Out of the Storm News
A record four major hurricanes struck Florida in late 2004, meaning we are in the midst of commemorating the 10-year anniversaries of their landfalls. Former Gov. Jeb Bush visited Punta Gorda on Saturday to mark Hurricane Charley’s anniversary, and residents of Martin and St. Lucie counties recalled Hurricane Frances’ landfall on Sept. 4, while residents of Pensacola remember Hurricane Ivan striking on Sept. 16. Still to come is Sept. 26, when Hurricane Jeanne struck in almost exactly the same place Frances had hit.
More than eight years have passed since Florida was last struck by a hurricane, the longest period of calm in the state’s recorded history. But instead of using this providential streak to better prepare for the next big one, the changes our politicians enacted in 2007 to the state’s property insurance system would actually make a physical and economic recovery more arduous.
Once the lucky streak ends and Florida again faces a single bad storm or series of storms, state taxpayers will be saddled with years of debt to pay the bills incurred by the state-run Citizens Property Insurance Corp. and Florida Hurricane Catastrophe Fund, both of which were made much bigger by the ill-conceived 2007 “reforms.”
Fortunately, new leadership in the Legislature and a governor with the foresight and courage to undo some of those bad 2007 policies have made positive progress.
Citizens held 1.48 million policies at its peak, but it has shed more than a half-million policies to stand at 933,000 policies today. This 37-percent reduction has lowered the possible assessments Citizens could lay on policies that cover homeowners, renters, automobiles, boats, businesses, churches and even charities, from a high of nearly $12 billion to less than $4 billion.
The Cat Fund, Florida’s state-run reinsurer from which every property insurer is required to buy coverage, also has the ability to impose assessments on virtually every policy sold in the state above and beyond those levied by Citizens if it runs out of cash. During five of the past seven years, the Cat Fund’s own actuaries predicted it would face a shortfall if it were asked to cover its full obligations, which currently stand at $17 billion. A 2012 letter from the state’s Office of Insurance Regulation estimated that just a 25-percent shortfall by the Cat Fund would result in the insolvency or near-insolvency of almost half of the state’s top 50 property insurance companies.
The Legislature has scaled back the size of the Cat Fund, and eight hurricane-free years have allowed it to collect almost $10 billion, meaning it currently would be able to fund its obligations for one very bad year, although it likely would be flat broke in the following year.
One solution, which Citizens has already implemented, is for the Florida Cabinet to authorize the Cat Fund to negotiate the purchase of private reinsurance. This would minimize the need to issue debt, decrease the likelihood or severity of post-hurricane taxes and leave the Cat Fund better prepared for a second event.
The Legislature could also right-size the Cat Fund by reducing the amount the law requires it to sell. A practical way would be a gradual reduction of $1 billion per year over three years from the current $17 billion to $14 billion, which experts believe is an amount of coverage the Cat Fund could realistically cover and sustain year after year. The current “buyers’ market” in global reinsurance could easily and affordably assume the $3 billion. The Legislature could also establish a “circuit breaker” that authorizes the Cabinet to increase the Cat Fund’s size up to the current $17 billion on a year-to-year basis in case there is ever a spike or disruption in private reinsurance markets.
These are common-sense reforms that would cause little or no impact on insurance rates, while shielding Floridians from a crisis down the road. If the anniversaries Florida is commemorating this year and next teach us anything, it is that the state is not immune to back-to-back intense hurricane seasons. More can and should be done to prepare, including making Florida’s insurance system sustainable beyond one storm.
San Francisco is in the midst of a housing shortage, fueled by huge demand and exacerbated by decades of wrongheaded regulatory intervention and, more recently, by professional troglodytes.
Firms such as Airbnb, a peer-to-peer lodge-sharing service, could mark a step toward a market-driven solution to San Francisco’s housing problems by allowing individuals to participate in previously unavailable markets. In response, existing power structures are seeking to place their incumbent interests ahead of ordinary San Franciscans.
The genesis of San Francisco’s housing shortage can be laid squarely at the feet of The City’s political administrators. San Francisco long has demonstrated a preference for strict control of its housing market. As a result, perverse regulatory incentives have chilled the market for property owners who operate long-term rentals.
For instance, effective June 1 this year, property owners who wish to rent their property on a long-term basis are subject to a schedule of steep charges, more than $100,000 in some cases, should they ever choose to cease renting their property. Characterized as a “relocation payment” to the tenant, including any subtenants, these funds also can be used for purposes other than resettlement.
Small-time renters have few options if they wish to avoid the charge. They can continue to rent against their will or they can wait out their tenant and then leave the unit vacant. Neither of these options furthers The City’s goal of providing available and affordable housing.
By erecting such formidable barriers to prevent long-term renters from leaving the market, San Francisco is effectively discouraging property owners from entering the market in the first place. Lodge-sharing arrangements may provide an alternative for small-property owners who would otherwise have strong incentive not to contribute to the supply of available rental properties.
