The Cost of Monopolies

Jon Caldara of the Independence Institute, when asked if teachers are paid too much, said, "How would we know? The reason that I say that is, there is a government monopoly for education…"  

Proposition 103 is on your ballot. It’s a huge increase, advertised as being for education (although the legislature is not required to spend the money on education.) IF it really does go to education, a major chunk of will probably go to increasing teacher compensation. It’s reasonable to ask if teachers should be paid more. 

I met many teachers while I was on the campaign trail in 2010. Every one impressed me as a caring, devoted, hard worker. They expressed a sincere desire to make a difference for the youth they teach. Teachers, like all of us, want to do good and also better their own lives. That’s a common instinct for all of us, and it’s what led to America’s prosperity.

Wages and benefits, like other valuable resources, are controlled by supply and demand. That’s the essence of a free market. In times of full employment employers often find it difficult to find workers. To entice people to join their companies they offer higher wages than other companies who are competing for those workers. If the strategy is successful the companies that are losing workers have to raise wages. At some point the businesses will either have to become more efficient or pass the increased costs on to customers. Those who can’t will lose customers. If they go out of business, their laid-off workers add to the supply. The fresh supply of new job-seekers reduces wages. In a free market for workers, wages never quite reach stability, but are always moving toward balance. 

In contrast, public education is a monopoly with wages set by union demands and school board acquiescence. Public teacher unions will always push for higher wages and benefits, regardless of sustainability, because public education simply won’t go out of business. Taxpayers are forced to meet the demands of these unions because the consumers (parents) never have to pay directly for the product. In contrast, private sector unions often give up some of their benefits to help in the survival of their industries. 

Back to Caldara’s question about how much public school teachers are paid: we can look at schools that compete for the same teachers but aren’t compelled by a union contract. This won’t give us a complete answer, because the supply of teachers is mostly consumed by public schools, but it could give us an indication.  

 

 

In 2007-08, private school teachers were paid $13,000 less than their public school counterparts, and that doesn’t even include the far superior benefits most public schools offer. So do private schools have trouble finding qualified teachers at a considerably lower price?  

Compared to private schools, public schools are free. Private schools must offer enough value to persuade parents to pay for them. If private schools could not get enough teachers, or if they were only able to hire teachers rejected by public schools, they would not be able to compete for customers. Who would pay thousands of dollars every year to put their children in poorly staffed schools? The existence of successful low-paying private schools indicates that they can find good teachers. 

Meanwhile, unions are sending good teachers to the unemployment lines. There are about 50,000 public school teachers in Colorado. If unions agreed to accept lower wages and benefits for teachers, every 25 cents per hour in reduced compensation would allow our public schools to retain 3-400 teachers. Would public schools be able to find enough teachers at lower wages? 

Principal Pat Gardner of Broomfield Academy (a private school) tells me that she quickly gets 40 qualified applicants for every open full time teacher position. After that she quits taking applications. Broomfield Academy pays less than public schools. Granted, working for a private school has other benefits. Because of the greater freedom to hold students and parents accountable, a teacher can be more effective. Does that added benefit make up for less pay? As Caldara said, how can we know?

Stuck With a Dishonest Tax Increase

There will be no floor debate, no committee hearings, no amendments. Proposition 103 is already written, and if we approve it we are stuck with it.

Boulder Senator Rollie Heath’s Proposition 103 increases sales and income taxes to raise over $500 million per year, supposedly for education. I applaud Senator Heath for properly proposing this tax increase. He’s following our constitution’s Taxpayer’s Bill of Rights (TABOR) that requires tax increases be voted on by the people.  A whole slew of groups are trying to circumvent and destroy TABOR. 

The Colorado Supreme Court ruled that property taxes could be increased without our vote. They also ruled that removing a tax exemption is not a tax increase, leading to the “Dirty Dozen” tax increases in 2010 which killed businesses and jobs. The legislature raised fees instead of taxes to get more money, and we got a huge increase in our vehicle registration fees.

Westminster City Councilman Bob Briggs sued the state to end the Taxpayer’s Bill of Rights. Separately, Lobato v. Colorado would more than double education spending, creating a crisis that would require emergency tax increases. It’s another end-run around our Taxpayer’s Rights. If this assault on TABOR continues, our right to vote on taxes will soon be but a cherished memory. 

But Senator Heath got this one right. At least he’s asking us for more tax money. That’s where my appreciation for Heath’s efforts ends.

