.  It is a massive decline in jobs and it has happened while the US economy has been growing.  In 2014, Kentucky’s economy only grew 1% while the US as whole grew at 2.2%.

Between July 2013 and May 2015, Kentucky’s Medicaid and Chip roles increased faster than any other state in the country (85.57%).  During the exact same time period, Kentucky’s labor force participation rate fell by more than any other state (1.9 percentage points).  States that did not expand Medicaid with the Affordable Health Care Act saw an average increase in their labor force participation rate of .04 percentage points during this same time frame.   In June 2015, Kentucky had the fourth lowest labor force participation rate (57.5%) of any state in the country, only ahead of West Virginia, Alabama, and Mississippi.  That means for every 100 adults in Kentucky, 42.5 do not have so much as a part time job.

In 2013, 14.4% of Kentuckians were over the age of 62 only slightly higher than the national average of 14.1%.  That is, the lack of labor force participation in Kentucky cannot be explained away merely by an aging demographic.  Apparently, Medicaid expansion has freed members of Kentucky’s low income households from the burden of having to work.  In fact, the Congressional Budget Office was very clear that Obamacare would reduce American’s willingness to work.  Vice President Joe Biden explicitly stated this as a benefit of Obamacare: that people would have greater freedom to quit working.

One man’s freedom from work, however, can only be purchased by confiscating another woman’s work product from her.  This is the double edged problem with transfer payments.  As they increase, you reduce work effort from both the transferee (who has less need to work) and the transferor (who now benefits less from the work they do).

Kentucky’s Low Skilled Workforce

A 2013 study by the U.S. Bureau of Labor Statistics found that Kentucky has the largest share of employment of any state in occupations that typically require a high school diploma or equivalent.  A full 41.7% of jobs in Kentucky require only a high school degree.  On the bright sides, Kentucky’s four year high school graduation rate in 2012/2013 was 82%.  That tied it for 22nd highest rate in the country.  While Kentucky does a slightly above average job at “graduating” students from high school, it does a much worse job at preparing them for an occupation or equip them for success in higher education.

The Kentucky Chamber of Commerce recently released a report on the Kentucky work force.  Among other issues, employers in Kentucky complained that few potential workers were able to pass drug tests while other potential employees came to their interviews wearing pajamas.  It noted that a major way to improve Kentucky’s work force is to focus on “soft skills” – being professional and being able to communicate in a professional manner with others.

In 2014, Kentucky’s private non-farm workers ranked as having the fifth lowest hourly wages of workers in the US.  Workers in only four other states (New Mexico, South Dakota, Arkansas, and Mississippi) ranked below Kentucky’s $20.53 an hour wage.  On the other hand, for those private non-farm workers in Kentucky that did have a job, they put in the 12th most hours per week among US workers (34.9 hours a week).  These low earnings reflect the low education and skill level of the Kentucky labor force. The 2010 Census showed that Kentucky ranked fourth lowest in the country in the percentage of its population with a college degree (21%).compared to the national average of 27.9%.

Regarding higher education, Kentucky’s colleges are struggling to graduate incoming freshman despite being in the top 20 states in terms of state funding per college graduate.  In 2013, Kentucky’s four year college graduation rate stood at 24.2%, below the national average of 33.6%.  Kentucky’s six year graduation rate, 48.9% was also behind the national average of 57.6%.  Kentucky has the 13th lowest six year graduation rate in the US, but it ranks 20th in state spending per graduate ($72,975 vs. the national average of $66,436).

Businesses looking to relocate to a state are looking for a high skilled/educated workforce.  In order for Kentucky to increase its fourth lowest median household income, more Kentuckians will need to show up for work.  In addition, those workers will need to be better educated or equipped with skills in demand by dynamic labor markets. The best place to start is by improving the education of tomorrow’s workers.

Kentucky already ranks in the top half of states in education spending per student/median household income.  That is, Kentucky already spends an above average percentage of its income on education.  The task, then, is to improve Kentucky’s educational outcome per dollar spent.  To start, Kentucky is one of only eight states in the US that does not allow charter schools.  Simple, but important school reforms such as allowing charter schools, or allowing more school choice could pay dividends for today’s students and tomorrow’s workers.