Missteps aside, threats to disruptive enterprise can, and will, come from anywhere. Last week, plaintiffs attorneys filed a class-action lawsuit against Airbnb alleging the firm “participates in, facilitates and enables the illegal short-term rentals (sic) for rooms and apartments in the City and County of San Francisco.”
This approach is interesting, in that it shifts opposition from politics to litigation. Removing a live public-policy dispute to the courts may temporarily grant some legal clarity. Regrettably, that clarity comes at the expense of disenfranchising voters from an opportunity to express their will.
Allegations of individual harm have a questionable nexus with lodge-sharing activity. Enterprising plaintiffs attorneys have shown they are willing to fill their wallet at the expense of innovation. If anything, San Francisco should intervene on behalf of Airbnb, since its model encourages small-property owners to make their units available for public use.
While there is no panacea for San Francisco’s housing shortage, market-oriented reforms that accommodate lodge sharing are an essential first-step toward a long-term fix. Neither a maladapted state regulatory apparatus nor a phalanx of greedy troglodytes should have the last say on innovation.
This past week, I had the privilege of serving on a panel discussing Alabama’s prison woes at the Faulkner Law Review’s Annual Symposium in Montgomery. The discussion highlighted capacity issues within the prison system, length of sentences, problems with Alabama’s habitual offender law, health care and mental health issues.
While the panelists engaged in a robust discussion of the critical issues surrounding Alabama’s prisons, there was little disagreement that the state has a problem in need of an immediate solution.
The facts seem to back that conclusion. According to the latest report from the Alabama Department of Corrections, Alabama’s prison system currently holds almost 190 percent of its designed capacity. Combined with prison-staffing issues, Alabama’s prison problems are clear.
Unfortunately, the most difficult problem to solve may be the politics of prison reform.
The immediate solutions to Alabama’s prison problems are relatively limited: Spend money to improve prison conditions and expand capacity, reduce the number of inmates in prison or choose some combination of both.
With cash-strapped state budgets, spending more money on prisons means finding more revenue. The last thing any Alabama politician wants to do is raise taxes or cut state programs to pay for better inmate conditions. In that respect, spending more money on prisons seems like a political non-starter.
The second option is to reduce the current inmate population quickly. That conversation involves discussions about parole, sentencing modifications and alternatives to incarceration. Even if the discussion is limited to non-violent offenders, political advocates of the changes will likely find themselves the targets of allegations that they are “soft on crime.”
A combination of the two approaches does not seem to provide a much more palatable result.
What would happen if Alabama politicians were required to make similar tough decisions by a federal judicial decree resulting from a lawsuit initiated by the likes of the Southern Poverty Law Center or even the Department of Justice under Eric Holder’s guidance?
Under that scenario, Alabama’s politicians would be able to blame an “activist judge,” a “liberal special interest group,” or even “President Obama’s Justice Department” for forcing them to make any politically unpopular reforms. For many politicians in Alabama, that situation is a much more favorable political dynamic.
Other politicians like state Sen. Cam Ward have repeatedly called on their colleagues to enact solutions before a lawsuit requires state action. Ward raises an alternative outcome where voters fault politicians for letting a federal judge dictate state policy.
Either way, the politics of prison reform are just as important as the facts in developing actual solutions to Alabama’s prison challenges. Unless we are willing to give state legislators and the Governor a political pass for making the tough policy decisions now, we may be forced to wait until they are operating under the confines of a federal judicial mandate to see the problems addressed.
What is an autonomous vehicle? As demonstrated in a Sept. 15 California Department of Insurance informational hearing, that’s a misleadingly simple question.
Regulators’ attempt to stay in front of the curve, by delving into how autonomous vehicles will interact with insurance, is sensible in light of the regulatory obstacles presented by Prop 103. The emergence of this new suite of technologies actually belies a complicated narrative.
In truth, the era of semi-autonomous vehicles is not waiting to arrive; it is here now. For instance, collision avoidance systems, such as those warning of unintentional lane departure, while seemingly minor in their interference, place a vehicle on the autonomous vehicle spectrum.
The National Highway Traffic Safety Administration categorizes levels of vehicle autonomy into five tiers, from zero to four. Level zero envisions no automation whatsoever. “I think of it as a ’55 Chevy,” Princeton University professor Alan Kornhauser told the CDI. On the other end of the spectrum, at level four, is a vehicle that neither requires nor accepts driver input for critical driving functions. A level four vehicle would have no steering wheel or pedals. Today’s new vehicles largely function at level one.
Where it gets interesting for questions of insurance coverage is at the intersection of levels two and three. At level two, a vehicle may have control over a number of major functions, but still require constant driver attention. Level three sees the need for driver attention reduced to the extent that drivers can focus on other activities. Between these two levels, delineating fault and liability in the event of a collision moves from difficult to, perhaps, impossible.
