Voice For Liberty

Tag: Government spending

  • In Wichita, private sector employment lags behind government

    Recently Kansas Policy Institute looked at the growth of employment in the private sector versus governments. The finding is that government employment is growing much faster than private sector employment.

    In its blog post that presented results, KPI concluded “A heftier tax burden must be carried by each private sector employee to support the growing local public sector.”

    I looked at the employment statistics from the Bureau of Labor Statistics independently, going back a little farther in time than did KPI. The results are the same: Private sector employment over the last 20 years in the Wichita area has grown much slower than total government employment. Private sector employment has also grown slower than any sector of government employment: federal, state, or local.

    The figures in the chart presented below are based on an index, where the 1990 value is equal to 100.

    Employment growth in the Wichita area.

  • Wichita pension plan report

    First, the good news: The condition of Wichita Employees’ Retirement System is nowhere near as dire as Kansas Public Employee Retirement System, or KPERS. But the city is having to make much higher contributions to keep the plan funded. These contribution rates are likely to increase, as the plan relies on unrealistic assumptions.

    Wichita has two employee retirement plans, one for police and fire, and another for other employees. The two plans are nearly equal in size, and both experience the same problems.

    As a result of low investment returns, the city finds itself saddled with higher retirement plan costs. In 2009, the city’s contribution to Wichita Employees’ Retirement System was $3,887,085. For 2011, it is $7,695,317, an increase of 98 percent in two years. In reality this increase, as large as it is, is not nearly enough to fund the plan if realistic assumptions and accounting was used.

    In the words of report authors, the Wichita Employees’ Retirement System plan experienced a “large increase to the unfunded actuarial liability.” In plain language, the plan’s investments did not earn enough in 2011 to meet expected future expenses. This is termed, again by plan authors, an “unfavorable experience.”

    The reality is worse than reported, as Wichita uses a valuation method called “asset smoothing.” This technique smooths out uneven investment returns. It means that the recent years of investment losses are not fully incorporated into the official statistics. Again, from the report authors: “Under the asset smoothing method used in the valuation process, a portion of this investment loss is deferred to future years.” Private sector pension plans can’t do this.

    As of December 31, 2011, the actuarial value of the plan’s assets — determined using the asset smoothing technique — was $513.3 million. The market value was $458.8 million, or 10.6 percent less. Also, a measure called “Portion of Actuarial Liabilities Covered by Reported Assets” has declined from 90.1 percent in 2009 to 73.9 percent in 2011.

    The effect of this unrealized loss on the plan is severe. If these losses were recognized, the city would have to increase its contributions to the plan by a large amount, write the authors: “If the deferred losses were recognized immediately in the actuarial value of assets, the funded percentage would decrease from 93% to 83% and the actuarially determined contribution rate would increase from 12.6% to 17.9%.” (It’s important to remember who pays for these contributions: Wichita taxpayers.)

    A chart in the report shows the expected city contribution rate for future years. It rises rapidly, from about 10 percent now to over 16 percent in 2015. This assumes that the plan earns 7.75 percent investment returns.

    The ongoing problem

    The Wichita retirement plan uses an assumed rate of return of 7.75 percent. Calculations as to how much the city needs to contribute are based on this assumption. The problem is that this rate is simply too high.

    In the private sector, pension plans use much lower assumed rates, such as the rate of return on high quality corporate bonds. This might be somewhere between five percent and six percent. If the Wichita retirement plans were re-evaluated using this assumption, the unfunded liability would explode, and the contributions the city would need to make would be much greater, perhaps by one-third. That’s because of the long time frame of pension fund investments, where small changes in rates of return have a large dollar impact.

    Solution going forward

    The ongoing problem is that city and state pension plans operate under unrealistic assumptions. This means that Wichita is taking on too much risk in the form of future promised benefits that it isn’t presently paying for.

    It’s also easy for cities and states to promise generous retirement benefits without paying for them. The solution is to simply stop this practice and adopt what most of the private sector has: Defined contribution plans like 401k plans.

    The city has done this, partially, as new employees (not police and fire) are initially in a defined contribution plan. But employees can later decide to move to the defined benefit plan — the type that causes so much trouble for state and local governments. As it turns out, almost all eligible Wichita employees choose to enter the defined benefit plan.

    Government employee representation groups are strongly in favor of defined contribution plans. Last year, in its message to its followers, Kansas National Education Association (KNEA, the teachers union) wrote this about defined-contribution plans: “First, they claim that a DC plan gives the employee control over their own retirement. And if you have lots to invest and have the time and knowledge to do so effectively, that might be true. Of course, even if you do, you can end up like the folks who found Enron to be a great investment or trusted Mr. Madoff. The fact is most of us are not prepared to do our own analysis and investment.”

