Wednesday, June 20, 2018

End of the Road

Friends,

I am shutting down this blog once and for all. I have the opportunity to do something else that, hopefully, will lead to policy reforms but under different circumstances. It won't be as visible, but there is a good chance it will be even more effective. Time will tell, but it is worth a shot. 

I will leave the blog up so you can use the 400 articles and videos as reference material.

Thank you to you all for these two years! 

Tuesday, June 19, 2018

Is Rental Housing Unaffordable in Wyoming?

There is more of the egalitarian welfare state on the way to Wyoming. A story by KGAB on unaffordable housing is a red flag for an effort by a nationwide coalition to expand economic redistribution. We the taxpayers are expected to shovel more money into the egalitarian welfare state in general, and into redistribution of housing in particular. 

Before we get to the specifics of this report, let us once again raise the one question that no proponent of more government spending has yet been able to answer:

When is government big enough?

I answered this question in my book The Rise of Big Government: How Egalitarianism Conquered America. Plain and simple, government will stop growing when the welfare state has eradicated all economic differences between individual citizens. 

To an American, this sounds ridiculous, and that is precisely what it is. Nevertheless, our welfare state is built on egalitarian principles, which - as I explain in my book - means one thing, and one thing only: everyone should have the same income and the same standard of living. 

We do not see much of this egalitarian campaign in our daily lives, or even in the often-minute grinds of a legislative session. Nevertheless, every time appropriations grow for a spending program, or a legislature prioritizes tax increases over spending cuts, it advances the idea that government growth is inherently good. Since about half of a state budget, and two thirds of the federal government's spending, is dedicated to advancing egalitarian spending programs, a policy that grows government over time is also a policy that advances egalitarianism.

Hardly surprising, the desire to eradicate economic differences is more pronounced in political rhetoric than in practical policy. Several different organizations and campaigns are trying to push the Democrat party, and American politics in general, farther to the left. This means, for example, ramping up the campaign for more and bigger entitlement programs, courtesy of the federal government. 

Which brings us back to the KGAB story:
According to a new study, the average renter in Wyoming now needs to make $16.46 per hour to afford a two-bedroom house. The National Low Income Housing Coalition compared each state and concluded the average hourly wage that workers need to rent a two-bedroom home at market value without spending over 1/3 of their income. Ranked from the most expensive to the least expensive, Wyoming was 31st nationwide.
The report from the National Low Income Housing Coalition cited by KGAB is an annual product where the Housing Coalition calculates the cost of rental housing by state. With an impressive attention to detail, the report wants to tell us how much a person would have to make in order to be able to afford the rent on a two-bedroom house in every one of America's 50 states, even by county.

When referred to in a quick news story, the Housing Coalition's report seems to make a compelling point about the need for more government spending on economic redistribution. After all, it says that, here in Wyoming, you need 2.3 full-time jobs at minimum wage to rent a two-bedroom house. How unfair is that?

It is not unfair, but the fairness concept is something we will have to discuss another day. For now, there is a major methodological problem with their report, one that basically nullifies their conclusions on the unaffordability of rental housing. 

Before we get to that problem, let us note that this report is not some isolated product popping up randomly at some obscure think tank. The Housing Coalition is part of a broad network advocating so-called affordable housing. They have a long list of state partners, such as Housing Colorado, Housing Action Illinois and Homeless and Housing Coalition of Kentucky. They also have a partnership with about 40 national organizations, all advancing egalitarian policy goals. 

In other words, their report on "unaffordable" housing is a campaign piece, written and marketed in an effort to grow the welfare state. If it achieves its goals in terms of policy reform, it will make even more people depend even more deeply on taxpayers in their daily lives. 

Even though the Housing Coalition does not yet have any partners in Wyoming, it is only a matter of time before they do. Part of the idea behind a report like this is to provide material for advocacy campaigns, especially in states where they do not yet have a strong presence. In other words, expect to hear a lot more about "unaffordable housing" here in Wyoming in the coming year.

