Tag Archives: wages

Taxes And Growth

One of the most reliable laments I post to this blog is the absolute refusal of many policymakers  to base their decisions on evidence. We live in a time when experience and reality are no match for the preferred ideologies of our lawmakers. (In all fairness, that phenomenon is probably not new, but it has certainly become more obvious.)

Marketwatch is a business publication that focused upon that disconnect in an article from early May. The title was”Texas, California and Indiana offer surprising lessons about low taxes and economic growth” and the subtitle–which trumpeted the basic conclusion–was “Indiana slashed taxes. Yet wages have fallen even further behind the national average.”

If the subtitle was insufficiently clear, the introductory paragraphs left no doubt:

Among the most common claims of state economic development officials is that higher taxes drive down growth and cause businesses and people to relocate to low-tax states. If you listen to cable news, you are likely to hear dire stories of people fleeing high-tax states in droves.

Yet the high-tax parts of both California and Texas are growing faster than the low-tax parts of both states. And growth in Indiana, which has cut corporate and personal income taxes in the past decade as well as put a cap on property taxes, is dismal.

I tend to foam at the mouth whenever I encounter a reference to Indiana’s property tax cap–not only is the cap bad policy, not only does it disproportionately strangle urban areas in our rural-privileged state, but in an unconscionable move to elevate political game playing over responsible governance, former Governor Daniels constitutionalized the cap–ensuring that, even if subsequent evidence of its counter-productivity emerged, the measure would be virtually impossible to reverse.

The article wasn’t aimed at the multiple flaws of the tax cap, however, so I will leave my extended diatribe for another day.

Why is it that prescriptions for lower taxes, like other seemingly obvious economic “cause and effect” formulations, turns out to be contradicted by real-world evidence?

Modern economic research consistently reports that lower taxes tend to promote growth and migration, but only when all other factors are held constant.

Here’s the rub: It is straightforward to create a model holding all these other factors constant, but in the real world, they never are constant. So the role of taxes has to be weighed against the value of what tax dollars provide.

It took me a long time to recognize the importance of that insight. I used to think it was obvious that a higher minimum wage would depress job creation–until I realized that such a result required all things being equal–and all things are rarely, if ever, equal. The “obvious” result ignored–among other things–the effects of low-wage workers’ increased buying power. We now have real-world evidence from jurisdictions that raised the minimum wage that the “obvious” result isn’t necessarily the actual result.

In the case of economic growth, the article looks at the rivalry between Texas and California, and finds (surprise!) that the popular rhetoric doesn’t reflect reality.

Stories about people “fleeing” California for Texas are common, and Elon Musk’s high-profile announcement that he was moving to Texas fuels the anecdote-driven news cycle. Taxes per capita are higher in California than in Texas, giving weight to the story that low taxes are driving this migration.

In fact, in the last year for which we have data, two out of every 1,000 Californians departed for Texas, while 1.2 of every 1,000 Texans moved to California. This is hardly a notable exodus, and it hardly explains why a rational Texan would head to California. Something else has to be going on.

Furthermore, as the article notes, people are more likely to move from city to city within a state than they are to move out of state, and tax rates vary far more between local governments than between states.

In California, the total state and local taxes in the highest-taxed place were more than three times that of the low-tax county. In Texas, the difference is three times as large as in California.

Further contradicting the preferred story, it turns out that population growth in both California and in Texas is concentrated in the higher-tax places. That’s because–as city planners have long insisted–what matters most isn’t the tax rate (although it certainly factors in) but the quality of life. It’s value for the dollar.

 Taxes represent one price for living in a particular city or town, but value — not price — is the key decision variable.

For the average family, value comes from tangible amenities like safe, livable neighborhoods, high-quality schools and great parks and trails. They go far beyond natural amenities such as beaches and mountains.

That’s a lesson I doubt Indiana’s gerrymandered legislators will ever learn.




“The Poor You Have Always With You”

A few statistics about my state of Indiana (the state that Vice Presidential candidate Mike Pence brags is “a state that works”); these are facts that should “afflict the comfortable” and motivate the rest of us to support policies that will “comfort the afflicted”:

According to the latest Census numbers: More than 1 in 3 Hoosiers remain below self-sufficiency despite increased employment, 21.5% of Indiana’s children live in poverty, and the number of Hoosiers in poverty persistently hovers around one million.