Since driver input at levels two and three is not constant, evaluating a collision to determine when a driver is in control – or in the process of continually regaining and relinquishing control, and thus responsible for driving – is a labor-intensive proposition. Another layer of complexity is introduced by the prospect of level two and three vehicles communicating with one another to coordinate their activities. In that case, determining which vehicle was the genesis of a causal, collision-inducing action may prove impossible.
Loss scenarios that complicate insurance considerations should not forestall rapid autonomous vehicle development; instead they should inform early discussions about rating autonomous vehicles. The CDI requires insurers to base their rates on actuarially sound data. This is, of course, impossible when there is no data, but instead, only the prospect of favorable outcomes. Insurers are left in a bind.
Since nothing ever works perfectly, not all autonomous safety augmentations will achieve all of the risk reduction for which they are designed. One manufacturer’s system might outperform another, while another manufacturer’s system might promote or augment operator behavior in a dangerous way.
Without loss data, the ability of actuaries to promulgate an accurate picture of the relative risks of level two and three autonomous vehicles will be hamstrung. Insurers would not be able to immediately offer rates that reflect the promised risk-reduction of autonomous-vehicle technology. Here, the CDI can play a positive role by embracing rating flexibility.
It is indeed encouraging to see the CDI hold a meeting to anticipate the new world of automobile insurance in a robotic age. The hearing solicited testimony from academics, stakeholders and the public. Participants drew attention to an array of pitfalls that the state could encounter or foster if it is indelicate in its approach.
Hopefully, continuing efforts will be focused directly on solving the inevitable problems posed by today’s gradually less-relevant, and increasingly burdensome, insurance laws. Perhaps the CDI could induce insurers to take the lead in laying bare anticipated problems and providing timely solutions. The CDI has the power to stimulate insurers’ problem-solving prowess, and it should, since it has neither the profit motives nor practical expertise to do the job itself. It will need to assist insurers by advocating, in legislation and regulation, changes to modernize insurance law appropriately before relentless change overtakes both it and California drivers.This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
From the Birmingham Business Journal:
“There is definitely correlation between population density — and thus traffic density — and insurance rates,” said Eli Lehrer, president of the nonprofit research group The R Street Institute. “When you have more cars on the road, you have a greater likelihood of accidents and insurance claims.”
In a letter to Samuel Kercheval dated July 12, 1816, Thomas Jefferson wrote, “I am certainly not an advocate for frequent and untried changes in laws and constitutions.”
Since 1816, there have been more than a few changes to both America’s’ federal laws and even the Constitution itself. In all likelihood, Jefferson and the other founders of the United States would scarcely recognize the nation they sacrificed to establish.
The states, intended by America’s founders to enjoy governing primacy in all but a few enumerated areas of political power, now find themselves as both dependents of the federal government’s financial largess and frequent subordinates to its authority.
At America’s founding, the federal government had few meaningful resources, very little infrastructure and was, by all accounts, the very definition of limited government. It was created by states that saw mutual benefit in ceding some of their autonomy and authority in well-defined areas for their common good.
Many Americans view a return to the founders’ model of public governance as a proven formula for American success and prosperity. Unfortunately, that affinity for America’s founding is easily characterized and confused with a desire to literally return to the social and cultural norms of a much earlier period in American history.
A federalist form of government under which states enjoy a high degree of self-governance is not the enemy of progress. In fact, America’s federalist design is far more innovative than the emerging one-size-fits-all big government approach, because it gives citizens the choice to both reward and penalize state governments for the public policy choices they make.
The emergence of a powerful federal government has mitigated the consequences of many state policy decisions and removed some choices from the states entirely. At the same time, federal action creates a convenient political excuse for state laws and regulations that seem to produce poor results.
Many Americans might be surprised to find that Jefferson, an ardent critic of consolidated federal power, understood the need for American governments to change over time.
In the same letter in which Jefferson expressed his reluctance to frequently modify laws, he nevertheless noted the importance of accepting and embracing change.
“[L]aws and institutions must go hand-in-hand with the progress of the human mind,” wrote Jefferson. “As that becomes more developed, more enlightened, as new discoveries are made, new truths disclosed, and manners and opinions change with the change of circumstances, institutions must advance also, and keep pace with the times.”
Jefferson appreciated the need for institutional flexibility that accommodates change, but he rejected the idea that a strong federal government was best situated to achieve that goal. His unique perspective may have been lost in the annals of history, but America needs to again understand that restoring the intended role of the states in our government is the right recipe for progress.
The Detroit-Warren-Ann Arbor metropolitan area has higher auto insurance rates than any other top 25 metro area in the United States. It wasn’t even close, according to the financial information provider (Bankrate Insurance) quoted in USA Today. With average rates more than 165 percent higher than the national average, Detroit makes the second-place New York-New Jersey-suburban Connecticut metro area’s rates, which were 36 percent higher than average, look like a real bargain.
Detroit can’t catch a break these days. The largest bankrupt city in America, which already has the highest income and property taxes in the state, also had the most cars and basements underwater following heavy rains a few weeks ago. Mayor Jim Fouts in nearby Warren publicly called out insurance companies to say they weren’t paying claims. But most of the people who lost cars in the flooding apparently weren’t insured for flood or water backup.