Kentucky’s labor force is shrinking.  Failure to address worker training and education while increasing entitlement spending will lead to further labor force deterioration.  How low can Kentucky’s labor force participation rate go?  If Kentucky does not change its course on education and entitlements, it will soon find itself with more nonworking than working adults.  Eventually workers will grow tired of having more and more taken from them to support a growing number of jobless adults. Employers will move out of state taking jobs and tax revenue with them making it even harder to educate and employ those who remain.  Action is needed now to prevent this downward spiral before its inertia is too difficult to overcome.

Permanent link to this article: http://new.wkubbtcenter.com/2015/07/31/kentucky%e2%80%99s-labor-market-ranks-49th/


Youth Employment and The Last 30 Years of the Minimum Wage in the United States

The below chart illustrates the impact of minimum wage changes on the youth (aged 16-19) employment rates in the US over the last thirty years.

The red line represents the real minimum wage from 1983-2012 (in 2012 $ x 7 for scale purposes) as provided by the US Department of Labor.  The blue line represents the youth employment rate as reported by the US Bureua of Labor Statistics.

What the graph illustrates:

From 1983 until 1990 the purchasing power of the minimum wage was falling while youth employment increased.

There is an inflection point in 1990 where the value of the minimum wage spikes and youth employment falls.  In March 1990, the last month before the minimum wage increased to $3.85 the youth employment rate stood at 47.1%.  In April the next year, following an increase in the minimum wage to $4.25, the youth employment rate stood at 42.8%.  In a single year, one out of ten teenagers with jobs lost them.  The slide continued.  By the following March the youth employment rate had fallen to 40.2%.

The minimum wage increases of 1996 and 1997 had a smaller initial impact on youth empployment.  The youth employment rate fell from 44.4% to 44.1% the month the wage was incrased in 1996 while it fell from 43.2 to 42.8% the monthe the wage was increased in 1997.   The tightening job market of the late 1990’s helped cushion the employment blow of an incrased minimum wage.  The national unemployment rate was below 6% and was below 5% from 1998 until 2001.

The 2001 recession saw a large decrease in youth employment.  This decline stabilized from 2003 through 2007 as the real value of the minimum wage fell.  Increaed globalization decreased the domestic demand for unskilled labor in the US.  The 2007, 2008, and 2009 increases in the minimum wage rate failed to take this lower demand into acount.  The huge drop in youth employment that came with the last round of minimum wage incrases has only begun to stabilize since 2009, as the value of the minimum wage has been allowed to fall.

Between March 1990 and July 2014 the youth employment rate has fallen from 47.1% down to 27.1%.  That is, 44.8% of teenagers who held a job in 1990, no longer hold one in 2014.  Youth employment is almost half of what it was 25 years ago.

A climb up the income ladder begins by placing one’s foot on the lowest bar.  More important  than the wage they earn is the experience, on the job training, and self-respect young people gain.  If socieity truly wants more people moving up the income ladder, it must stop removing the lowest rungs of the ladder.  Sure, if you outlaw a $7.25 job people won’t  legally have them, but the alternative is not a $10.10 job, but rather, no job at all.

If the US increasesed its minimum wage to $10.10 an hour the following would result:

-          An increase in demand for illegal low wage labor (often performed by undocumented illegal immigrants)

-          A huge reduction in youth employment in lower income areas (rural states and inner cities)

-          Increased automation of unskilled work (say hello to the self-serve fast food kiosk that looks like the self-serve airport check-in kiosk)

-          The elimination of tipping as a standard American practice if servers are guarenteed $10,10 an hour whether they are tipped or not

-          A reductin in US agricultural output if the minimum wage applies to the agricultural industry

-          Increased usage of college loans as fewer young people will have access to jobs

If there is any doubt what high minimum wages and highly regulated labor markets give young people, look no further than Europe where the youth unemployment rates are: Greece (57.7%), Spain (54%), Croatia (48.7%), Italy (43%), Cyprus (37.3%), and Portugal (34.8%). Seven and a half million young Europeans between the ages of 15 and 24 are not employed, in school, or in training.

Society cannot take away the lowest rungs on the economic ladder and expect young people to pole vault into the middle class.  We know the outcome of eliminating job opportunities for young people and it is not pretty.  The purchasing power of the US minimum wage is higher now than it has been for most of the last thirty years.  Now is not the time to raise it even higher.

Permanent link to this article: http://new.wkubbtcenter.com/2014/08/15/youth-employment-and-the-last-30-years-of-the-minimum-wage-in-the-united-states/


Should We Transfer Money from the Top 1%?