Heath and his campaign to raise taxes have been, shall we say, less than honest. Heath used fourth grade students as campaign props without asking permission. Robo-calls say it’s a time-out in cuts to education instead of a tax increase. The website for Prop 103 falsely claims that the new revenue will go to education. 

The biggest deception of all is in the proposed law itself. It requires the money raised by the tax increase to be spent on education. This is pure folly. Heath knows it and yet it’s his biggest selling point. 

The legislature is under no obligation to spend the money on education. Prop 103 is a law, and it is only valid until it is superseded by another law. That law is the budget. Prop 103 will not automatically move money into education. It must be done through the budget, a law that is passed every year by the legislature. They are not obligated to write the budget in accordance with Prop 103.

Heath could have written this as a constitutional amendment to direct the new taxes to education. He chose not to. He knows that the money is not required to be spent on education, yet he and his campaign continue to sell it that way. Heath is also not telling you if the money is spent on education it will create two huge education budget cuts.  

The 2012-13 education budget would have roughly $783 million in extra revenue for education. In 2013-14 there will only be $533 million in extra revenue. That’s a $250 million cut. And when (or if) the temporary tax increase ends in 2017, education funding would lose over $500 million. 

As disheartening as all of that is, the second worst part is that there is no plan for this additional spending to improve education. There is no correlation between higher levels of funding and improvements in educational outcomes as many studies have shown. AJTT.org compares spending to outcomes. Washington D.C. spends more per pupil than 47 states and is ranked dead last in outcomes. North Dakota is outspent by 41 states and has the 6^th highest quality educational system. Money spent on education funding will not guarantee better education. 

Now for the worst part: Prop 103 is a job killer. A study by Economics International Corp. found that the proposal would result in a loss of 30,500 jobs. The average family of 4 will pay $400 per year to lose those jobs. 

A dishonest tax increase. Future education cuts. Huge job losses. Is this what we want to be stuck with?

Reality Over Hope - Three Jobs Saved

We cannot solve our problems with the same thinking we used when we created them. Albert Einstein 

President Obama has explained his new stimulus program. Let’s see how the old one did. Obama’s Council of Economic Advisors (CEA) reports that the American Recovery and Reinvestment Act (ARRA) has been a success, creating or saving 2.4 million jobs through the first quarter of 2011 at a cost of $666 billion. As pointed out by The Weekly Standard, this comes to approximately $278,000 per job. We’d have saved $427 billion by just writing $100,000 checks to each person who has a job because of the stimulus.

The CEA is a group of three economists appointed by the President to…advise the President on economics. Being economic advisor to the man that spent $278,000 per job only to see unemployment stuck at over 9% would be a tough job. How do you tell the President that he wasted oodles of money and prolonged the recession –without losing your job? The report relies on Obama’s old campaign slogan. Heavily invested in HOPE, the president might see only what he wants to see in the report, and believe the skewed conclusions.

The report mentions twice that nobody can observe what would have happened in the absence of the stimulus. We can observe that the economy reversed its downward trend one quarter before the stimulus, and that the biggest positive jump was in the first quarter before 98% of ARRA funds had been spent. And we can see that as stimulus spending increased, the economic growth trend reversed again, going down. The report says that it can’t determine the cause of what happened, but in a triumph of hope over reality, it misconstrues facts, confuses correlation with causation, and lays the groundwork for more stimulus. 

It gets worse. The first company that got a government guaranteed loan under ARRA was Solyndra, a California solar panel manufacturer. Government guaranteed loans, by the way, are actually guaranteed by you and me. Solyndra got $535 million. Assuming all of its 1100 workers were hired because of the stimulus money, that’s over $486,000 per job. Now Solyndra is bankrupt. Solyndra’s 1100 jobs were lost because Obama was mistaken in his choice of handout recipients. How many more failures will we see? If a company requires a subsidy, it probably doesn’t deserve it. 

We’re not done with that CEA report yet. It relies on “independent approaches and supplements those estimates with those of numerous outside analysts”. The data was cherry-picked to create the desired outcome: Impress the President and save the jobs of three economists. If outside data is included, where is data from other countries that demonstrate whether their stimulus programs worked? 

Our nearest “rich country” neighbor is the closest thing to that which the CEA said could not be observed – the effect of doing nothing. Canada did next to nothing. According to David Lee, writing for the Mises Daily, Canada’s stimulus package “was little more than a clever display of political gamesmanship whereby the appearance of action was maximized, while the action itself was minimized…It is precisely in this abstinence that we find Canada's source of relative success”. Canada’s economy grew 3.3% in 2010. Job losses have been recouped. Their unemployment rate is 7.2%, compared with ours at 9.1%. A recent business survey indicates record hiring expectations and optimism about future demand. 