    (While KNEA is writing about KPERS, the state employee retirement plan, the principles apply to the Wichita plan.) There’s quite a bit of misinformation here. But before that, a huge irony is that this information is aimed at Kansas schoolteachers, and their union assumes they are not intelligent enough to plan for their own retirement.

    In fact, planning for retirement is quite easy and simple. All one needs to do is select low-cost index stock and bond mutual funds, of which there are many. These funds, over the long time horizon appropriate for retirement investing, beat the performance of all managed funds, meaning funds managed by professionals who attempt to analyze markets and earn greater than average returns through an active trading strategy. This is not disputed by anyone except by those who sell actively-managed mutual funds.

    “The evidence is clear. Low-cost index funds regularly outperform two-thirds of actively managed funds, and the one-third of actively managed funds that outperform changes from period to period. Even the very few professional investors who have beaten the market over long periods of time — Berkshire Hathaway’s Warren Buffett and Yale University’s David Swensen, for instance — are quick to advise that investors are likely to be much better off with simple low-cost index funds than with expensive actively managed funds.” (Burton G. Malkiel, ‘Buy and Hold’ Is Still a Winner. Also, see the author’s book The random walk guide to investing: ten rules for financial success.)

    Generally, most investors would select just one or two funds in which to place their contributions. Over time, investors may want to change the balance or characteristics of the funds they invest in. This again is easy to do. In fact, large mutual fund companies like Vanguard have index funds that automatically shift the balance between stocks and bonds as investors move along towards retirement.

    The idea that the teachers union believes that professionals like schoolteachers are not capable of becoming informed and making these decisions is laughable if it weren’t the actual belief of the union. Suggestion: An actually useful and productive role for the teachers union would be to help their members learn to invest for their retirement. Cities like Wichita could do the same.

    The problem cited about Enron and Madoff is that some people placed all or nearly all their investments with these two firms. That’s a bad strategy for anyone to follow with their retirement investments. Using index funds will not expose investors to the risk of losing all their money.

    The claim by the KNEA that “lots to invest” is required is false. The companies that manage defined-contribution retirement plans accept new employees into the plan no matter how little they have to invest, and they accept their periodic contributions each pay period no matter how small. Scale — the amount available to invest — is not an issue, contrary to the assertions of the teachers union.

    One claim made by KNEA is true: defined contribution plans give workers control over their retirement savings. This is a benefit. If a worker has a low tolerance for risk, they can keep their contributions in cash (actually treasury bonds would be the choice for these people). Others who wish to take an active role in the retirement investing can do so, as most plans offer funds that have targeted goals such as real estate, growth stocks, short-term bonds, long-term bonds, etc.

    But in KPERS — and the Wichita plan — all members are invested in the mix of investments that the plan trustees decide on. These investments are largely in stocks and bonds, a fact possibly lost upon Jane Carter of Kansas Organization of State Employees. She asked her members “Do you really want to take your retirement security and gamble it on the stock market?” The reality is that KPERS is invested in the stock market, and those returns are essential to funding KPERS benefits. The investments that the trustees choose may not be suitable for each individual member. But KPERS members have no choice.

    The point is that the individual is in control, and can choose investments that match their goals.

  • Federal grants increase future local spending

    “Nothing is so permanent as a temporary government program.” — Nobel Laureate Milton Friedman

    Is this true? Do federal grants cause state and/or local tax increases in the future after the government grant ends? Economists Russell S. Sobel and George R. Crowley have examined the evidence, and they find the answer is yes.

    This paper is especially important as south-central Kansas starts a comprehensive planning process under a HUD Sustainable Communities Regional Planning Grant — a federal grant. Some officials have justified their votes in favor of the planning grant because the grant is “just for planning purposes.” It does not bind us to future actions that might raise taxes, they say. But this attitude is naive and dangerous.

    The research paper is titled Do Intergovernmental Grants Create Ratchets in State and Local Taxes? Testing the Friedman-Sanford Hypothesis.

    The difference between this research and most other is that Sobel and Crowley look at the impact of federal grants on state and local tax policy in future periods.

    This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.”

    The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”

    The conclusion to their research paper states:

    Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. Our results are consistent with Friedman’s quote regarding the permanence of temporary government programs started through grant funding, as well as South Carolina Governor Mark Sanford’s reasoning for trying to deny some federal stimulus monies for his state due to the future tax implications. Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.

    So: Not only are we taxed to pay for the cost of funding federal and state grants, the units of government that receive grants are very likely to raise their own levels of taxation in response to the receipt of the grants. This is a cycle of ever-expanding government that needs to end, and right now.

    An introduction to the paper is Do Intergovernmental Grants Create Ratchets in State and Local Taxes?.