Now for the methodological flaw in their report. Like every quantitative analysis, theirs is confined by a set of given variables that form the framework of their study. This is standard methodology and should be simple enough; however, there is a basic rule of logic runs through all analytical work: never assume what you want to prove. 

The Housing Coalition's report violates this basic rule of logic, and they do it twice. 

Before we get to those violations, we need to note another, less serious mistake that they make, probably without even noticing it. At the heart of the Housing Coalition report is the concept of "affordability". To define it, the report uses three variables: a person's income, a standard amount of rent, and a specific relation between the two. Personal income is defined as the minimum wage. To make its general point about unaffordable housing, the report explains (p.1):
A full-time worker earning the federal minimum wage of $7.25 needs to work approximately 122 hours per week for all 52 weeks of the year, or approximately three full-time jobs, to afford a two-bedroom rental home at the national average fair market rent. The same worker needs to work 99 hours per week for all 52 weeks of the year, or approximately two and a half full-time jobs, to afford a one bedroom home at the national average fair market rent. 
They then adjust the minimum wage by state to get disaggregate numbers. 

There are two problems with using the minimum wage here. First, few people work for minimum wage, especially in a state like Wyoming where jobs paying $7.25 per hour are so few they are not statistically identifiable. A far better approach is the market-set wage for low-skill jobs.

Secondly, the report solidly gives the impression that a person working a minimum-wage job does not have access to any other incomes. However, as Michael Tanner, senior fellow at the Cato Institute, explained in his 2013 study Work vs. Welfare, here in Wyoming a person who knows his or her way around available welfare programs can earn as much as $15.68 per hour on welfare. Adjusted for inflation over the past five years, this means well over twice the minimum wage.

Even if an individual working a minimum-wage job does not qualify for all welfare that goes into Tanner's calculations, he or she will qualify for some programs and therefore have non-work based income to add on to the pay from work. By not taking this into account, the Housing Coalition distorts the reality they are trying to reform.

In fact, the report does not even mention welfare programs.

Now for the first of their violations of basic logic, or the "don't assume your conclusions" rule. The other variable needed to give "affordability" quantitative meaning is, of course, rent. Here, the report uses the "fair market rent", or FMR, formula defined by the U.S. Department of Housing and Urban Development. Again, there is no methodological problem here; the problem is that there is an underlying axiom built into this formula, one that ideologically taints their report. Explains HUD:
FMRs must be both high enough to permit a selection of units and neighborhoods and low enough to serve as many low-income families as possible. The level at which FMRs are set is expressed as a percentile point within the rent distribution of standard-quality rental housing units. The current definition used is the 40th percentile rent, the dollar amount below which 40 percent of the standard-quality rental housing units are rented.
Since the FMR is used in the provision of housing assistance for low income families, its very definition is redistributive in nature. The purpose behind this variable is to maximize economic redistribution in the housing market. 

In other words, when someone uses the FMR formula for the very purpose of explaining that we need more affordable housing, they have already guaranteed that outcome by using a formula the very definition of which is aimed at maximizing the supply of affordable housing. 

This is the same logical somersault as if I wanted to prove that all swans are black, and started out by defining a swan as a "black bird". 

The second violation of basic logic comes to play in the third component of their "affordability" definition. This component is the ratio between minimum-wage earnings and FMR-based housing costs. The idea here is that nobody should have to spend more than 30 percent of their income on housing. If someone has to pay more than 30 percent, he is defined as "cost burdened".

This ratio is completely random. Why not 20 percent, or 40? However, the real problem here is that this ratio is another example of how the Housing Coalition builds its conclusion into its premises. The 30-percent ratio has a similar history to our definition of poverty:  it is a relative concept created to make people eligible for economically redistributive, tax-paid entitlements. Instead of defining an absolute, minimum standard of living, below which a person would be "poor" on the housing market, the 30-percent definition means that people can experience significant increases in income and yet qualify as "cost burdened" simply because I chose to increase my spending on rent by a proportionate amount.