Are you ready to forcibly redistribute income from the top 1% of income earners to the other less fortunate 99%?  Don’t answer too quickly.  An income of just $32,400 places you in the top 1% of the world’s population.  For $32,400 a year you can be richer than seven billion other people.

World’s Top      Income

1%         $ 32,400

10%       $ 13,745

20%       $ 6,715

50%       $ 1,305

The average income for people in the world is $1,305 a year.  Redistributing income from the rich to the poor would actually mean taking money from people who earn more than $1,305 a year to give it to the world’s poor.  If we define “rich” as the top 20% of world income earners, we will only start taking money from those who make more than $6,715 a year to give it to the poor.  Is there anyone advocating taking money from people in the US who earn less than $10,000 a year?  If not, why not?

A person making the federal minimum wage of $7.25 an hour working 40 hours a week for 50 weeks a year earns $14,500 .  This is enough to place them in the top 10% of income earners in the world.  Maybe instead of debating an increase in the minimum wage we should be debating increasing taxes on these “wealthy” people to help out the poor.

Let’s say that two minimum wage workers who have strong work ethics get married and pool their incomes.  If each partner worked 60 hours a week 52 weeks a year, their family income would be $45,240 which would place them in the richest .41% of the world’s population.  That’s right; you can flip burgers in the US and still be in the richest .41% of the world’s population!  Surely if redistribution from the rich to the poor is moral, we should be taking more money from affluent Americans to help the truly needy around the world.  We don’t do so either because we don’t care about non-Americans or we don’t actually think that income redistribution is just.

In the US a married family with three kids qualifies for food assistance (SNAP) from the federal government if their income does not exceed $35,844.  Said family lives within the world’s top 1% of income earners.  That means that someone feels there is a moral imperative to transfer money from the top half of the top 1% in order to give it to people in the bottom half of the top 1%.  At the same time there is no sense of moral urgency to transfer money from the bottom half of the top 1% to the bottom half of the bottom 1% of the world’s income earners.  Does that make any moral sense?  Of course not.

Shame on politicians who pander to the world’s bottom half of the top 1% telling them they are morally entitled to income transfers from the few people richer than themselves while they simultaneously have no moral claim on their income from the bottom 99%.

Permanent link to this article: http://new.wkubbtcenter.com/2014/07/21/should-we-transfer-money-from-the-top-1/


The Lack of Slavery May Be Hurting Economic Growth; Or, How to Miss the Forest of Human Flourishing for the Trees of GDP Growth.

On June 13th, Tyler Cowen published a piece in the New York Times entitled, “The Lack of Major Wars May Be Hurting Economic Growth”.   In it, Tyler suggests that “the very possibility of war focusses the attention of governments on getting some basic decisions right – whether investing in science or simply liberalizing the economy.  Such focus ends up improving a nation’s longer-run prospects.”  This is the necessity is the mother of invention argument.  The focus of the argument is that man will just sit around doing the same thing he did yesterday unless he is forced to change his behavior by some pressing need.

To his credit, Tyler does suggest that more peace even with lower growth may be better than more growth but with the cost of added war deaths.  Still, he surveys academics who are seeking to revive an understanding that war may be good for GDP growth.  To show why this is a dangerous path to go down, I will (sarcastically) substitute “slavery” for “war” in the following parody article:

The Lack of Slavery May Be Hurting Economic Growth

In the first quarter of 2014 the US economy contracted by a 1% annualized rate.  Why is it that the US economy grew so quickly in the 1800’s and how can we recreate that growth?  The World Bank reports that between 2000 and 2005 real per capita income rose 1.46% a year while it rose just .07% a year between 2006 and 2010.  Between 1840 and 1860, southern states’ per capita income rose at a rate of 1.7% per year.  One key difference between the antebellum South and now is their use of slave labor.  Perhaps scholars may wish to reappraise the benefits of slave labor.

The Egyptians built large pyramids and public works with slavery.  King Solomon used slaves to build a temple and other public works.  All roads don’t lead to Rome because they were built by free men.  The Great Wall of China could not have been built without slave labor.  Without that wall, it would be boring to look at the earth from a spaceship. (Never mind that you can’t really see it from space).  Slave cultivated cotton, tobacco, rice, sugar, and indigo drove the southern economy for decades.