  • Kansas and Wichita quick takes: Tuesday April 3, 2012

    Arts funding. For a view of government arts funding from an actual artist, please read The Government, art funding and Sam Brownback in KS by Christopher Allen. He makes an important point: “The government not paying for you to make something is NOT censorship.” I haven’t heard government arts funding advocates use the “censorship” word yet, but you can tell it’s on the minds of those who feel they should be receiving taxpayer money to support their work. … Allen also draws attention the incredible freedoms we in America and the free world enjoy regarding art: “If you want to make art, nobody’s stopping you. In some countries of the world, you get beheaded for making art that others disapprove of.”

    Arts censorship. I thought that no one in Kansas had used the “Censorship” word regarding government funding of arts, but I now realize I spoke too soon. Reporting on a recent visit by Rocco Landesman, National Endowment for the Arts Chairman, the Lawrence Journal-World reported: “Kevin Willmott, a KU film professor, asked Landesman if he was concerned about what Willmott called ‘corporate censorship’ of the arts, saying if a movie he created wasn’t perceived as being able to make money it wouldn’t get seen. Landesman replied with a line that drew applause from the audience. ‘The reason we have public funding of the arts, and the reason we have the NEA at all, is so the marketplace is not the sole determinant of what is seen and what is excellent,’ he said.” … I think Wilmott ought to be more concerned that the people of Kansas will continue to fund university film departments at the same time our universities are having trouble producing graduates equipped for a modern economy.

    Comparison of state comparisons. There are a number of studies that have ranked the states based on economic competitiveness. Emily Washington of the has looked at three reports produced by organizations that favor free markets and reports on the differences. Included are State Business Tax Climate Index by Kail M. Padgitt of The Tax Foundation, Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index from American Legislative Exchange Council, and Freedom in the Fifty States: An Index of Personal and Economic Freedom from Mercatus Center at George Mason University. Washington’s report is at A Comparison of Indices that Rank State Economic Competitiveness.

    Ryan tax plan. Cato Institute’s Chris Edwards comments: “The goal is to simplify the tax code and spur economic growth, and you can do that without changing the total revenue raised or who it is raised from. Ryan’s strategy is to eliminate tax deductions and credits while replacing the current six-rate income tax structure with two rates of 10 and 25 percent. The result would be less tax paperwork, more jobs and more investment, which would be good for everybody. Liberals rail against the idea of cutting the top income tax rate from the current 35 percent, but Ryan’s lower 25 percent rate was not picked out of thin air. IRS data show that taxpayers with the highest incomes currently pay an average of about 25 percent of their income in income taxes. At the same time, middle-income taxpayers pay an average of roughly 10 percent. That is why Ryan’s two-rate tax structure of 10 and 25 percent would collect about the same amount of money from the same income groups as the current code if we got rid of the deductions and credits.” See The Truth about Paul Ryan’s Tax Plan.

    Are earmarks returning? “After just 14 months at the levers of power of the House, it appears that some House Republicans are ready to admit that they have been unsuccessful in kicking their spending addictions. Rep. Mike Rogers (R-AL) is suggesting to House Republicans that the ban on earmarking be lifted so that members of Congress could ‘grease the wheels’ of legislation in an effort to pass bills faster. The ban was put in place shortly after Republicans, backed heavily by Tea Party conservatives calling for more fiscal responsibility in Congress, won the majority in the House during the Fall 2010 midterm elections. The ban is set to automatically expire at the end of this session of Congress at the end of the year. Bill Wilson, President of Americans for Limited Government, said, ‘This is an open acknowledgement that earmarks are nothing more than legislative bribery to buy votes. But what it represents is a further repudiation by leadership of the principles that got them in power in the first place. In 2010, Republicans pledged to ‘put us on a path to balance the budget and pay down the debt.’” See Are earmarks returning?

  • Kansas may again resort to government art

    Kansas may be ready to restore some state funding for the arts. But for reasons economic, human, and artistic, we ought to keep Kansas government out of art. Kansas should allow people themselves to decide how to spend their own money on what they think is important to them. To implement government funding of art is to override the freedom of individual choice with political and bureaucratic decisions.

    It’s puzzling as to why artists — generally a group of independent minds and free spirits — would want to reintroduce government control over the funding of their craft. Perhaps it springs from the prevailing attitude taught in our (government controlled and funded) schools and universities that government is a force for accomplishing good. While government does some good things for us, when government expands too much — like deciding which artists to spend someone else’s money on — it overreaches and tamps down individual freedom and liberty.

    The economic case for government art funding

    Supporters of government art funding make the case that government-funded art is good for business and the economy. They have an impressive-looking study titled Arts & Economic Prosperity III: The Economic Impact of the Nonprofit Arts and Culture Industry in the State of Kansas, which makes the case that “communities that invest in the arts reap the additional benefit of jobs, economic growth, and a quality of life that positions those communities to compete in our 21st century creative economy.”