The entitlement programs providing housing assistance are not quite as automatic as this point make them sound, but that is also a side note. What matters here is how the premises that guide the Housing Coalition's report put its analysis on autopilot straight to its conclusion. If you are going to suggest that rental markets around the country are out of reach for millions of Americans, it is not a good idea to rely on assumptions - axioms, premises - that preclude any other conclusions already from the start. 

I welcome the Housing Coalition's solid quantitative work, and I would like to recognize their effort for being more solid on that front than most work published by libertarian and conservative think tanks. At the same time, their credibility is eroded by the lack of logical integrity in their study. I understand why this weakness is built into their report - social scientists today are not well trained in this higher level of analytical work - but it is very important for people who discuss the conclusions in their report to be aware of how they reached those conclusions. 

This is particularly important in a state like Wyoming, where the Housing Coalition is likely looking to make inroads. When they do, we must be ready to explain where their work comes from and how they came up with their numbers. Legislation based on weak analytical work inevitably ends up harming the very people it is supposed to help. 

Monday, June 18, 2018

That Income Tax Again

The battle over a state income tax continues. Reports Better Wyoming:
A leading state lawmaker told the Wyoming Legislature’s Joint Revenue Committee last week that the answer to reforming Wyoming’s tax code is simple: Wyoming should join the vast majority of American states and implement an income tax. “It’s clear as a bell that, if you want to diversify the tax base, we need a state income tax,” Rep. David Miller (R-Riverton) told his colleagues.
To the best of my knowledge, Representative Miller is still opposed to an income tax. However, the very mention of it in the context of tax reform is a reason for us all to be vigilant. There is also the possibility that Mary Throne becomes our next governor, and if that happens, all bets are off when it comes to taxes. 

Better Wyoming appears to agree that Miller is opposed to an income tax:
Miller said he also opposes this commonsense solution. “I, for one, do not advocate a state income tax,” Miller continued. “I enjoy the mineral industry paying all the bills.”
I suspect that the real story here is that Better Wyoming, which is pushing hard for an income tax, are trying to get a free ride on Representative Miller's back. I will leave it to him to duke it out with the liberals; what matters here is that the closer we get to the election in November, the more important the tax policy issue will get. 

As mentioned, there are two reasons to take the threat of an income tax seriously, regardless of what leading legislators have to say about it. First, the discussion in the Revenue Committee about a comprehensive tax reform inevitably opens up for a conversation about an income tax. This happens whether the Committee members like it or not. By talking about a revenue-neutral overhaul of our tax system, they put themselves in the position of having to defend why all other taxes are open for debate but not the income tax. 

It is, of course, good that no Republican seems to want to propose an income tax. Nevertheless, when we approach a tax reform from the angle of revenue neutrality, they condition their discussion by the pursuit of as much revenue as possible. That, in turn, means that if all other alternatives fail to deliver the revenue they want, they will inevitably have to have a conversation about an income tax.  

Proponents of an income tax know this, and will do their best to capitalize on the tax-reform conversation. 

It is a far better approach to tax reform to let it be preceded by spending reductions. That way, by the time the legislature gets to the tax reform issue, they will already have closed the budget deficit. This drastically reduces the need for a strict revenue-neutral tax reform, and thereby removes the threat of an income tax before the conversation about tax reform even starts.

The second reason to take the income-tax issue seriously is the gubernatorial race. As we get into the last leg of the GOP primary, the tax conversation will gain even more momentum. Even more so, in the lead-up to the November election, there will probably be quite a bit of distance on this issue between the Republican candidate and Mary Throne, making it one of the defining distinctions between the two. 

Throne is much more likely than any Republican to sign tax-hiking bills into law. As governor, she will put emphasis on revenue rather than spending reform; until she takes the tax pledge, we must assume that she is willing to sign a tax-reform bill that creates an income tax. Therefore, we cannot ignore the possibility that with her in the governor's mansion, the legislature will be more likely to consider taxes they would not consider with a conservative governor in office.