However much they like it when the Tigers or the Red Wings sit atop the standings, the title of highest auto insurance rates in America is not a crown folks in lower Michigan really wanted. They earned it fairly, though, building through steady effort over the years. The state government has a lot to do with winning this distinction. Decades ago, the Legislature passed an “essential insurance” act which allowed auto insurers to offer discounts to their government-approved rates, but not to increase them, which is not the kind of flexibility that allows insurers to develop their competitive instincts.
When no-fault auto insurance became a fad 40 years ago, Michigan went all in. The theory was that more benefits could be paid to injured drivers and victims by their own insurance companies if the money spent litigating over “pain and suffering” for less-severe personal injuries was eliminated. The idea that you didn’t have to go to court to prove somebody else caused your injury was very appealing, and a number of large states changed their laws to try one version or another of no-fault. But Michigan was one of only three states that decided the proper balance for saving some money on non-economic damages was unlimited medical benefits for auto accidents – unlimited both as to amount and to the time over which the benefits could be paid.
After extraordinarily high insurance rates led to public outcry, the two other unlimited medical benefit states, Pennsylvania and New Jersey, eventually put limits on their expensive coverage decades ago. Pennsylvania also instituted a medical fee schedule, and Michigan needs to do the same.
“The average claim for our medical coverage is increasing at a significant rate,” advises Lori Conarton, communications director for the Insurance Institute of Michigan.
Detroit’s high rates stem from many causes, but two of the biggest impacts are the system itself, and abuse of the system. Paying doctor, hospital and other provider rates which are routinely four or more times as much as for a patient in the next bed who is covered by Blue Cross or workers’ compensation is clearly an abuse. The amount paid for home attendant care by auto insurance is outrageous compared to other insurance coverage. This all needs to be fixed.This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
Our recent policy study by Associate Fellow Steven Titch — “Alternatives to government broadband” — looks to recent efforts some municipalities have made to attract Google Fiber’s super-high-speed 1 Gbps service as a model that can and should be opened to all broadband companies, both incumbents and new players. By loosening their insistence on a raft of taxes and fees and streamlining the approval process, local governments could attract significant investment in broadband without needing to set up their own municipal networks, which have proven unsuccessful nearly everywhere they’ve been tried.
Alas, a recent New York Times story on Google Fiber’s roll-out in Kansas City finds an unexpected “problem” with the service: it’s just too darned fast.
It has been a little more than three years since the Kansas Cities — both Kansas and Missouri — won a national competition to be the first places to get Google Fiber, a fiber-optic network that includes cable television and Internet running at one gigabit a second. That is about 100 times as fast as the average connection in the United States…
But be careful what you wish for. After a few million in waived permit fees and granting Google free access to public land, the area is finding out that Google Fiber is so fast, it’s hard to know what to do with it.
There aren’t really any applications that fully take advantage of Fiber’s speed, at least not for ordinary people. And since only a few cities have such fast Internet access, tech companies aren’t clamoring to build things for Fiber. So it has fallen to locals — academics, residents, programmers and small-business owners — to make the best of it.
Of course, the Times doesn’t actually offer a clear view of what it is, exactly, that locals must “make the best” of. Blazingly fast Internet speeds aren’t generally considered a problem, particularly when it is priced competitively at $70 a month for Internet and $120 for Internet and cable television. As to a lack of applications, it’s useful to remember that Eugenio Barsanti and Felixce Matteucci invented the free-piston, four-cycle internal combustion engine in the 1850s, a good half-century before automobiles started rolling off Michigan assembly lines.
Buried deeper in the piece is what we consider the good news:
And some analysts have speculated that Google is building Fiber to prod other cable and Internet companies into increasing their speeds.
In April, AT&T said it would introduce a gigabit-speed TV and Internet service, U-verse with GigaPower, in 21 metropolitan areas in the United States. Three cities in Texas already have it: Dallas, Fort Worth and Austin.
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
Sept. 15, 2014
The Honorable Chris Christie
Governor of New Jersey
Trenton, NJ 08625
We are encouraged by recent movements by the state Legislature calling for the elimination of the New Jersey estate and inheritance taxes. This change is much-needed relief for small business owners and individuals in New Jersey who are currently forced to grapple with the most burdensome state death taxes in the country. While other proposed reforms are a step in the right direction, New Jersey would be best served by full repeal of the estate and inheritance taxes.
Simply put: death should not be a taxable event. It makes no sense to force a grieving family to pay a tax on their loved one’s property. New Jersey is currently one of only 19 states that impose an additional tax at death, and only one of two to impose both an estate and inheritance tax. Forbes recently listed New Jersey as a place “Not to Die” in 2014 because of its high death tax. New Jersey’s low estate-tax exemption of $675,000 and high rate of 16 percent make it the most confiscatory estate tax in the entire country. In New Jersey, even a middle-income family with a modest home and retirement savings can easily surpass the $675,000 exemption. In recent years, increasing home prices have lead to one in five single-family home sales greater than $500,000.