This week the BLS reported that Americans spend more time sleeping than working.  This preposterous development would never be true in a country with slavery.  If one man could benefit from the work of another, you better believe the latter is going to be forced to work a solid sixty to eighty hour work week.   In the mid 1800’s, male US slaves worked on average 70 hours a week.  Slave women averaged 60 hours of work a week.  Even slave children averaged 40 hours or more of work per week (Roger Ransom and Richard Such, One Kind of Freedom 1977).  Furthermore, slaves were forced to work in the gang labor system which helped to make slave agriculture 28% more efficient than free agriculture (Robert Fogel and Stanley Engerman Time on the Cross 1974).

The employment to population ratio for US adults aged 16 and over in May was 58.9%.  Under slavery, the employment to population ratio was 100%.  As soon as slaves were emancipated, the gang labor system disappeared and free blacks reduced their hours worked by a third.

Outside of a few exceptions, there are not many industries that even employ children any more.  At age eight I was working a paper route six days a week. That doesn’t happen anymore.  We could speed up the economy by putting these unproductive eaters to work.  I have four kids who could really use a job.

Come to think of it, poverty and starvation used to be really good motivators for innovation and work.  If one starved if they refused to work in the fields, people had a tendency to show up for work.  As mankind has decreased their poverty rates, their hours worked have fallen which has been a drag on economic growth.

It turns out that the use of sticks may be an effective way to increase GDP.  Whether a master uses a whip, or a foreign enemy points the tip of their spear (or nuclear war head) at one’s head, one may respond with more work and do so with greater intensity.  The threat of starvation may in fact yield advancements in farming and certainly helps employment rates.

To summarize, the problem with our economy is that we don’t want to kill/enslave others like we used to.  People are so rich they cannot even be bothered to get out of bed to go to work.  This massive existence of peace and wealth is ruining the economy.  If only we were poorer and meaner we could have faster economic growth.

With the pace of automation we are experiencing it won’t even be long until robots are doing all of our work for us.  Then where will the economy be?  At least we can enslave robots.  They are not yet a constitutionally protected class.  Maybe we have our robots attack your robots…..

Permanent link to this article: http://new.wkubbtcenter.com/2014/06/20/the-lack-of-slavery-may-be-hurting-economic-growth-or-how-to-miss-the-forest-of-human-flourishing-for-the-trees-of-gdp-growth/


The Rest of the Story: Employment Recovery?

The Bureau of Labor Statistics released the April Jobs numbers today.  The AP reported the following as their big story: US Gains 288K Jobs, Most in 2 Years; Rate 6.3%.  The unemployment rate fell in one month from 6.7% to 6.3%.  That sounds great, but in honor of the late Paul Harvey, “and now, the rest of the story”.

Here are the raw numbers from the BLS:

Civilian noninstitutional population        +181,000

Civilian labor force                                      -806,000

Employed                                                      -73,000

Not in labor force                                        +988,000

Employment –population ratio                -.07%

Conundrum #1: How did the US economy create 288,000 jobs in the same month where 73,000 fewer people had jobs?

Answer:  The economy destroyed more jobs than it created.  The new jobs number conveniently leaves out the jobs that were lost each month.  A dynamic economy has job churn every month where some jobs are created while others are destroyed.  It is however, an odd world where a net decrease of 73,000 jobs is lauded as good economic news.

Conundrum #2: How can the unemployment rate fall even as fewer people have jobs?

Answer:  The unemployment rate is calculated by dividing the number of adults without a job but actively looking for one by the number of people with a job or actively looking for a job.  Last month over 800,000 people who were unemployed stopped looking for work.  They didn’t get a job. They just gave up looking for a job.   The employment rate fell by .07% meaning fewer American adults had a job in April than they did in March.

The takeaway:  Be careful of government statistics.  Beware further of the spinning of government statistics.  Anyone who sees a decrease in employment as a good sign for the economy is delirious.  Said people will also suggest that the lackluster .1% growth rate in first quarter GDP just means the economy has more room to grow in the future.

Job killing taxes, regulations, and increased transfer payments reduce employment.  And now you know the rest of the story.