Canada is perceived as the hope-over-reality bastion of socialism in North America. But the truth is that in 1993 “Canada underwent one of the most fiscally responsible periods in its history…[Finance Minister] Martin made it clear from the start that the priorities of the government would be fixed squarely on eliminating the deficit and the record of the following decade leaves little doubt that this was a commitment that was delivered upon powerfully”. 

While the CEA shows us that they can save their own jobs, Canada shows us that government non-interference is how job creation really works.

Bananas and Broken Windows

A guy walks into his local grocery. Noting the price of bananas is 89 cents per pound, he complains that the grocery across the street sells bananas for 69 cents per pound. The grocer asks him why he didn’t buy bananas from the other grocery. “They are all out of bananas.” The grocer tells him, “When we’re all out, we sell them for 49 cents per pound.” 

It makes sense, doesn’t it? When Grocer A runs out of bananas, Grocer B can charge more. As the supply dwindles and he continues to raise his price, some customers will switch to oranges. Meanwhile, banana growers, realizing more profit, will produce more bananas. But now there are fewer customers because some converted to oranges, so grocers will lower the price to sell their bananas before they go bad. This shows that profits motivate sellers to adjust prices to meet changing supply and demand.

This is common sense economics, understood since people first began to trade. An “education” in basic economics just gives you the ability to draw graphs about prices, supply and demand. “Advanced economics” gives certain economists like Paul Krugman the ability to baffle the masses with more complicated graphs. We are led to believe that government intervention by politicians, justified by graph-makers, will cause more employment, abundant goods, stable prices, and a chicken in every pot. Common sense flies out the window. 

The economy is so complex that it’s impossible to determine all the effects of government intervention. A 19^th century economist, Frederic Bastiat wrote, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” Bastiat went on to describe the “Broken Window Fallacy” to illustrate the point. Let’s go back to the grocery. 

While the grocer and customer haggle over bananas, a hoodlum throws a rock through the front window. A crowd gathers and begins to discuss the misfortune of the grocer who will have to pay $500 to have his window repaired. Eventually someone points out that the window repairman will have more money to buy bananas for his family. He’ll also buy a pane of glass, providing income for the glass manufacturer. The glass manufacturer will buy raw materials. Truck drivers will deliver these materials. This stimulus will ripple through the economy. When you consider these benefits, isn’t the hoodlum a hero? 

The broken window and the economic activity it will create are easily seen. What is not seen is what would have transpired had the window never been broken. Prior to the act of vandalism the grocer had a good window and $500. After the repair he only has a good window, but not the $500. What would he have done with the $500? Perhaps Christmas bonuses for his staff, a vacation for his family, a new credit card machine to improve service at the checkout register? The very grocer who earned that $500 gets none of the benefit of it! Five hundred dollars of his wealth has been destroyed. If this were truly an effective economic stimulus, the government could hire hoodlums to break windows everywhere!  

The Broken Window Fallacy has been thriving ever since people first began asking government to improve their lives. It’s all the rage today. A tax levied on one group of people to benefit another group has the same effect as throwing rocks through windows. 

Here are some examples of the Broken Window Fallacy:

• Economic development subsidies (see Gaylord Entertainment)
• Stimulus programs
• War-on-Poverty programs
• Government jobs programs

No economist or politician can tell you what would have been created if the tax was never collected.  But you know what you would have bought with the money. Even if you just buy bananas, it’s best left to the wisdom of individuals who own the money instead of government.

The Anti-Stimulus Program

Politicians often lack a foundation in basic economics, or we probably wouldn’t be facing the possibility of a financial collapse. The average individual has a better intuitive understanding of basic economics than many of our elected officials, or even famous economists. Humans, from the time they first began to trade, have understood supply and demand, pricing, and the use of scarce resources. Billions of people know how to balance spending against income. Our most famous economists, however, are so wrapped up in fallacy that they have forgotten the basics. And history. 

Nobel Prize winning economist Paul Krugman is leading the call for a new WPA-like program. The WPA (Works Progress Administration) was a depression era jobs program. In 1935, just when it appeared that the economy was turning around, President Roosevelt feared that it wouldn’t turn around fast enough. Even though his administration was spending tax money at an enormous rate on public works projects, he created the WPA to give jobs to even more people, lower the unemployment rate, and right the economy. This was a stimulus plan, featuring “shovel ready jobs.” 