A New Jersey resident could easily move to any of the 32 states that don’t tax death to avoid a state death tax altogether. From 2001-2010, $13 billion in annual gross income has left New Jersey, according to data from the non-partisan Tax Foundation. Recent studies in North Carolina, Oregon, Rhode Island, Connecticut and other states all show that the death tax discourages business expansion and drives productive tax payers out of states with death taxes. Florida, a state with no death tax and a constitutional ban on enacting estate taxes, has been the largest beneficiary of out-migration from high death-tax states.
Proposing repeal of the estate and inheritance tax comes at a critical time, as states have been moving quickly in recent years to eliminate or reduce the burden of their death taxes. In the past four years, Ohio, Indiana, North Carolina and Tennessee have all eliminated their state death taxes. Additionally this year, Maryland, Minnesota, New York and Rhode Island have increased their state estate tax exemptions.
Repeal of New Jersey’s estate and inheritance taxes is a common-sense improvement that will help grow New Jersey’s economy by keeping business owners, workers and retirees in the state. We look forward to working with you this fall to see this important policy change through.
60 Plus Association
Americans for Prosperity – New Jersey
Executive Vice President
Wine & Spirits Wholesalers of America
New Jersey Gasoline, C-Store, Automotive Association
Patrick A. Stewart
Associated Builders and Contractors – New Jersey Chapter
Douglas K. Woods
AMT – The Association For Manufacturing Technology
NFIB – New Jersey Chapter
Executive Vice President – Government Affairs & Communications
Commerce and Industry Association New Jersey
Director – Government Relations
CPA Society of New Jersey
Vice President of Government Affairs
National Association of Electrical Distributors
Director of Government Affairs
Heating, Air-Conditioning & Refrigeration Distributors International (HARDI)
Director of Government Relations
American Supply Association
Service Station Dealers of America and Allied Trades (SSDA-AT)
Vice President Legislative Affairs
Aeronautical Repair Station Association
Christian A. Klein
Vice President of Government Affairs
Associated Equipment Distributors
Director of Operations
WMDA Service Station & Automotive Repair Association
J. Barry Epperson
Associated Wire Rope Fabricators
Forest Landowners Association
Executive Vice President
The Tire Industry Association
Director, Government Affairs
Manager of Congressional Relations
The Petroleum Marketers Association of America
Americans for Tax Reform
Vice President of Government Affairs
National Taxpayers Union
R Street Institute
Senior Fellow for Finance and Access to Capital
Competitive Enterprise Institute
Campaign for Liberty
Family Business Coalition
The R Street Institute will be hosting two energy events on Capitol Hill this Wednesday, September 17. We hope you can join us for one or both of them! Please see below for more details and how to RSVP for each event.
Wednesday, September 17:
The R Street Institute and American Action Forum will host a discussion on the Environmental Protection Agency’s (EPA) new proposal to reduce greenhouse gas emissions from existing facilities across the electricity sector. Our event will focus on the impacts of the EPA’s regulations on consumers, states, industry, and other stakeholders. The event will feature keynote remarks by Council of Economic Advisors Chairman Jason Furman. The panel following will be moderated by Erica Martinson from POLITICO and feature Douglas Holtz-Eakin of the American Action Forum, Lori Sanders of the R Street Institute and Adele Morris from Brookings.
The discussion will take place in the Dirksen Senate Office Building, room G11. This event is open to the public and the press. Please RSVP by clicking here.
The R Street Institute is pleased to invite you to a forum on nuclear energy policy. The House Committee on Science, Space and Technology and the minority of the Senate Energy and Natural Resources Committee are the forum’s honorary co-hosts. Members of Congress, including Rep. Lamar Smith, R-Texas, will be on hand to present their ideas. Participants, in a roundtable format, will exchange views on trends in domestic and global markets, the importance of a dynamic and robust R&D program and international cooperation, and the role in government advancing civil nuclear power. The discussion will provide input to potential legislation. Confirmed roundtable participants include representatives from academic institutions, EnergyWire, Exelon, FirstEnergy, General Atomics, the Japanese Ministry for Economy, Trade and Industry, the Korean Atomic Energy Research Institute, the Nuclear Energy Institute, the Nuclear Infrastructure Council, Nuclear Intelligence Weekly, the U.S. Department of Energy and U.S. National Labs.
The discussion will take place in the Rayburn House Office Building, room 2318. This event is open to the public and the press. A reception will follow at 5:00pm in Rayburn 2325. Please RSVP by clicking here.
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
The ground has been shifting in the battle over the minimum wage. With President Obama’s proposal to hike the national minimum from $7.25 to $9 an hour stalled in Congress, local labor activists have been aiming even higher, getting behind a vastly higher minimum wage of $15 an hour.