Fortunately, it is not that difficult to refute income-tax arguments. As for Better Wyoming, it does not help them in their campaign for an income tax that they get practically every fact wrong. In their article about Representative Miller and the Revenue Committee meeting, they get almost every fact wrong: 

1. It does not matter how many times they continue to say that the state budget passed in the 2018 session is the smallest in 15 years - it is simply not true.
2. They also suggest that the Revenue Committee were presented with a report from an economist whose conclusions concur with Better Wyoming's continuous drum beat for higher taxes in general and an income tax in particular. Again, fiction does not become fact just because you say so.
3. And expectably, they bring up that chart from the Economic Analysis Division saying that we only pay for a fraction of the government services we get. Again, a myth does not become truth just because Better Wyoming keeps repeating it.

These are standard arguments that income-tax proponents put forward from time to time. This time around, though, Better Wyoming has added a new argument to its roster. This one is not entirely fictional, just irrelevant:
Creating new jobs that attract people to Wyoming would increase the burden on our schools, roads, and other public services, he said. But there would be no mechanism to collect revenue from these new residents—such as an income tax—so our already distressed public infrastructure would face further strain. This is problematic for Gov. Matt Mead and other top state lawmakers who have made economic diversification a focus.
Contrary to what Better Wyoming is trying to say, we do indeed have taxes that produce revenue in proportion to the state's population. Sales and excise taxes are paid by consumers; when the number of consumers goes up and more people spend money in Wyoming, the state as well as local communities collect more revenue from sales and excise taxes. 

Likewise, when more people move to Wyoming, demand for property goes up. When demand for property goes up, so do property values. Over time, this increases revenue collected from property taxes. An increase in the population also motivates new construction of homes and businesses. When new property is added to a community, the property tax base expands. 

Just to give a couple of examples of how important these taxes are, the Census Bureau reports that in 2015 the state of Wyoming collected $811 million in general sales tax revenue. Other taxes yielded $1.2 billion, and that does not include severance tax revenue administered by the federal government (which in federal statistics is defined as "federal funds" or "federal aid to states").

In other words, we do indeed have revenue sources for government that accommodate to the size of the population. 

It is encouraging to see that Better Wyoming is worried about funding for our infrastructure. Perhaps they would like to join this blog in calling for toll funding of the I 80? That would go far in securing sustainable infrastructure funding for our state.

While we are waiting for our friends on the left to come around, it might be worth looking a little bit more in depth at the income-tax issue. Anyone who claims that our state can solve its budget deficit problem by means of a personal income tax must present his evidence in open court, so they can be properly vetted. This is especially true for those who - like Better Wyoming - appear to believe that higher taxes have no negative effect on the economy.

However, this burden of proof is not limited to left-wing pundits. State legislators who disguise their arguments for an income tax in rhetorical trickery about enjoying how the minerals industry pays the bills, must come clean and tell us whether or not they are willing to reform our state's tax system without any reforms to the spending side of the budget.

If the answer is "yes, we want tax reform without spending reform", then we know we can expect a significant net increase in the burden on Wyoming taxpayers. To get an idea of what this means, let us assume that the target for a reform is to raise revenue by $700 million to $1 billion per year; the current budget deficit is on a trajectory into those numbers, and given the static calculations underpinning the typical tax reform, we have to expect a "revenue neutral" reform to pursue higher tax collections in this bracket.

What kind of income tax would it take to close the budget gap from the revenue side?

The number to use for revenue calculations is the total taxable income in Wyoming as per the definition used by the Internal Revenue Service. This is also the definition that the IRS uses as base for the federal personal income tax. Using this definition, in 2015 Wyoming taxpayers earned a total of $16 billion that was subject to federal personal income taxes. 

Under static assumptions, i.e., disregarding negative multiplier effects, a flat state income tax

-at two percent would have collected $320 million in tax revenue;
-at four percent would have collected $640 million in tax revenue; and
-at six percent would have collected $960 million in tax revenue.

Some states have a multi-bracket, progressive income tax. As an example of what such a tax would look like, a three-bracket version with two percent on incomes up to $50,000, four percent up to $100,000 and six percent there above, would have yielded $828 million in 2015. For simplicity, though, we stick to the flat-rate tax for now.

