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Friday, August 25, 2017

Taxes, Colleges and Economic Growth

Last night I sat on the panel at a town hall meeting in Gillette. It was organized by the John Patriots and debated the proposal for a 0.25-percent increase in the sales tax in Campbell County. I had the privilege to sit on the opposition side together with Representative Clem, with Mark Englert of Gillette College and Phil Christopherson of Energy Capital Economic Development on the pro-tax side. 

A special shout-out to Vicki Kissack for organizing and managing the event. 

The discussion, which was both informative and a bit polemical (as is always the case with town hall meetings), was relevant to a larger audience than the many people who attended. It centered in on two arguments that often pop up when there is a debate over taxes and government spending: 

  • The pro-tax side explained why their institutions, the community college and the development organization, were doing a good job;
  • We on the opposition side argued that the tax is unaffordable and perpetuates an unsustainable funding model.

Interestingly, and frustratingly, these two arguments run on parallel tracks. The pro-tax side is correct in that the Gillette College does a great deal of good for the local business community - I don't think anybody would argue that our community colleges here in Wyoming are bad in any way. The problem is that the existence of a good college does not mean that taxpayers can afford to pay more for it.

The incompatibility of these two arguments reminds me of a discussion here at home. A couple of years ago when my wife and I had both taken pay cuts, we had to make some budget cuts. I wanted to keep my Cadillac, and my foremost argument was that it made me happy, because it was fun to drive. (Have you ever driven a CTS hard and fast down a twisty two-lane highway...?)

My wife responded with a loving smile and her index finger on our bottom line. End of argument.

Of course, the analogy between a household budget and our state's economy is limited. On the one hand, taxpayers do have a bottom line as inarguable as anything can be; on the other hand, it is possible to make the argument that some types of government spending could generate growth and thereby expand the tax base. This could, for example, be the argument for economic development, and that the organizations doing that work around our state are deserving of new revenue from higher taxes.

This is a form of standard Keynesian macroeconomics applied to, for example, Campbell County. It is true, under some strict circumstances, that a small set of government spending programs can indeed help grow an economy. Those are limited to investment infrastructure and - in countries with weak state functions - law enforcement. But there are two strict conditions that have to be met if infrastructure investments are going to help an economy grow. 

First, it has to be made clear that there are no private alternatives that would do a better job: in terms of broadband and other electronic infrastructure, there are plenty of examples of how private businesses have brought those services to under-served areas and done a good, profitable job doing so. Other examples are oil pipelines and power grids, not to mention the railroads in the 19th century. 

It is, in other words, while government can be a good provider of infrastructure investments, its role in that business is not a given.

Secondly - and most importantly - if government is to be involved, it cannot finance its investments by means of taxes. The investment itself is supposed to make a net contribution to the capital stock of the economy; by taxing members of that community to simultaneously expand the capital stock, government weakens the ability of the economy to grow and thrive from that very capital investment. 

It works the same way with workforce training and economic development. If government takes money from the community to educate workers, then when those workers are ready to join the workforce, the tax may have tightened economic conditions enough to deprive them of job opportunities. 

The same point applies to economic development. If taxes pay for an organization to recruit businesses to, again, Campbell County, and the county offers a tax climate that - tallying up all forms and levels of taxes - makes it unattractive to businesses, then by taxing the community, the development organization has defeated its own purpose.

We can certainly use Keynesian economics to understand how the economy works. I am not alien to doing so, but it must not be the distorted, politicized version floating around in leftist textbooks. It would have to be the originalist kind of Keynesianism, as formulated by Keynes himself in his brilliant book The General Theory of Employment, Interest and Money. There, he explains how an economy can use borrowed money to fund itself out of a depression.

Yes, depression, not recession. The difference is very important: there is really no place for Keynesian economics in a regular business cycle. It is not until an economy falls so deep into a hole that the private sector entirely loses faith in the future, that government could play a role in pulling it back up again. 

At that point, however, Keynes does NOT argue that higher taxes is the path forward. His point is that if government should play a role in ending a depression, its means of funding operations should come in the form of borrowed money. Keynes was not a high-tax advocate. 

Now, if we follow the logic of those who argue for government-provided economic development and government-run colleges and apply a Keynesian argument in their favor, the macroeconomic logic behind their proposition should be that they avoid relying on taxpayers' money for funding their investments in the community. 

Does this mean they should borrow money to pay for economic development and workforce training? No, at least not entirely (though there is a case to be made that economic development could function based on free-market lending) and certainly not to pay salaries for college faculty. But taxes and credit are not the only funding sources for a community college. Private donations provide a substantial part of all college education in America. 

The other "third path" funding consists of tuitions and scholarships. Gillette College is diligently working on expanding both private donations and scholarships, and there is no doubt that Mark Englert is doing a good job in trying to build a sustainable funding model for the school. Having been a college professor myself, I have a lot of respect for the work he does to sustain and grow the college. 

That said, with the substantial majority of the college's funds coming from taxpayers, and with efforts to expand that funding source, Englert risks falling into the defeat-your-own-purpose trap. It is a fact of reality that the success of a college such as Gillette, which effectively is a highly advanced vocational school, is strongly dependent on the success and future stability of the local business community. Therefore, the college's funding model must not get in the way of that very success. 

During the town hall discussion, Englert expressed frustration over the funding model he was set to work with. I sympathize: the majority of the revenue comes from taxpayers, and that revenue in turn is split between state and local sources. There is no coordination between the levels of government that provide the funding, which adds an element of unpredictability to the college budget. 

But this is precisely why it is a good idea to move both Gillette College and other community colleges here in Wyoming off their dependency on taxpayers. The more independent they become, the more of a genuine investment institution they will be: if the workforce they train do not drain the economy of money in order to be trained, there will be more jobs waiting for them.

The business community, in turn, thriving from an educational institution that - no doubt - contributes well to the skills and abilities of our state's workforce, should see the value in the college and participate in voluntary, sustainable funding models. Alumni, personally experiencing the difference that the college makes in their lives, should value participating in the same funding model. 

Furthermore, there is always a market for student loans, which prospective students should see the value in when they realize what difference the college can make in their lives. Those loans can be provided by the private sector, just as has been the case historically here in the United States (before the ugly political maneuvering that involved socialization of student loans in exchange for Senate support for Obamacare). 

Private funding is not alien to Gillette College or the other community colleges in our state. The problem is that its share is far too low. I was happy to hear Representative Clem express interest in an overhaul of the funding model for community colleges, including a more flexible tuition model. Hopefully, such an overhaul can begin the transition of funding for our colleges away from reliance on taxpayers.

Again, what matters here is not whether or not our colleges are good and necessary. They are both good and necessary. What matters here is to find a way to fund them that allows them to provide workforce education without choking the community where that workforce is supposed to find jobs, settle in and become contributing members. 

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