The proposals are gaining steam. The small city of SeaTac, Wash., which includes Seattle-Tacoma International Airport, already has a $15 minimum in force, while Seattle plans to implement one over time. Similar “super-minimum” proposals also are under consideration in cities like San Francisco and Chicago. Recent state-level legislation will phase in a minimum wage of greater than $10 in California, Connecticut, Maryland, Hawaii and Vermont. Massachusetts’ minimum will rise to $11 by January 2017, while the District of Columbia’s is set to rise to $11.50 by July 2016.
Predictably, market advocates and business interests warn that such laws portend disaster: layoffs, benefit cuts, huge surges in consumer prices, mass unemployment and business closures. Just as predictably, labor unions and their allies on the left paint the subject in terms of “fairness,” arguing the higher wages will be paid out of what one SEIU lawyer called “billions and billions” in “extra” profits earned by fast food restaurants and others.
In truth, while the proposals are deeply flawed, the projections of economic catastrophe are at least somewhat overblown. The best reason to oppose a $15 minimum wage is that it’s a bad way to help the very people it is intended to help.
Though the economic literature on the subject is mixed, a comprehensive review done in 2013 by the National Bureau of Economic Research found most studies do find a small but measurable increase in unemployment in response to minimum wage hikes. The effects tend to be concentrated in a few industries that employ lots of low-wage workers, often teens and seasonal employees.
That a rising minimum wage would have only a small impact on unemployment shouldn’t be terribly surprising, because government regulation doesn’t have that large an immediate effect on jobs anywhere. The Bureau of Labor Statistics regularly asks employers the reason behind layoffs. Those attributed to “government regulations/intervention” are routinely less than 0.5 percent of the total.
Both because they want to take care of their employees and because they would lose customers if service levels get cut sharply, business owners will avoid layoffs if they can. Nor are the costs of higher minimum wages simply passed on to customers. While a portion of almost any cost increase will almost certainly be passed on to consumers in the form of higher prices, price competition alone means that consumers will rarely have to pay all of it. Instead, businesses may look to cut the cost of non-labor inputs, or to slow cost-of-living adjustments, cut raises for employees earning more than the minimum wage, or increase employees’ share of health-care costs. And yes, some will accept lower profits.
Of course, none of this makes a vastly higher minimum wage a good idea. Higher labor costs will encourage businesses to automate more tasks and, over time, look for creative ways to avoid filling vacancies. This will encourage elimination of many of the easiest-to-replace jobs. And while mass insolvencies and rampant unemployment may be unlikely, there will certainly be some effect. Some already teetering businesses will almost certainly be pushed over the edge and some jobs that could have been taken by teenagers, the disabled and those lacking familiarity with work itself will never be created in the first place.
What’s more, raising the minimum wage is simply a terrible way to help the poor. Only about 7 percent of those below the federal poverty line work a full-time job of any sort. Meanwhile, many of those who earn the minimum wage aren’t poor at all. Roughly 42 percent live with a parent or relative, while another 18 percent are married second income earners, which helps explain why the average family income of a minimum wage earner is $53,000 per year.
Expanding the Earned Income Tax Credit, a direct subsidy for those who work for modest wages, is a much better and much more direct way to help the working poor. Changes to healthcare, nutrition and education programs could do still more to help those in poverty. By comparison, a $15 minimum wage, even if not as disastrous as some market advocates claim, is likely to do more harm than good.
- The Alabama Education Association (AEA) in crisis – This week, former AEA head Paul Hubbert penned a bombshell letter to members of the AEA board highlighting a crisis at the organization caused by “both internal and external threats.” The AEA under Executive Secretary Henry Mabry has unsuccessfully waged war against Republicans and a number of education reforms in Alabama. Would the AEA have had better success with different, more collegial, tactics? Does Hubbert’s letter signal the end of an era for a powerful AEA or can AEA’s leadership change direction in time?
- The death of an honorable corporate titan – S. Truett Cathy, Chick-fil-A’s founder, died at age 93. Cathy turned a simple chicken sandwich into a multi-billion dollar empire. Cathy has been quoted as saying, “We live in a changing world, but we need to be reminded that the important things have not changed. I have always encouraged my restaurant operators and team members to give back to the local community. We should be about more than just selling chicken, we should be a part of our customers’ lives and the communities in which we serve.” Is there something to Cathy’s vision that businesses should be more than dollar-chasing machines?
- Obama details the fight against the Islamic State – On Wednesday, President Obama addressed the nation and clarified his vision for defeating the IS. “Our objective is clear,” said Obama. “We will degrade and ultimately destroy [IS] through a comprehensive and sustained counterterrorism strategy.” He mentioned more than 150 airstrikes already executed against IS and increasing “our support to forces fighting these terrorists on the ground.” Does Obama need congressional approval under the War Powers Resolution? Given America’s history in the region, are we potentially arming our next enemy by supporting the native opposition to IS?