The problem with these numbers is that they are built on the assumption that economic behavior does not change in response to the tax. Needless to say, we do indeed change our behavior in response to changes in taxation; any tax reform will have dynamic effects on the economy. It does not matter if the architects of the reform claim that it is going to be revenue neutral; to the best of my knowledge, there has never been a tax reform in an industrialized nation that has delivered on revenue-neutrality promises. Therefore, in order to get the full picture of the consequences of an income tax, we need to take into account its negative multiplier effects.

These effects are not just theoretical. An income tax will rob Wyoming families of money that they would otherwise have spent in their local communities. Based on the size of private consumption as share of the Wyoming GDP, we can calculate a consumption multiplier to give us a rough estimate of what those repercussions might look like. In 2015, 

-Wyoming GDP was $39.47 billion;
-Private consumer spending in our state amounted to $23.28 billion.

In other words, consumption absorbed 59 percent of GDP. Using this number, we can calculate a multiplier effect that will unfold as follows.* A flat personal income tax would reduce economic activity in Wyoming:

-by $800 million if the tax rate is two percent;
-by $1.6 billion if the tax rate is four percent; and
-by $2.4 billion if the tax rate is six percent.

The multiplier is linear so long as the tax is flat. This is no longer the case under a multi-bracket income tax, when, for example, a doubled tax rate will more than double the multiplier effect on private spending. 

Given that it takes two years, approximately, for consumption multipliers to work their way through the economy, the implementation of an income tax in 2019 would in theory fully affect our state by 2021. In practice, it could happen faster, but sticking to the two-year period as a default, we would experience a downturn that was about as long as the one we went through in 2014-2016.

To get an idea of what the downturn would do to the Wyoming economy, let us recap what our latest economic plunge meant:

-State GDP fell by $3.6 billion, or 8.7 percent, in current prices;
-The private sector lost 12,900 jobs, or 5.7 percent.

At a four-percent income tax, aimed at collecting $640 million per year, the effect on the Wyoming economy would, in theory, be almost half of what this downturn did to us. In practice, it would be bigger: an income tax is going to hit the state economy harder than a downturn in minerals, simply because it strikes all households and all communities across the state. Job losses are likely to be higher for this very reason.

There is also the outflow of wealthy residents whose mobility is significantly higher than that of middle-class families. This means a stronger negative effect on property values and higher-end consumer spending.

With all this in mind, a rough estimate would suggest that a four-percent flat income tax could cost our state about 8,000 private-sector jobs.

Keeping in mind that the revenue target for this tax is "only" $640 million, we have to add the possibility that a tax reform will try to recover up to $360 million by means of other new or higher taxes. One candidate is a sales tax on services, another an increase in property taxes, a third is the gross receipts tax. If we take these into account and simplify the reform effort into an all-out reliance on the income tax, we end up with the six-percent income tax. 

At this level, the macroeconomic repercussions are likely going to be far bigger than a simple, linear multiplier extrapolation as explained above. We could easily be looking at an economic downturn of the same magnitude as we went through in 2014-2016. If we split the tax increase over several taxes, the effect is more difficult to calculate in detail, but in the aggregate the impact will be approximately the same. All taxes eventually rob the same pockets.

Some proponents of higher taxes use the so-called balanced-budget multiplier to counter analysis such as presented here. Their point is that a tax dollar in to government is not a tax dollar out, but more than that. However, this objection is invalid here, simply because we are not operating with a balanced budget - we are trying to raise taxes to close a budget deficit. Therefore, there is not a single dime's worth of new government spending coming out of these higher taxes. 

All that the tax hikes do is drain the private sector of money that would otherwise be spent in local communities around the state.

The Wyoming economy cannot survive another downturn of the same magnitude as we experienced in the last few years. This is especially true if the downturn is not caused by a one-time decline in production, but a perpetual increase in the tax burden.