Did it work? No. Even the government at the time counted WPA workers as unemployed. Since the private sector could not provide jobs for them, it’s obvious that the economy had not improved.

During the depression, the WPA faced several unanswerable questions that undoubtedly limited its effectiveness. A new WPA program would face similar questions in a more complex world. Nobody can know the right answers. 

1. What wage should be paid? The WPA had a limited budget. They could put more people to work by paying lower wages. But low wages puts downward pressure on wages in general. In the free market, that’s not a problem. Remember basic economics of supply and demand? Labor is a market good. If there are lots of workers available (lots of supply), wages will already be depressed. But government labor is not a free market. It is controlled by unions who spend billions of dollars to elect their bosses. An influx of cheap labor would be bad for unions. Union supported politicians are not likely to do anything to jeopardize union power. 

2. What kind of work should they do? Again, we see a conflict with the unions. They will object strenuously to the government hiring non-union workers to compete with them at their skilled jobs. The WPA jobs will have to be low skilled, or workers will have to be unionized. Republican politicians who are rarely the beneficiaries of contributions from unions are not likely to let union power expand through government spending.  

3. How do you evaluate worker performance? Private sector workers must create value for their employers. The primary purpose of WPA jobs will be to lower unemployment. The longer it takes to complete a particular project, the more employment is created. If creating employment is the goal, the least efficient projects will be the most successful. In the private sector, that’s called waste. In this case, it’s a waste of our tax money. 

4. Who should get the jobs? If the goal is to reduce suffering caused by unemployment, it makes sense to hire the neediest people. Those people may have the fewest work skills. Hiring the least capable workers leads to even more inefficiency. This is more waste of our tax dollars. 

5. The program is ripe for corruption. During the depression, more WPA money went to districts with politicians that supported Roosevelt. WPA workers were pressured to register and vote as democrats and campaign for democrats.  

Now the biggest questions. Who has the wisdom to administer it? How big should it be? How long should it last? The Obama administration told us that the stimulus package would keep unemployment below 8%. They were very wrong. But government has a long history of throwing more money at failed programs. A new WPA would be another example.

The Spending Crisis

Breathe a sigh of relief – the debt ceiling has been raised. 

By and large, it’s pointless. Both parties have raised the debt ceiling time after time.  Its purpose is to limit the national debt, but since it always gets raised, it limits nothing. Often it has been merely a procedural vote – little debate, no Pomp and Circumstance, just a couple of votes, a quick signature, and more debt. 

Let’s talk about the real crisis – spending. The runaway federal spending is cause for concern from both parties. It’s a concern for everyone except President Obama, who wants to raise the debt ceiling so he can continue buying votes with our money, and the money of generations that have yet to exist. Obama wants to raise the limit by $2.7 trillion dollars.  He’s calculating that $2.7 trillion in new debt will last until after the 2012 elections. He doesn’t want to have this debate again before asking for your vote. 

Think about that. It’s 15 months until the election. From 1776 until now, our nation has accumulated $14.3 trillion in debt.  Obama wants authority to borrow and spend 1/5 of that in 15 months. Despite his rhetoric, he has offered no plan to reduce the debt or deficit. Republicans insist that the additional debt limit be matched by spending cuts over the next 10 years. The federal government will be borrowing something like $180 billion each month, and reducing spending only $22.5 billion per month. The spending cuts may not happen at all or may be reversed by future congresses. 

The debt ceiling will be raised. Even so, we still face the very real possibility that our debt will be downgraded. It was threatened before the debt limit debate, not because of a possibility of immediate default, but because of a potential future default. If our economy collapses under the extraordinary spending and debt, America will not be able to pay its obligations. That is the real crisis.

The Strawman Cometh 

I always cheer up immensely if an attack is particularly wounding because I think, well, if they attack one personally, it means they have not a single political argument left. Margaret Thatcher 

I am honored that Senator Lois Tochtrop responded to my columns about unemployment insurance (UI) (go here and here for my articles). Although she called my writings inaccurate, she never actually refuted anything I wrote. She prefers to mislead us with strawman arguments.

She tells us that employers would not forego hiring to avoid paying a payroll tax of $3.29 per week. But that’s per employee. $3.29 times 95 employees is enough to provide a job that’s substantially more than the average $125 per week unemployment benefit. One in five youths (who might like to work for minimum wage) is unemployed. They are sitting by idly while others accrue unemployment benefits. 