    This report, however, is full of the same problems that fill most other reports of similar type. As an example, the report concludes that the return on dollars spent on the arts is “a spectacular 7-to-1 return on investment that would even thrill Wall Street veterans.” It hardly merits mention that there aren’t legitimate investments that generate this type of return in any short time frame. If these returns were in fact true and valid, we should invest more — not less — in the arts. But as we shall see, these returns are not valid in any meaningful economic sense.

    Where do these fabulous returns come from? Here’s a passage from the report that government art spending promoters rely on:

    A theater company purchases a gallon of paint from the local hardware store for $20, generating the direct economic impact of the expenditure. The hardware store then uses a portion of the aforementioned $20 to pay the sales clerk’s salary; the sales clerk respends some of the money for groceries; the grocery store uses some of the money to pay its cashier; the cashier then spends some for the utility bill; and so on. The subsequent rounds of spending are the indirect economic impacts.

    Thus, the initial expenditure by the theater company was followed by four additional rounds of spending (by the hardware store, sales clerk, grocery store, and the cashier). The effect of the theater company’s initial expenditure is the direct economic impact. The subsequent rounds of spending are all of the indirect impacts. The total impact is the sum of the direct and indirect impacts.

    The fabulous returns erroneously attributed to spending on the arts derive from this chain of spending starting at the hardware store. But there’s a problem with this reasoning: Most spending induces the same rush of economic activity. What the authors of this study fail to disclose — and what government art supporters fail to see — is that anyone who buys a gallon of paint for any reason sets off the same chain of spending. There is no difference — except that a homeowner buying paint is doing so voluntarily, while an arts organization using taxpayer-supplied money to buy the paint is using someone else’s money. Money, we might add, that is taken through the government’s power to tax.

    The study also pumps up the return on government spending on arts by noting all the other spending that arts patrons do on things like dinner before and desert after arts events. But if people kept their own money instead of being taxed to support the arts, they would spend this money, perhaps on restaurant meals, too. Most importantly, people would spend their own money on the things they value — not on what someone else values.

    This report — like most of its type that attempt to justify and promote government “investment” — focuses only on the benefits without considering secondary consequences, how these benefits are paid for, and what people would do if left to their own devices. The report, however, seems to make sense in promoting taxation and government spending on arts. This is characteristic of many arguments for government spending, as explained by Henry Hazlitt, in his masterful book Economics in One Lesson:

    While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

    It is, as Hazlitt terms it, “the special pleading of selfish interests” that drives much of the desire for government spending on the arts. Government-funded arts advocates promote their case with these economic fallacies.

    The human and artistic case

    Besides the economic aspect of government funding of arts, there’s the artistic issue. There are very important reasons to keep government away from art. Lawrence W. Reed wrote in What’s Wrong with Government Funding of the Arts? of the harm of turning over responsibility to the government for things we value and find worthwhile:

    I can think of an endless list of desirable, enriching things in life, of which very few carry an automatic tag that says, “Must be provided by taxes and politicians.” Such things include good books, nice lawns, nutritious food, and smiling faces. A rich culture consists, as you know, of so many good things that have nothing to do with government, and thank God they don’t. We should seek to nurture those things privately and voluntarily because “private” and “voluntary” are key indicators that people are awake to them and believe in them. The surest way I know to sap the vitality of almost any worthwhile endeavor is to send a message that says, “You can slack off of that; the government will now do it.” That sort of “flight from responsibility,” frankly, is at the source of many societal ills today: many people don’t take care of their parents in their old age because a federal program will do it; others have abandoned their children because until recent welfare reforms, they’d get a bigger check if they did.

    The boosters of government arts funding in Kansas make the case that arts are important. Therefore, they say, government must be involved.

    But actually, the opposite is true. The more important to our culture we believe the arts to be, the stronger the case for getting government out of its funding. Here’s why. In a statement opposing the elimination of the Kansas Arts Commission, former executive director Llewellyn Crain explained that “The Kansas Arts Commission provides valuable seed money that leverages private funds …”

    This “seed money” effect is precisely why government should not be funding arts. David Boaz explains:

    Defenders of arts funding seem blithely unaware of this danger when they praise the role of the national endowments as an imprimatur or seal of approval on artists and arts groups. Jane Alexander says, “The Federal role is small but very vital. We are a stimulus for leveraging state, local and private money. We are a linchpin for the puzzle of arts funding, a remarkably efficient way of stimulating private money.” Drama critic Robert Brustein asks, “How could the [National Endowment for the Arts] be ‘privatized’ and still retain its purpose as a funding agency functioning as a stamp of approval for deserving art?” … I suggest that that is just the kind of power no government in a free society should have.