Thankfully, the resistance to new and higher taxes is growing among our gubernatorial candidates. They are also starting to have a conversation about spending reform. Is there any chance our legislative leadership might come onboard and join the conversation?

---
*) Standard multiplier calculations use disposable income to find the propensity to consume; rather than doing that, we are going to stick to the 59-percent rate. The reason is that we also have to have a savings estimate - not too difficult - but also be able to identify out-of-state spending in Wyoming as well as Wyomingites' spending in other states. Normally, such transactions would fall under foreign trade statistics, but in an economy as integrated as the U.S. economy, with no practical barriers to consumer spending across state lines, there are no formal national-accounts products that equal balance of payments numbers at the national level. Estimates can be made, but the methodology is too complex and time consuming to warrant its application in this article. Therefore, for simplicity the multiplier estimates used here are based on consumption as share of GDP.

Friday, June 15, 2018

The Art of Destroying A Country

Since last fall I have been working on my next book manuscript, which is about the risk for a Greek-style fiscal disaster here in the United States. However, I have decided not to publish it as a book, at least not at this point in time. The story of this new book is simply too serious and too urgent to put through the slow-moving grinds of another book publication period. My two latest books, on Gower and Routledge, took almost a year from acceptance to availability.

This is normal for a peer-reviewed publication, but this time around I do not think my message can wait that long. Over the course of the summer, I am going to publish the material in the form of four openly available, comprehensive essays.

To maintain quality I am submitting key parts of the analytical work to peer review through conference papers; the first part was discussed at a conference in Amsterdam last month, with very helpful feedback from a strong selection of sharp-minded economists. The second part is discussed in another conference paper, due out later this summer. 

While maintaining scholarly standards, I also want to tailor the message for a broad audience. The story of this book is simply too brutal to be kept confined to scholarly circles:

1. The United States will experience a Greek-style fiscal crisis. It is no longer a matter of if - it is a matter of when, and how bad it will be. We meet all the conditions for a crisis. All we need is a "trigger point", and it is only a matter of time before we hit one.
2. Our political, academic and think-tank elites are almost unanimously in shocking denial over the seriousness of the situation. This even includes those who raise their voices in protest over big government spending.
3. When we combine the ripe-for-crisis conditions in our economy and the denialistic mentality among policy makers, we have the perfect recipe for a crisis with devastating consequences.
4. We must educate ourselves about this situation, not because we can do much to prevent the crisis but because we can learn how to ride it out, mitigate its consequences and - most importantly - take the necessary, painful steps to make sure it never happens again. 

There is still a slim chance that we might avoid a Greek-style fiscal crisis, but the room for preventative measures is shrinking rapidly. This is why I want to get my analysis out in the public as soon as humanly possible. Therefore, over the summer I will roll out my four comprehensive essays and for free. 

I am not an alarmist. I am simply sharing my scholarly analysis, based on almost two decades of Ph.D.-level academic and public-policy research, peer-review publications and production of policy solutions to complex macroeconomic and fiscal problems. Frankly, in the particular case of this very project, if I kept my work to myself in order to publish it as yet another book by another academic publisher, I would not be doing my job.

The common title for the essay series will be:

The Art of Destroying A Country

and the first essay will be published next week.

Those who wish to gain some valuable background can pick up a copy of my latest book, published this past winter on Routledge:


You do not have to read it to follow my new series of papers, but it helps in understanding the background of America's looming Greek-style fiscal crisis. 

Wednesday, June 13, 2018

More Candidates Sign the Tax Pledge

On his radio show today, Rush Limbaugh made an important point (as he so often does). Senator Bob Corker (RINO-Tenn.) had made some rather insulting comments about Republicans who back President Trump, suggesting that their support creates a "cult-like" atmosphere in the GOP. Limbaugh explained that Corker's inability to understand Trump supporters is typical of someone who does not see the new dynamic in American politics. This is, Limbaugh said, not about left vs. right, but about insiders vs. outsiders. Corker, an insider, is unable to comprehend why people on the outside don't like him and his establishment buddies. 

Tuesday, June 12, 2018