Tochtrop states that the Federal Reserve Board says “unemployment benefits are not important factors in the increase of unemployment or the length of unemployment.” I never argued that it does. Quite the contrary, UI is a disincentive to layoffs. If there are additional costs for layoffs, an employer thinks twice before hiring. 

She tells us that unemployment benefits creates more economic stimulus than tax credits for corporations. I’m not certain where tax credits came in to this discussion. I fear that Tochtrop believes that money is something government allows individuals and businesses to keep. She also seems unaware of what truly drives economic expansion and creates jobs – capital investment. An entrepreneur nearly always has to invest money to start or expand a business. This comes from some sort of savings. 

Tochtrop and her colleagues passed a law last year (HB 1128) that “will guarantee the long-term solvency of the Unemployment Insurance program.” Tochtrop is at best misleading. 1128 merely alters the manner in which higher unemployment taxes will be confiscated. Government programs will always be solvent as long as government is willing to extract money from citizens by force.

Gambling With Our Tax Dollars

Fired. Can you believe it? Governor Hickenlooper fired the entire gaming commission board. Their sin? They granted a tax rate reduction for Colorado’s casinos. When Coloradans are facing layoffs, wage cuts, increasing energy and grocery costs; and when the State is short on revenue and struggles to close budget shortfalls, these commissioners granted a tax rate reduction to one industry. Hickenlooper, in a fit of populist rage, appointed a new board that he hopes will reverse the tax cut.

The gaming commission is charged to “encourage business growth and investment in the gaming industry and to permit licensed operations…to realize a fair and just profit.” Isn’t that what the commissioners tried to do? In their judgment, a 5% tax rate cut would help the gaming industry achieve a “fair and just profit.” Keep in mind that statewide gaming revenue dropped an average of 7% during the last three years. 

You might ask, “Where’s the tax cut for all the other businesses in Colorado? What’s fair about that?” That question assumes the gaming industry starts from a fair position. They don’t. The gaming commission sets tax rates for the industry. Whereas other businesses pay 4.63% of their profits, the gaming industry pays a graduated tax on their Adjusted Gross Proceeds. The tax rate can vary from 0% up to 40%. Adjusted Gross Proceeds means the tax is based, not on profits, but on revenue less payouts, which is a higher portion of the same income. Casinos can’t deduct wages, benefits, capital expenditures, interest, depreciation or other normal business expenses. 

This is an industry that asked permission to operate in Colorado.  Colorado said, “Okay, but you’re going to pay dearly for that permission. You will be subject to the whims of an unelected commission. If the Governor doesn’t like what the commission does, you’ll be subject to a whole new commission. You really can’t guess how to budget for Colorado taxes, but rest assured: YOU WILL PAY THEM!” 

Compare that to the tax situation for Gaylord Entertainment’s proposed project in Aurora. We’re not talking quarter slots, this is real money - $300 million in public financing. It’s your money and politicians are gambling with it. 

Gaylord Entertainment wants to open a convention center and hotel with 1500 rooms and 400,000 square feet of conference space. Aurora, Denver, and the State of Colorado are offering subsidies worth over 36% of the projected cost of the project. Governor Hickenlooper, where is your rage? 

They justify this under the premise that it will bring conferences, people, and money to Colorado. The new activity is supposed to generate new tax revenue. According to their website, Gaylord Hotels “strive to make planning easier for you by providing ‘everything in one place.’ From guest rooms and meeting space, to recreation and dining, in a self-contained environment…” Any conventioneers that come to Colorado will not need to visit anyplace other than Gaylord Hotels. 

Reality check: what are the chances that the CEO of a large corporation will say, “Let’s have a convention, hold it in Aurora, and stay inside”? No offense, but…Aurora? Yet that’s what will be required for Gaylord to generate new revenue.  Here are three possible and obvious ways that your tax dollars will fail to generate the predicted tax revenue: 

1. Tax revenue might be diverted from other local hotels, restaurants, and other businesses to Gaylord. Instead of generating new revenue it just relocates it. Businesses that once depended on that revenue could be hurt.

2.  Conferences might very likely continue going to convention centers that are in more exciting locations than Aurora.

3. Gaylord appears to be a healthy, profitable corporation. So did Enron. If Gaylord fails, our tax money has been wasted. 

If it’s a viable, worthwhile project, private investors will invest in it. If it isn’t worthy of private investment, why should government force us to invest? Let’s leave the gambling where it belongs - in Blackhawk, Central City, and Cripple Creek.