A report on the Status of Working Families in Indiana 2015, issued by the Institute for Working Families, puts the information in an Infographic including state SNAP & TANF responses to poverty, and highlights what it calls the “21st Century Job Swap” from high & middle-paying to low-skilled, low-income jobs by industry;

The June data available from the Bureau of Labor Statistics shows that Indiana has a 108,400 jobs deficit when population growth since the recession is factored in.

The Annie E. Casey Foundation finds that Indiana ranks #30 in child well-being, having slipped 2 spots relative to other states since 2014.

Women are doing even worse than children in national rankings: Indiana is dead last in Work & Family rankings, 39th in Employment & Earnings, 37th in Poverty & Opportunity, and Indiana received a D- in the National Partnership’s Expecting Better report, “the most comprehensive analysis to date of state laws and regulations governing paid leave, paid sick days, protections for pregnant workers and other workplace rights for expecting and new parents in the United States”

Despite the fact that the minimum wage cannot support even a single adult in any county in the state, Indiana’s legislature has not only refused to raise that wage– but has preempted the authority of cities and counties to do so (or to provide paid leave, or enact environmental regulations, etc.)

To add insult to injury, in 2015, Governor Pence diverted three and a half million dollars of desperately needed TANF funds to  anti-abortion crisis pregnancy centers.

There is much more, but rather than get bogged down in the details of one state’s inability to raise living standards–an inability that, unfortunately, is not unique to Indiana–we “comfortable” Americans need to ask ourselves some hard questions, beginning with one posed by eminent economist Robert Samuelson in a recent column for the Washington Post: Is ending poverty impossible?

Samuelson begins by pointing out that neither Presidential candidate has focused on the poor. Clinton’s proposals to decrease inequality are aimed primarily at the middle class, and Trump’s tax cuts would benefit the rich and upper middle class.

Samuelson cites two reasons for ignoring the plight of the truly poor: Poor people don’t vote (they are a disproportionate percentage of nonvoters); and there is no consensus on anti-poverty policies. (That shouldn’t come as a surprise; these days, when there is consensus on anything, that’s a surprise.)

The lack of will to attack poverty can be traced to attitudes about the poor and lack of faith in government. Americans’ widespread suspicion that social welfare recipients are “playing the system” (despite reams of data to the contrary) can be traced all the way back to Fifteenth Century English Poor Laws that forbid “giving alms to the sturdy beggar.” A bastardized Calvinism reinforced the belief that people are poor because they are disfavored by God, probably because they are morally defective. (Or, to use George W. Bush’s more recent formulation of that patronizing analysis in promoting his Faith Based Initiative, because the poor “lack middle-class values.”)

If we ever get serious about eliminating poverty, we will need to do two things, and neither will be simple or easy. We will need to marshal armies of community organizers who can persuade poor people to vote (despite the formidable barriers to their votes put in place by legislators who would not benefit from their participation); and we will need to educate the “comfortable” about the reality of poverty–and especially about the plight of the millions of hard-working Americans who put in forty hours or more a week for wages insufficient to sustain them.

Unless we can do those two things–and not so incidentally, fix our gridlocked political system–the poor will always be with us.


Gravity is Serious….

Remember Gravity? The company that established a “minimum wage” of 70,000 a year, to the hoots and derision of more “serious” business experts?

According to Market Watch,

Gravity Payments, that Seattle credit-card-payments processing company that said all its employees would earn at least $70,000 in three years, is defying the doomsayers.

Revenue is growing at twice the rate it was before Chief Executive Dan Price made his announcement this spring, according to a report on Inc.com. Profits have doubled. Customer retention is up, despite some who left because they disagreed with the decision or feared service would suffer. (Price said he’d make up the extra cost by cutting his own $1.1 million pay.)

The company is doing so well that it has hired an extra ten people to handle the additional business. The only person who isn’t doing so well, evidently, is Price himself–at least, not in the short term.

