Thursday, July 14, 2005

In the GRIP of idiocy 

In an editorial last Sunday in the local newspaper, I got to read a former congressional candidate here in St. Cloud string together economic fallacies in an amazing chain of confusion while arguing for "livable wages". I know some of her colleagues in GRIP but not Anne Nolan, and I'm not likely to have a good meeting after I'm done with this. But somebody has to do it.

Although the cost of living in our area is 10percent lower than in the Twin Cities metro, our median wage is 20 percent lower, according to JOBS NOW Coalition. To meet a bare-bones, basic needs budget in our region, a two-earner family of four needs to earn $23.06 per hour � $11.53 per hour for each worker. In Central Minnesota, 40percent of jobs pay less than $11.53 per hour.
What is meant here by "needs to earn"?

Communities often use business subsidies such as tax increment financing, which originated as an anti-poverty tool. But are these subsidies being used wisely when they create poverty-wage jobs or very few jobs? Or when they pit one group of taxpayers against another?

Tax-increment financing originated as an anti-poverty tool? Says who? Not the Legislature. TIF is to be used to

It is better thought of for use for the affordable housing project you people are goofing up than for creating new jobs. Government, as we said yesterday, doesn't create jobs.

In exchange for a promise to create two full-time and seven part-time jobs paying less than $7 per hour and one job at $11 to $12.99, St. Cloud provided $414,976 of tax increment financing in 2000.

In exchange for a promise to create nine jobs paying $11 to $12.99 per hour, without health insurance, Waite Park provided $2,430,000 of tax increment financing � or $270,000 per job.

In exchange for relocating from one community to Sartell with no promise of new jobs, multiple local and state tax benefits were provided, worth about $400,000.

Have we lost sight of the original goals of economic development dollars?

But wage-jobs aren't the purpose of TIF. TIF is designed to develop or redevelop property to bring up its market value and increase the flow of property taxes from it. You are borrowing against the increased value of the property. Does the new property repay the monies forwarded by the financing or not? That's the test of the use of the money, not the number of jobs it creates.

You won't have much problem convincing me that businesses are capturing much of the benefits of TIF money from government. You won't have much problem convincing me that a good deal of it is inframarginal, meaning that it doesn't affect the economic decision of building new businesses or relocating others, just changes the profit and loss situation of the actors. But the proper answer to this is to reduce the corporate welfare that TIF often becomes by eliminating it. TIF gives municipalities an ability to bribe firms; there's no reason to support this.

But for Anne Nolan, that would defeat the purpose. She doesn't want to get rid of TIF at all; she needs it to engage in her little bit of social engineering. She wants to muck with markets as much as the city of Sartell did in the last example. She wants to muck for a different group.

Bringing new poverty-wage jobs to the community can lower overall average wage levels and increase employees' dependency on social services � food stamps, Medicaid, housing and utility assistance.
All services you insist on providing. So, you now use the welfare state as a stick to force increased wages?

Creating too many tax breaks without a fair return on the subsidy investment can deprive the state and community of the resources needed to maintain the infrastructure and educational systems that support a high-quality work force.
One last time: You got a return from having higher property taxes on the developed land. Which you spend on roads and schools.

The Minnesota Business Subsidy Accountability law says that if a community wants to grant job creation subsidies � things like low-interest loans, TIF or the big tax breaks that come with locating in JOBZ zones � then that community first must adopt legally binding criteria to say which businesses are eligible, including a specific wage standard.
In other words, this law is a back-door minimum wage law at a local level to be applied against any company receiving a government subsidy. So what's it been like? I looked at the latest report from the Department for Employment and Economic Development. In 2003, the last year reported, $29.4 million was spent on local business development through TIF, loans, subsidies and the like. This was planned to create 1,187 jobs, for a cost of $24,768 per job, and 74% of these jobs were promised to pay $11 an hour or more. They actually created 528 jobs, or $55,682 each, of which 76% are paying over $11/hr.

Why do you suppose that is? Because the money isn't about job creation. It's about rent-seeking. And rather than stopping the rent-seeking by eliminating TIF and reducing taxes so that local governments get out of the financing business, the GRIPpers want to keep the rent and redistribute it.
GRIP decided to ask our cities and counties to work together to develop common criteria for business subsidies, including a living wage standard. Together, our communities could move from competition to cooperation and benefit from one
another's best practices.
As Thomas Sowell points out, living wage standards are simply a municipality trying to impose a higher minimum wage. We know where that leads. As research from Deere, Murphy and Welch points out, these lead to job losses in particular for older families. The research on living wages per se in other states -- usually imposed on governments or those contracting with them -- show relatively poor results. See Yelowitz and Toikka, Horowitz, and MacPherson.

I noted during the introductory economics lectures that firms do not compete with labor for wages. They compete with other firms. And workers compete with other workers. Minimum wages are the suppression of competition between workers seeking jobs. They discourage firms from competing with each other to find workers. Firms will adjust by reducing the number of hours worked, which tends to be the larger problem for low-skill workers than the wage paid. I find once again Russ Roberts well worth quoting, this time discussing WalMart wages.

Wal-Mart doesn't offer health insurance or pay more than they do because they've found that they can attract enough workers with the pay package they currently offer. Period. For other companies, they have to offer health benefits to attract workers. They reason they offer health insurance isn't because they're socially responsible or kind or altruistic. They find that to compete for workers they have to offer it.

Paradoxically, Wal-Mart doesn't determine what it pays its workers or what benefits it offers any more than you can set the price of your house when you want to sell it. Suppose houses of similar quality and location sell for $500,000. You're free to set any price you want, but if you set a price of $1,000,000, you're going to wait a long time for a buyer. Oh, you might get a slight premium above $500,000 because you did such a nice job renovating your kitchen. Or maybe a little less if your taste in kitchen's is real different from most people's. You don't set the price of your house.

Wal-Mart is in the same situation. They don't determine the compensation of their workers in any real sense. The compensation of their workers is set by the market for people of a particular skill level and the alternatives in the work place available to workers of that skill level. What Wal-Mart does have some control over is the level of customer service and knowledge and skill used by their workers.

At the beginning of her editorial, Nolan notices that our median wage in St. Cloud is 20% below that of the Twin Cities. What she does not note is the difference in skill levels of workers here versus there. Our firms pay less because they use a mix of labor and capital that requires less skill in our workforce than theirs. One evidence of this is the difference in education levels that Rich MacDonald and I noted in our last Quarterly Business Report.

U.S. Census data show education levels in the St. Cloud-area work force have improved since 1990 but remain lower than the nation as a whole, based on high school and college graduation rates. More than 24 percent of the nation�s work force had at least a bachelor�s degree in 2000, compared with 21 percent locally. Educational limitations could prevent St. Cloud-area workers from benefitting as much as other parts of the nation from the introduction of computers.
Since jobs with computers typically pay a premium over those that do not use them, that will account for at least some of the gap in pay. This will not be overcome by people with good intentions. What GRIP needs to ask, instead of...
Remember, we are only talking about applying a wage standard to subsidized businesses. And we are talking about job creation subsidies that our communities are already using. All we are asking is that our communities decide together what will make businesses eligible and hold them to high standards. "what can we do to encourage firms to choose to use a higher set of skills, and induce workers to increase the skills they possess?" GRIP can certainly help with answering this, I do not believe government has a role in that answer.