Archive for the ‘Economy’ category

Increasing Poverty and Homelessness: Who Benefits?

27 March 2014

Giving politicians the power to manage the economy causes all kins of problems. For one thing, they act in their own interest – just like anyone else. This shouldn’t be a surprise to anyone, but it seems to be. It’s time to get past the idea that politicians (or bureaucrats) are wise and altruistic overseers of the economy, taking necessary actions to correct imperfections and imbalances caused by, well, regular people.
A good example is the proposed legislation in the Maryland General Assembly to raise the state minimum wage by nearly forty percent. The purpose of this law is to make it illegal for a high-school dropout — let’s call him John — to agree to accept a $10 hourly wage from a shop owner.
The evidence clearly shows the likely result of this action. If the shop owner has a job, she will hire the best-qualified person she can. A person with a good work history, or a high school diploma or GED, will seem like a better bet than John. John, representing the lowest level of skills and education in our society, will be the loser from this legislation. He will become unemployed, and likely remain unemployed for the long term. An increase in the minimum wage almost always increases unemployment for that reason. Specifically, it increases the already abysmal employment prospects for those starting out in the job market (the 17 – 25 cohort), and even more so for the black and Hispanics in that group. An increases in the minimum wage ends up being a knife in the back of the least advantaged, the worst-off among us. When Montgomery County sought to raise the minimum wage, this was the advice they got from expert labor economists at the University of Maryland and Georgetown University. The deleterious effects, the economists testified, are more likely when the increase is large and when the unemployment rate is already high. Economist Stephen Fuller looked at the Maryland bill and concluded it would probably cause a reduced standard of living and higher costs.

But political management of the economy doesn’t pay any attention to those people at the bottom. When the high school grad with the increased wage gets his paycheck, he’ll thank the politicians who caused it. The politicians have no incentive, however, to be concerned about the people at the very bottom of the economy – the ones we should be most concerned about. John’s lost job or lost employment opportunity doesn’t have any political loss for them. They are seeking political support, and they get rewards for increasing the minimum wage — and also for increasing unemployment, poverty, and homelessness.

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Maryland Business Climate: Close to the Worst

20 February 2014

Politicians usually realize the importance of attracting business to an area, and keeping existing businesses from moving.  There are two ways in which they can develop policy towards those ends.

One way is through targeted subsidies and other bribes to firms.  An example would be the tax incentives offered by Montgomery County to Westfield, to subsidize Costco’s arrival in Wheaton Plaza.  Another (on a grander scale, though no different) is the $200 million that Maryland gave to Art Modell to bring the Browns from Cleveland to Baltimore (on top of building the stadium for Modell).

Another way is to develop a set of policies that make an area a friendly place to do business.   Good, well-designed and fair tax systems are simple, transparent, don’t require large resources to comply, don’t skew towards particularly favored enterprises, and minimize the impediments to growth and prosperity.

What’s the difference between the two strategies?  And why do both the State of Maryland and Montgomery County prefer the first strategy?

The first strategy is general, and aims to provide a good climate for all business.  But that doesn’t gain very many brownie points, or rack up debts and favors that politicians can draw on later.  When something benefits the population in general, no one business gains enough that a politician can show up at the door with hat in hand.  However, the first strategy gains the politician just that.  By helping out Westfield,  MoCo councilmembers can count on campaign donations and other favors from the corporation.  For the most part, politicians don’t gain from advancing the general public good (as much as I hate using that nebulous and overused term).  They do gain from granting favors to individual actors, who then enter into a mutually advantageous backscratching relationship with the pols.

Maryland devotes a nice chunk of the budget to the Department of Business and Economic Development,  devoted to handing out this kind of corporate welfare to favored businesses.  When it comes to creating a favorable business climate (syn) however, the state government doesn’t do so well (for the reasons outlined above).  In fact, it does pretty lousy.

A report issued by economist Kail Padgitt at the Tax Foundation concluded that the Maryland fits in the ten worst business tax climates in the nation.  (Sixth from the bottom, actually).  The  report doesn’t look at an overall business climate (a pretty complicated assessment, one would think, covering transportation and other infrastructure, real estate costs, education, etc.), but rather just the tax aspect of the business climate.

The ranking is hardly incontrovertible, but is methodical and fairly applied across the 50 states.  It evaluates the business climate tax index by a weighted ranking of five tax factors.  Here’s how Maryland is ranked in comparison with Virginia (since those states competes for businesses):

MD            VA        PA

Corporate Tax                          14            4         38

Individual Income Tax            49            17        14

Sales Tax                                       11            8        28

Unemployment Insur Tax        47            29        42

Property Tax                                 40            25        44

Overall Ranking                      44            12        26

To his credit, Padgitt cites critiques of the annual Business Tax Climate Index report, but also notes several academic studies that demonstrate that the index tends to correlate well with economic growth in the state.

It is likely that tax policy is helping to steer some businesses (and jobs) away from Maryland into border states.  Without discounting other factors that are part of business location decisions, we have seen several cases in the past few years where businesses considered – and rejected – Montgomery County as a location for operations.  It would seem that if we want to improve the employment situation in Maryland, the General Assembly is going to have to take a hard look at the the areas where we do most poorly in comparison to other states – the individual income tax, the unemployment insurance tax, and the state property tax.

Council and Executive Lay Higher Burdens on Montgomery Residents, Drag Down the Economy

4 June 2013

The County Council (last week) approved the budget for the upcoming fiscal year.  In a time of austerity, this budget represents a turn back to bigger government.  While the citizens are tightening their belts, this budget increases spending by 4.1% over last year.  The budget recommended by the county executive and now approved by the county council increases property taxes and increases energy taxes.  Combined with the increase in state taxes (including the jacked-up gasoline tax), this will be a draw down on the county’s economy.

There is a popular opinion that Montgomery County has not been affected by the recession, and therefore the government can increases taxes and spending willy-nilly.  But unemployment in the county is 56% higher than it was in 2008.  A report from the Sage Policy Group concludes that the 80% increase in the state’s regressive gasoline tax is likely to cause the loss of  959 jobs, and a loss of $124M to the economy.   The county budget is only likely to drag down employment and the economy even further.