    We give up a lot when we turn over this power to government bureaucrats and arts commission cronies. Again I turn to David Boaz, who in his book The Politics of Freedom: Taking on The Left, The Right and Threats to Our Liberties wrote this in a chapter titled “The Separation of Art and State”:

    It is precisely because art has power, because it deals with basic human truths, that it must be kept separate from government. Government, as I noted earlier, involves the organization of coercion. In a free society coercion should be reserved only for such essential functions of government as protecting rights and punishing criminals. People should not be forced to contribute money to artistic endeavors that they may not approve, nor should artists be forced to trim their sails to meet government standards.

    Government funding of anything involves government control. That insight, of course, is part of our folk wisdom: “He who pays the piper calls the tune.” “Who takes the king’s shilling sings the king’s song.”

    A few years ago Rhonda Holman of the Wichita Eagle wrote an editorial (City can be proud of its arts work, July 15, 2008 Wichita Eagle) which started with the stirring invocation “The arts fire the mind and feed the heart.” I hoped that she was going to call for less government involvement in the arts, thinking that she would argue that anything so important to man’s nature should not be placed in the hands of government.

    But she described the City of Wichita’s commitment to permanent spending on arts as “a bold and even brave investment in quality of life.” It appears that even the yearnings of our hearts and minds are subject to government bureaucratic management.

    “Government art.” Is this not a sterling example of an oxymoron? Must government weasel its way into every aspect of our lives? Governor Brownback and the Kansas legislature can do the human spirit and the people of Kansas a favor by opposing government funding of the arts.

  • Wind tax credits are government spending in disguise

    Recently Kansas Governor Sam Brownback and U.S. Senator Jerry Moran of Kansas made the case for extending the production tax credit (PTC) for the production of electrical power by wind.

    The PTC pays generators of wind power 2.2 cents per kilowatt-hour produced, a high rate of subsidy for a product that sells for 9.5 cents, according to a March 2010 illustration provided by Westar.

    Brownback and Moran contend that this tax credit is necessary to let the industry “complete its transformation from being a high tech startup to becoming cost competitive in the energy marketplace.” But wind is not a new industry. The PTC has been in place for twenty years. If an industry can’t get established in that period, when will it be ready to stand in its own?

    The authors also contend that canceling the PTC will result in a “tax hike on wind energy companies.” To some extent this is true — but only because the industry has enjoyed preferential tax treatment that it should never have received.

    The proper way to view the PTC is as a government spending program in disguise. That’s the true economic effect of tax credits. They are equivalent to grants of money.

    Amazingly, Brownback and Moran do not realize this — at least if we take them at their written word as they describe the PTC: “These are not cash handouts; they are reductions in taxes that help cover the cost of doing business.” (Emphasis added.)

    It is the mixing of spending programs with taxation that leads these politicians to wrongly claim that tax credits are not cash handouts. But not everyone falls for this seductive trap. In an article in Cato Institute’s Regulation magazine, Edward D. Kleinbard explains:

    Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

    U.S. Representative Mike Pompeo of Wichita recognized the cost of paying for tax credit expenditures when he recently wrote: “Moreover, what about the jobs lost because everyone else’s taxes went up to pay for the subsidy and to pay for the high utility bills from wind-powered energy? There will be no ribbon-cuttings for those out-of-work families.”

    This is an example of the seen and unseen, where thinking is confined only to what is easily seen. Many years ago Frederic Bastiat explained this problem in his famous parable of the broken window. More recently the school of public choice economics has warned us the problem of concentrated benefits and dispersed costs. Politicians hope we won’t notice.

    When Brownback and Moran write of the loss of income to those who profit from wind power, we should remember that these profits do not arise from transactions between willing partners. Instead, they result from politicians who override the judgment of free people and free markets with their own political preferences — along with looking out for the parochial interests of the home state. We need less of this type of wind power.

  • Kansas and Wichita quick takes: Thursday March 29, 2012

    Sustainable development. Sedgwick County Commissioner Richard Ranzau writes that next week the commission will vote on the issue of sustainable development, and whether Sedgwick County should participate in a planning process. Writes Ranzau: “Sedgwick County will be voting on this issue next Wednesday, April 4th, 2012. Those of you that have concerns about this need to speak up now. Please email and call the commissioners and encourage them to vote NO on this. If you are a property owner, business owner, home owner, builder, developer, farmer, or taxpayer you should strongly oppose this agenda. Now is the time to stop this. This is President Obama’s plan to use HUD, DOT, and EPA to implement Sustainable Development/Smart Growth/UN Agenda 21.” Ranzau has written on this issue. His paper is at Sustainable Development and U.N. Agenda 21: Economic Development or Economic Destruction? Contact information for commissioners may be found at Board of County Commissioners. As of this writing the agenda and explanatory material for the April 4th meeting is not available. When it is, it can be found at the same page.