- The bigger and biggest iPhones – Apple announced the iPhone 6 and iPhone 6 Plus this week with the catch phrase “Bigger than bigger.” That’s right. The main selling point is that they are bigger phones…like those currently on the market from Samsung and other competitors. Apple expects to sell out of the new phones as soon as they hit the market. Is Apple really the innovative company it was under Steve Jobs, or are you already waiting in line for your new iPhone?
- Senate Democrats push constitutional measure to limit speech related to campaigns – Sen. Tom Udall, D-N.M., and many of his Democratic colleagues in the Senate failed 54-42 in their attempt to pass S.J. Res 19 which creates a constitutional amendment to allow government officials more control over political expenditures and contributions. The purely political measure was designed to give Democrats the talking point that Republicans want to protect the ability of major donors to influence elections. Republicans countered by claiming that Democrats are attempting to stifle political opposition in direct conflict with the intent of the First Amendment to the Constitution. Who has the better argument? Which party takes a bigger political hit from the failed legislation?
And that’s your Friday Five. Feel free to discuss the topics in the comments section below. Be safe, have fun and invite the neighbors over for dinner and conversation.
Last week, the New England Journal of Medicine inflated a study of mouse brain activity with nicotine into a gateway-to-cocaine claim. This week, I report that the journal never properly fixed an error it made regarding e-cigarette use among children.
I reported on April 9 that “the New England Journal of Medicine and authors of a commentary on e-cigarette use ignored our call for correction of a substantial error regarding e-cigarette use among American schoolchildren in 2011 and 2012.”
The following day, Dr. Fairchild, first author of the commentary and professor of socio-medical sciences at Columbia University, emailed me: “We have, in fact, been talking with NEJM about the graph. I’ll let you know what happens.”
No further communication was received from Dr. Fairchild, but on June 12, the journal published its idea of a correction in the form of a revised bar chart, which appears on the left. The revision involved changing a stacked bar chart to a side-by-side chart, with the entirely insufficient note that “some students may have been included in both categories.”
May have been? It is clear from the CDC reports (here and here) that the original article double-counted a large number of dual users of both e-cigarettes and cigarettes. The journal should have corrected the error by issuing a chart we provided (the chart at right), illustrating the huge proportion of dual use.
Why did the journal “revise” the presentation of data, rather than acknowledge and correct a significant error regarding dual use of e-cigarettes and cigarettes among American youth? One could conclude that an anti-tobacco bias overrode standard editorial policy.
Recently, there have been demonstrations by fast food workers and labor unions calling for an increase in the minimum wage from the current $7.25 per hour to a whopping $15 an hour. This comes as recent reports show that more than 35 percent of Americans receive some kind of welfare benefits, whether they be SNAP, Medicaid, TANF, WIC or some other program.
Raising the minimum wage would likely raise unemployment and having more than a third of the population on public assistance is not sustainable. But there is one idea policymakers could use to combat poverty while encouraging work. Devised by Nobel laureate Milton Friedman, the negative income tax would address low-wage employment while simultaneously steering welfare recipients to work, rather than collecting benefits.
Problems with the minimum wage
The biggest problem of the minimum wage is that arbitrarily raising it can destroy jobs. As businesses’ labor costs increase, they erode profit margins. In order to maintain profits, they will have to raise prices or reduce costs, including labor costs.
The minimum wage harms low-skilled workers because it prices their labor out of the market. As the price of labor goes up, employers will seek to streamline or automat processes, and invest payrolls in more skilled workers. This makes it tougher for those entering the workforce, particularly teenagers, and those trying to re-enter the workforce, such as after a stint in prison or in a substance abuse rehabilitation program.
For the most, the minimum wage does not actually help poor families. Economist David Neumark noted in a recent piece that only 17 percent of those who make minimum wage are actually members of poor households. Most are members of families in which their minimum-wage job provides just a small percentage of family income.
Problems with welfare
Studies demonstrate that welfare programs can discourage positive behaviors such as work, marriage and investment in education. Welfare programs tend to be structured with what economists call massive “tax cliffs,” in which benefits phase out as income increases in a way that it becomes more expensive to get off of them by working to improve one’s self. It’s hard to think of a more perverse disincentive to encouraging Americans to become more self-reliant than the current social safety net.
There needs to be a solution that doesn’t discourage work, while at the same time encouraging productive social behaviors such as obtaining an education and getting married. Meanwhile, most citizens believe it is reasonable to provide a basic safety net to prevent Americans from being unable to feed, clothe or shelter themselves for reasons of both compassion and to maintain order in American society. History shows a correlation between people being unable to feed themselves and violent revolution.
Why a negative income tax?
A negative income tax is the best way to eliminate the pitfalls of both the minimum wage and the failed, bureaucratic welfare state. The NIT would function as a basic minimum income that would get cash to the people who need it without the red tape of bureaucracy and benefit rules. Since it is a cash payment that can be spent on anything (rather than a voucher-type system) and it is done through the tax code, there is no need for special welfare fraud enforcement.