Permanent link to this article: http://new.wkubbtcenter.com/2014/05/02/the-rest-of-the-story-employment-recovery/


Give, Share, and Take are not Synonyms

A major cornerstone of the US rule of law comes from the definition and enforcement of property rights.  Long before the nation’s founding, private property had been recognized under British common law. The British did not invent private property either, as the concept goes back as long as recorded history.   Once private property was recognized, the following came into view:

Share: to have or use (something) with others

In order for sharing to occur, one who owns private property must permit another to also have use of the property.  They don’t forgo the use of the property themselves.  If a kindergarten teacher told Peter to share his toy truck with Paul, then Paul could play with the truck along with Peter, but Paul could not exert ownership of the truck.  Paul could not take it home and exclude Peter from playing with it.  People often use the term “share” when what they mean is “give”.

Give: to make a present of; to put into the possession of another for his or her use

If Peter wants to make a present of his toy truck to Paul, then Paul would indeed have the right to take home the truck and exclude Peter from playing with it.  It may not be nice of Paul to do so, but it would be his right.  Peter benefits from this transaction if he feels warm and fuzzy that he was able to voluntarily transfer ownership of his property to Paul for Paul’s pleasure.  Perhaps Peter considers Paul to be a friend and Paul’s increased happiness makes Peter happy.  If it does not make Peter happy to give his truck to Paul, Paul might well go home without a truck unless he takes Peter’s.

Take: to get into one’s hands or into one’s possession, power, or control

If while Peter was playing with his truck in front of Paul, Paul decided that he really wanted Peter’s truck, he could take it from Peter (providing he is stronger than Peter, or the kindergarten teacher agrees that Paul should get Peter’s truck and is more powerful than Peter).  Much like the scenario where Peter gave his truck to Paul, by taking Peter’s truck with enforcement from the teacher, Paul gains exclusive control of the use of the truck.  Paul can prevent Peter from coming to Paul’s house and playing with the truck.  The key difference is that Peter is unlikely to feel better as a result of the taking.  Why might Paul take Peter’s truck and therefore deprive Peter the option of sharing/giving his truck with/to Paul?

Covet; to feel inordinate desire for what belongs to another

Covetousness is specifically listed as a sin in the 10 Commandments.  That means that as long as people have claimed private property, others have looked enviously at their neighbors’ stuff.  As a result, much of government’s early role was dedicated to the protection of property rights from foreign invasion and thieves (the two largest groups of covetous people).  While taxes were not levied equally on everyone, everyone could share in the benefit from the protection of property rights.

Through time governments expanded their scope to encompass the provision of public goods such as roads, aqueducts, gardens, parks, and public buildings.  While tax revenues were assessed to people at various levels, all could share in the benefit the public goods provided. Rich and poor travelers alike could use the road between market towns.  Only after the implementation of the personal income tax did the US federal government use federal tax revenues in earnest for roads, sewers, parks, and public infrastructure.

Ever since the New Deal (and in large part due to the Great Society), the nature of government has changed.  The federal government has been collecting larger amounts of tax revenue while dedicating smaller and smaller portions of the spending to the provision of public goods and the protection of property rights.

In 2013, only 3% of the federal budget was spent on transportation and infrastructure. Defense spending totaled 19% of all federal spending.   By contrast, 24% was spent on Social Security, 12% on safety net programs, and 22% on subsidized personal health care.  By 2014 more than 2//3 of all federal spending was taken and given rather than taken and shared.  The US federal government first morphed from being the chief protector of property rights into the chief sharer of property.  More recently they have morphed again into the chief taker and giver of property.

When Paul buys a steak with his food stamps, Peter is not invited to Paul’s house to share the steak with him.  When Paul receives free medical visits, Peter does not get his blood pressure checked as well.  When Paul gets a check in the mail from the government, he does not have to buy Peter so much as a thank you card.

While politicians continue to talk about using the tax code for people to share their income/wealth with others, they have been dramatically changing their behavior.  The US federal government does a lot of taking and very little sharing anymore.  They take from Peter to give to Paul rather than allowing Peter to give to Paul or even making Peter share with Paul.

This is why our public infrastructure is crumbling and politics has become more divisive.  Government has replaced taking and sharing (which unites people around common public interests) with taking and giving (which deprives people the joy of giving while losing common public goods).  Those that were happy sharing are much less happy giving, and those who used to have to share are now never satisfied with what they are able to take.


Permanent link to this article: http://new.wkubbtcenter.com/2014/04/30/give-share-and-take-are-not-synonyms/


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://new.wkubbtcenter.com/2014/02/19/kentuckys-budget-and-tax-reform/

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