    Pachyderms to feature talk on sustainable development. On a related matter, this Friday (March 30rd) the Wichita Pachyderm Club features Tom DeWeese, President, American Policy Center, speaking on the topic “U.N. Agenda 21: Sustainable Development.” DeWeese is one of the nation’s leading advocates of individual liberty, free enterprise, private property rights, personal privacy, back-to-basics education and American sovereignty and independence. … The public is welcome and encouraged to attend Wichita Pachyderm meetings. For more information click on Wichita Pachyderm Club.

    Climate models. William Happer, professor of physics at Princeton, calls attention to the problems of modern climate science in the pages of the Wall Street Journal. He asks: “What is happening to global temperatures in reality? The answer is: almost nothing for more than 10 years. … The lack of any statistically significant warming for over a decade has made it more difficult for the United Nations Intergovernmental Panel on Climate Change (IPCC) and its supporters to demonize the atmospheric gas CO2 which is released when fossil fuels are burned.” While there has been warming over the past two centuries, Happer warns of linking this to the activity of mankind: “There has indeed been some warming, perhaps about 0.8 degrees Celsius, since the end of the so-called Little Ice Age in the early 1800s. Some of that warming has probably come from increased amounts of CO2, but the timing of the warming — much of it before CO2 levels had increased appreciably — suggests that a substantial fraction of the warming is from natural causes that have nothing to do with mankind.” While we need high-quality science regarding the earth’s climate, the current climate models are not providing that: “It is easy to be confused about climate, because we are constantly being warned about the horrible things that will happen or are already happening as a result of mankind’s use of fossil fuels. But these ominous predictions are based on computer models. It is important to distinguish between what the climate is actually doing and what computer models predict. The observed response of the climate to more CO2 is not in good agreement with model predictions.” … The complete article in the Wall Street Journal (no subscription required) is Global Warming Models Are Wrong Again: The observed response of the climate to more CO2 is not in good agreement with predictions. … Some will discount this article because Happer’s specialty is modern optics, optical and radiofrequency spectroscopy of atoms and molecules, and spin-polarized atoms and nuclei — not climate science. But, we see the problems with modern climate science and its predictive abilities.

    Shy regulators. The Obama administration is so out of touch with the public that it appears shy about publicity over its actions. The Hill reports: “The Obama administration announced landmark carbon emissions standards for new power plants Tuesday, but hardly shouted from the rooftops about them. The administration rolled out the proposal with relatively little fanfare, and President Obama — who was in South Korea at nuclear security summit — did not issue a statement about the regulation. In contrast, when the Environmental Protection Agency issued final rules to control power plant mercury emissions in December, Obama praised them as major public health protections while touting White House efforts to ensure they don’t affect power grid reliability.” … More at White House, rather quietly, advances climate change agenda.

    Just say no to taxes. Those who reject tax increases under all conditions are often described unflatteringly. The New York Times house conservative David Brooks has called them “fanatics” with “no sense of moral decency.” William Voegeli, writing in City Journal explains why we should not consider higher taxes as a solution to problems. “In rejecting tax hikes, Republicans aren’t trading in fanaticism. Rather, they’re confronting a governing failure — an abiding lack of candor about what our welfare state costs — that voters grasp but Democrats refuse to admit.” … The problem is soaring spending, growing faster than the economy: “What we can say is that over the last 40 years, government revenues have kept pace with economic growth while government spending has run steadily ahead of it. … Gross Domestic Product and federal revenues, both expressed in per-capita terms and adjusted for inflation, were about two and a half times as large at the end of the period as at the beginning. Federal expenditures were three times as large.” It is welfare-state expenditures that have grown the fastest, and by far. … Voegeli lays the problem at the feet of the Democrats: “For years, the Democratic Party’s raison d’être has been to establish, defend, and expand the welfare state. The Democrats could have told us all along — forthrightly, scrupulously, and unambiguously — that their project would cost a lot of money and that, should economic growth be insufficient to pay for it, big tax increases would be necessary. Had they done so, they would be in a strong position to argue that the terms of the deal they struck with yesterday’s voters oblige today’s Americans to pay higher taxes. But that’s not what they did.” … Much more to read at Not a Penny More: The case for antitax absolutism.

  • Kansas STAR bonds vote a test for capitalism

    Update: The bill passed in the House of Representatives 92 to 31. A similar bill passed in the Senate 27 to 13.

    An upcoming vote in the Kansas House of Representatives will let Kansans know who is truly in favor of economic freedom, limited government, and free market capitalism — and who favors crony capitalism instead.

    The bill is HR 2561: Extension of the STAR bonds financing act sunset provision regarding STAR bond projects. Under current law, the Kansas STAR bonds program will expire on July 1, 2012. This bill extends the program’s life for five years.

    The STAR bonds program allows increases in sales tax revenue to be directed to private interests rather than feeding the state treasury. The mechanism is that local governments like cities can sell bonds and give the proceeds to developers. Then, increments in sales tax revenues are used to make bond payments.