Price, meanwhile, has invested another $3 million in the company after selling all his stocks, emptying his retirement accounts and taking out mortgages on two homes, according to Inc. (He told the New York Times three months ago that he was “renting out my house right now to try to make ends meet.)

How this will all play out over the long term is anyone’s guess, of course. Which approach will prove to be better business practice over the long haul–Price’s insistence on paying all employees a wage that allows them to live well, or the Walmart /McDonald’s belief that paying below-subsistence wages (and letting taxpayers make up the difference via food stamps and other social welfare programs) will continue to be best for the bottom line?

I think we already know which approach is more likely to sustain consumer demand and generate economic growth.


The Brits are Right About Right to Work

I love the Guardian; as real newspapers have gotten rarer and actual reporting even rarer, it  reminds me what journalism used to be.

Recently, the paper reported on an upcoming Supreme Court case, Friedrichs v California Teachers Association. That case, said the Guardian


The article proceeded to provide the context of the ongoing battles over Right to Work–a context rarely provided by today’s “McPapers”:




What right-to work laws do is ban a particular type of employment contract, voted on by employees, that requires all employees – union or not – to pay fair share provisions, a fraction of the dues that union members pay to cover the costs of negotiating and enforcing their contract.

The article points out in some detail the “great irony” of small-government libertarians who are more than willing to use the coercive power of the state to ban private contracts in the name of workers’ freedom. As it concludes


Interestingly, larger employers are beginning to recognize that this war on workers’ wages ultimately hurts business–that paying better wages is good for the bottom line. Last month, Aetna and Ford announced that their workers would get substantial raises, joining enterprises like Costco, Trader Joe’s and several others who do better by paying better. Even Walmart--granddaddy of companies paying slave wages–has moved to increase wages.

At some point, evidence will outweigh ideology. When it does, the Guardian, at least, will report it.

Is the Light Finally Dawning?

An article in the February 9th issue of The New Yorker reported that Aetna, a Fortune 500 company, plans to raise the pay of its lowest-paid workers, and improve employee medical coverage. The proposed increase is substantial—from twelve dollars an hour to sixteen dollars an hour in some cases.

Mark Bertolini, Aetna’s CEO, was quoted as saying it wasn’t fair for employees of a Fortune 500 company to be struggling to make ends meet.

It isn’t only Aetna.

A recent announcement from Ford Motor Company unveiled the carmaker’s plan to raise the pay of 300 to 500 of its entry-level workers by more than $19,000 a year, or nearly 50%. The announcement was heralded as another sign of the rebound of the U.S. auto industry, but its implications go well beyond that rebound. (Henry Ford would have understood; in 1914, he famously raised his workers’ pay to the then-unheard-of rate of five dollars a day. Turnover and absenteeism plummeted, and profits and productivity rose.)

Little by little, American businesses are recognizing that their own long-term interests are inextricably bound up with the welfare of their employees. That’s a lesson retailers like Costco learned long ago. I’ve previously quoted Business Week’s telling comparison between Costco and Walmart–Costco pays hourly workers an average of 20.89 an hour to Walmart’s 12.67.

Despite paying higher wages and offering more generous benefits, Costco not only nets more per square foot than Walmart, its prices are competitive with—and sometimes better than—those of Walmart.

Early last year Consumer Reports ran a very interesting chart comparing prices for the same brand of purchases like flour, coffee, tall kitchen bags, toilet paper and similar items.  Consumers compared the costs of store brands, Costco, Walmart, various regional chains and Walgreens for each item. Store brands, unsurprisingly, were cheapest overall.

Next was Costco.

As the New Yorker article noted, there are solid business reasons to pay workers more—turnover declines, and better-paid employees tend to work harder. There is also the question of fundamental fairness. American corporations pay their executives truly obscene amounts, while wringing every dime possible out of people who can least afford to work for poverty wages. When Bertolini announced Aetna’s decision, he talked about inequality and corporate responsibility, saying “For the good of the social order, these are the kind of investments we should be willing to make.”

When Charlie Wilson was President of General Motors, during the Eisenhower Administration, he supposedly said “What’s good for General Motors is good for America.” What he actually said was “What’s good for America is good for General Motors.”

Wilson was right. Reducing inequality will be good for America, and what’s good for America is good for business.