The NIT, especially when combined with tax reform that sets a decent-sized gap between the income ceiling to qualify for NIT payments and the income level where income and payroll taxes would apply, can eliminate the perverse incentives in the welfare state against work, education and marriage. Unlike the current welfare state, an NIT can serve both as a safety net and as a springboard to help recipients improve their lives. Since an NIT only covers the gap between between what someone makes and a certain basic income, there is no penalty for getting a raise that puts you over the income threshold.
How would it work? The government would set a basic income amount, perhaps at 130 percent of the poverty threshold as defined by the U.S. Census Bureau. The poverty threshold is essentially the amount of money determined annually to feed, clothe, shelter a person or family in the United States. For a family of four, including 2 children, according to the latest figures available from 2013, the threshold would be $23,624 per year, such that 130 percent of that total is $30,711.20.
The NIT would pay out benefits every month, rather than once a year, as is the case with the current Earned Income Tax Credit. The only paperwork difference would be that W-9s would be submitted monthly instead of annually. For a family of four, basic monthly income would be $2,559.25. If the family earned $2,000, they would receive a check for $559.25. The funds could be deposited directly, like Social Security, without the red tape and restrictions of the current multitude of welfare programs.
The biggest objection that can be articulated is that a NIT still would discourage work by being paid out to the unemployed. Of course, one could retain the unemployment insurance program and count those benefits against the NIT threshold. For those who simply refuse to work, the NIT rate could be adjusted downward, say, for those who report no income for six months straight. If they bring in no income for another three months straight, it could be reduced again.
If crafted correctly, an NIT can replace the welfare bureaucracy and its perverse disincentives and it can actually encourage work and achievement and break a cycle of dependence. Also, by eliminating the minimum wage, an NIT can possibly help increase employment and help low-skilled workers enter the workforce. It’s a public policy solution that policymakers should seriously consider as we consider overhauling the welfare state for the 21st century.This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
Take a minute to list the top three American leaders of the past half-century. It does not matter whether they are politicians, religious leaders, or social reformers. Focus on the greatest examples of leadership. For many, names such as Ronald Reagan, John Kennedy and Martin Luther King Jr. come to mind. Other examples might include Billy Graham or even Henry Kissinger.
Now, name the greatest leaders of the last 10 years. The question becomes much more difficult. Part of the challenge is that the passage of time frequently gives way to nostalgia. The more controversial aspects of the leaders are forgotten and their agreed-upon virtues are more easily celebrated.
At the same time, the quality of leadership does seem to have changed markedly. Earlier this year, Fortune magazine released a list of the World’s 50 Greatest Leaders. While it only represents one perspective, President Obama did not make the list at all. How is the “leader of the free world” not an automatic inclusion on virtually every list of great living leaders?
Does former President George W. Bush engender the kind of respect attributed to a great leader? How about John Boehner or Harry Reid? Are George Soros and the Koch brothers inspirational reformers?
We have plenty of smart, capable individuals who helm our government, industry and culture, but we are currently experiencing a leadership vacuum. Many of us have become accustomed to identifying leadership by position rather than character because we have so few examples of the latter.
Many of our government heads and corporate leaders have become predictable functionaries. They perform their roles, stay on message and then move on to the next task. The job is done, the world moves on, but it frequently feels plastic and uninspired.
We might happen to agree with them, but would we follow them into uncharted territory? Do we continue to respect them when they disagree with us? Are they able to convince us to sacrifice our immediate self-interest for grand ideals?
In his famous “Letter from a Birmingham Jail,” Martin Luther King, Jr. critiqued the church for being “a thermometer that recorded the ideas and principles of popular opinion” rather than “a thermostat that transformed the mores of society.”
Many of our positional leaders have become thermometers for popular opinion rather than courageous visionaries. People are rarely disturbed or inspired by those who operate in such a manner. We would be just as well to have a direct democracy if polls were an effective method of guiding our nation. Regrettably, history has demonstrated that public popularity is no safeguard against destructive ideas or institutions.
For that reason, America was established as a republic with divided power, checks and balances, and safeguards against runaway public sentiment. Yet such a model requires leaders willing to cut against those popular opinions, win the hearts and minds of many, and suffer the slings and arrows of the rest.
Perhaps the greatest challenge to filling America’s leadership vacuum is finding those willing to accept its cost. With constant exposure, endless criticism and a tumultuous world stage, it is hard to blame anyone reluctant to serve as a thermostat for our nation, rather than solely a thermometer for their constituents, customers or congregations.
While a nation of free people should have a healthy suspicion of its leaders, we find ourselves in desperate need of men and women with character, a clear perspective on a brighter future, and a patient resolve to help us see and strive for it.
“There is definitely correlation between population density — and thus traffic density — and insurance rates,” said Eli Lehrer, president of the R Street Institute, a free-markets research group, said in a press release. “That’s why you see really crowded cities like Los Angeles and New York near the top of the list, while cities like Charlotte and Cleveland are near the bottom.”