    In economic impact and effect, the STAR bonds program is a government spending program. Except: Like many spending programs implemented through the tax system, legislative appropriations are not required. No one has to vote to spend on a specific project. Can you imagine the legislature voting to grant $50 million over a period of years to a proposed development in northeast Wichita? That doesn’t seem likely. Few members would want to withstand the scrutiny of having voted in favor of such blatant cronyism.

    But under tax expenditure programs like STAR bonds, that’s exactly what happens — except for the legislative voting part.

    Government spending programs like STAR bonds are sold to legislators as jobs programs. Development, it is said, will not happen unless project developers receive incentives through these spending programs. Since no legislator wants to be seen voting against jobs, many are susceptible to the seductive promise of jobs.

    But often these same legislators are in favor of tax cuts to create jobs. This is the case in the Kansas House, where many Republican members are in favor of reducing the state’s income tax as a way of creating economic growth and jobs. On this issue, these members are correct.

    But many of the same members are, I am told, in favor of tax expenditure programs like the STAR bonds program. These two positions cannot be reconciled. If government taxing and spending is bad, it is especially bad when part of tax expenditure programs like STAR bonds. And there’s plenty of evidence that government spending and taxation is a drag on the economy.

    It’s not just legislators that are holding these incongruous views. Secretary of Commerce Pat George is promoting the STAR bonds program to legislators. He wouldn’t do that unless Governor Sam Brownback supported the program.

    Last year at the time Brownback and a new, purportedly more conservative Kansas House took office, I wondered whether Kansas would pursue a business-friendly or capitalism-friendly path: “Plans for the Kansas Republican Party to make Kansas government more friendly to business run the risk of creating false, or crony capitalism instead of an environment of genuine growth opportunity for all business.” I quoted John Stossel:

    The word “capitalism” is used in two contradictory ways. Sometimes it’s used to mean the free market, or laissez faire. Other times it’s used to mean today’s government-guided economy. Logically, “capitalism” can’t be both things. Either markets are free or government controls them. We can’t have it both ways.

    The truth is that we don’t have a free market — government regulation and management are pervasive — so it’s misleading to say that “capitalism” caused today’s problems. The free market is innocent.

    But it’s fair to say that crony capitalism created the economic mess.

    But wait, you may say: Isn’t business and free-market capitalism the same thing? Not at all. Here’s what Milton Friedman had to say: “There’s a widespread belief and common conception that somehow or other business and economics are the same, that those people who are in favor of a free market are also in favor of everything that big business does. And those of us who have defended a free market have, over a long period of time, become accustomed to being called apologists for big business. But nothing could be farther from the truth. There’s a real distinction between being in favor of free markets and being in favor of whatever business does.” (emphasis added.)

    Friedman also knew very well of the discipline of free markets and how business will try to avoid it: “The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.”

    The danger of Kansas government having a friendly relationship with Kansas business is that the state will circumvent free markets and promote crony, or false, capitalism in Kansas. It’s something that we need to be on the watch for. The vote on the STAR bonds project will let us know how our state is proceeding. If the vote goes as sources tell me, the verdict is clear: Kansas legislators — including many purported fiscal conservatives — prefer crony capitalism over free enterprise and genuine capitalism.

    The problem

    Government bureaucrats and politicians promote programs like STAR bonds as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Kansas economy.

    Arnold King has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

    As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

    When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

    Despite this knowledge problem, Kansas legislators are willing to give power to bureaucrats in the Department of Commerce who feel they have the necessary knowledge to direct the investment of public funds. One thing is for sure: the state and its bureaucrats have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.

    What to do

    The STAR bonds program is an “active investor” approach to economic development. Its government spending on business leads to taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

    Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

    In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Kansas and many of its cities employ: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

    In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

    There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Government spending on specific companies through programs like STAR bonds is an example of precisely the wrong policy.

    We need to move away from economic development based on this active investor approach. We need to advocate for policies at all levels of government that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

  • Kansas and Wichita quick takes: Monday March 26, 2012

    Pachyderms to feature talk on sustainable development. This Friday (March 30rd) the Wichita Pachyderm Club features Tom DeWeese, President, American Policy Center, speaking on U.N. Agenda 21: Sustainable Development. Tom DeWeese is one of the nation’s leading advocates of individual liberty, free enterprise, private property rights, personal privacy, back-to-basics education and American sovereignty and independence. … The public is welcome and encouraged to attend Wichita Pachyderm meetings. For more information click on Wichita Pachyderm Club. … The club has an exceptional lineup of future speakers as follows: On April 6th: Jordan A. Poland, who will discuss his Master of Arts thesis in Public History at Wichita State University, titled “A case study of Populism in Kansas. The election of Populist Governor Lorenzo Lewelling from Wichita, and the Legislative War of 1893.” … On April 13th: Alvin Sarachek, Ph.D., Geneticist, Distinguished Professor Emeritus of Natural Sciences at Wichita State University, speaking on “Human Genetic Individuality and Confused Public Policy Making.” … On April 20th: Senator Steve Morris, President of the Kansas Senate, speaking on “Legislative update.” … On April 27th: Dr. Malcolm C. Harris, Sr., Professor of Finance, Friends University, speaking on “The Open Minded Roots of American Exceptionalism, and the Decline of America’s Greatness.”

    PPACAction. That is, where should you go to keep up with action surrounding PPACA, commonly known as Obamacare, as the legislation is argued before the U.S. Supreme Court this week? Try PPACAction, a project of Texas Public Policy Foundation. Also featured on the site is Experts’ Guide to the Issues.

    The seven rules of bureaucracy. In this article, authors Loyd S. Pettegrew and Carol A. Vance quote Thomas Sowell: “When the government creates some new program, nothing is easier than to show whatever benefits that program produces. … But it is virtually impossible to trace the taxes that paid for the program back to their sources and to show the alternative uses of that same money that could have been far more beneficial.” In order to understand the foundation of America’s morass, we must examine bureaucracy. At the root of this growing evil is the very nature of bureaucracy, especially political bureaucracy. French economist Frédéric Bastiat offered an early warning in 1850 that laws, institutions, and acts — the stuff of political bureaucracy — produce economic effects that can be seen immediately, but that other, unforeseen effects happen much later. He claimed that bad economists look only at the immediate, seeable effects and ignore effects that come later, while good economists are able to look at the immediate effects and foresee effects, both good and bad, that come later. … Both the seen and the unseen have become a necessary condition of modern bureaucracy. (Bastiat: That Which Is Seen, and That Which Is Not Seen.) The first rule? “Maintain the problem at all costs!”

    Civil society. Edward H. Crane, speaking nearly twenty years ago. I think things have become worse since then: “In a civil society you make the choices about your life. In a political society someone else makes those choices. And because it is not the natural order of things for someone other than you to make those decisions about your life, the political society is of necessity based on coercion. … Civil society, on the other hand, is based on voluntarism and predicated on giving the widest possible latitude to the individual so that he has sovereignty over his own life, so long as he respects the equal rights of others in society. It’s a simple concept, really, but a radical one nevertheless. It’s the concept on which this great nation of ours was founded and which was so revolutionary that it motivated tens of millions of people from around the globe to come here, often giving up everything, just to live in the ‘land of the free.’ … It does seem ironic that so many politicians in this country hold this curiously benign view of government as some kind of giant nanny, that will make everything okay if we just give it more money. Because as we enter the 21st century, government activities beyond its legitimate function of the protection of life, liberty, and property have pretty much been exposed as one of the great failures of civilization. Coercive, political society simply doesn’t work very well. Most people, whether they’re willing to admit it or not, know that now. There is a reason why East Germany produced the smoke- belching bucket-of-bolts Trabant, and West Germany produced the Mercedes, the BMW, the Porsche, the Audi, and the Volkswagen. Same people, same culture, different political system. Civil society worked; political society didn’t. Yet politicians in America continue to give credence to the idea that the political society can address our problems better than the institutions of the civil society. As Milton Friedman has observed, we seem to be saying that we know that socialism is a failure and that capitalism is a success, therefore we need more socialism.”

    One down, 48 to go. “‘Building better communities’ was the slogan of the California Redevelopment Association. But the critics charged that redevelopment agencies ‘deprived tens of thousands of working and lower-income residents of their homes and livelihoods while granting vast subsidies to billionaires.’ In the end, the social justice questions didn’t matter, but the subsidies did, so to save the state billions of dollars a year, California redevelopment agencies shut down for good last week. … California invented TIF in 1952. Since then, 48 other states have passed similar laws. Now a pioneer in ending such crony capitalism, the Antiplanner hopes the other 48 states will soon follow California’s example. Good riddance to a waste of money that benefited few people other than a few politicians and developers.” More from Randal O’Toole at One Down, 48 to Go. O’Toole also authored the Cato Institute Policy Analysis Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing.”

    Economic freedom in America: The decline, and what it means. “The U.S.’s gains in economic freedom made over 20 years have been completely erased in just nine.” Furthermore, our economic freedom is still dropping, to the point where we now rank below Canada. The result is slow growth in the private sector economy and persistent high unemployment. This is perhaps the most important takeaway from a short new video from Economic Freedom Project, which is a project of the Charles Koch Institute. The video explains that faster growth in government spending causes slower growth in the private economy. This in turn has lead to the persistent high unemployment that we are experiencing today. … To view the video at the Economic Freedom Project site, click on Episode Two: Economic Freedom in America Today. Or, click on the YouTube video below.