Sat, 27 Dec 2008

A Standard of Need

How much does it cost to live in Rhode Island? That's a hard question to answer, so here's another: how much do you have to earn so that you're not poor in Rhode Island?

Since it was first developed (by Mollie Orshansky, a researcher at the Social Security Administration, in 1963), the federal poverty level has been controversial, subject to misinterpretation and manipulation. Originally based on typical food budgets, the poverty level has crept up with food prices over the years, but not with the changes in the way we spend money, leaving it a poor measure of being poor.

If you're old enough, you'll remember a time in the 1970's when food prices were a political issue. Inflation, but especially food prices, defined economic concerns for many during that time. Spending about a third of your income on food was not unusual, and the poverty level was based on that.

Agriculture subsidies and policies to promote highly-efficient giant farms have driven down food prices ever since then, and so now food prices are not a political issue. (Except that these policies are the source of terrible environmental, labor and health consequences, but I'll save those for another time.) No one spends as much as a third of their monthly budget on food any more, but the poverty level -- officially about $1,460 per month for a family of three -- is still calculated off the food budget as if we did.

A more realistic measure is provided by the Poverty Institute, who has for several years compiled a state "standard of need." Essentially they have redone Orshansky's work, but using more realistic assumptions, and incorporating into the standard the various programs -- Medicaid, food stamps, and child care subsidies -- available to people who are poor.

And so they've found that if you're a single parent with two kids, you probably need to be earning more like $50,000 each year to be out of debt and have enough for the basic needs for you and your children. By "basic", I don't mean cable, either. We're talking about having enough to buy clothes and keep the fridge full, but no more. People who earn less are in trouble. For example, say you have a job paying $14.81 per hour. You're earning 175% of the poverty level, and about twice the minimum wage. Say you've found a real bargain of an apartment to live in, and have nothing but routine medical needs. Congratulations, with the subsidies for child care and Medicaid for which you qualify, you're probably only short about $50 every month.

Here's the catch: should you pick up some extra work, or be lucky enough to get an 84 cent per hour raise, you'll lose the child care and health care subsidies, and be about $1,100 in the hole every month. What luck. So someone who does everything right, and tries to get off public assistance, finds herself worse off than before. What this says is that our system is really nuts -- created as a response to the fantasies of politicians and talk show callers rather than to the real world. Motivated by the fear that someone, somewhere, might maybe get some aid he or she doesn't deserve, federal and state legislators have over the years created such an incredible mess of programs and eligibility regulations that irrationalities like this are the rule, not the exception.

I have on my desk a fascinating little book, called "Why Welfare States Persist" by Clem Brooks and Jeff Manza, sociologists at Indiana University and New York University respectively (University of Chicago Press, 2007). Their work asks why, in the face of budget cuts and right-wing backlashes in democracies all over the world, the components of the welfare state seem to survive. A common explanation they discuss is something you hear in Rhode Island all the time: powerful actors (such as unions) have seized control of programs in such a way to prevent the popular will from ending them. But given the decline in labor's political strength in many countries, and the persistence of labor-backed policies in those countries, it's a challenging case to make in a rigorous way. That is, it's easy to say, "It's all the unions' fault," but far harder to prove it in a world where pension givebacks and wage concessions are so common.

Brooks and Manza counter that you simply can't discount public opinion as a source of support for welfare state programs. Put simply, many of these programs are popular, and so they persist because this is a democracy, or at least something vaguely like one.

Popular? How can that be when you hear so much complaint about welfare, child care, Medicaid and the rest? But notice this: no one ever runs for office on eliminating these programs. I spent a fair amount of time reading Assembly campaign literature this fall, and I can't think of a single candidate who ran on *eliminating* a government program. Or at least none who would say so in public. Instead they'll say "we must do more with less" or something equally inane, or insist the programs are good, but need to be limited to those who deserve it. Depending on the candidate (and the audience) this might mean the white ones, the non-immigrant ones, or the ones who can find a job within two years while raising three children alone. This is an essentially dishonest approach, which is why I think it's worth looking at what politicians do instead of what they say.

People make mistakes, and bad things happen to good people, too. They deserve a system that can actually help them, not just one that allows us to pretend to help. You may say they shouldn't be "entitled" to that help, but many of us say we owe it to them. Enjoy your holidays this week, and please be generous, when you can.

14:09 - 27 Dec 2008 [/y8/cols]

Sat, 20 Dec 2008

Stimulating Conversation

I got a press release last week from the Governor's office. It seems that he's organized what they're calling a small business stimulus package. Well that's the kind of thing we need right now, so I clicked right over and looked for the details.

Sadly, what was on offer was something else entirely: a package of measures intended to make it more likely that Rhode Island businesses who need credit will get it. Apparently the Governor's office organized a bunch of local banks to pledge specific dollar amounts in local business credit and a variety of other ways to get credit to small businesses. This is a good thing, and I'm glad it's happening. The measures, all told, are cheap ways to use the government's power to get things to happen. Credit is the life blood of many businesses, and current events in the financial markets have jeopardized it, even for businesses in no danger of default.

But what of this word, "stimulus?" I'm afraid it's become a little overused, sort of cheapened by wide use this year. What is stimulus?

Here's what it isn't: credit. During the 1990's, interest rates in Japan were essentially zero, and it didn't do diddly to get them out of their recession, because who wants to borrow money if there's nothing to invest in? Through the early years of our Great Depression, economists argued about why there were no good investment opportunities. Among the big guns, Harvard's Alvin Hansen duked it out with Austrian economist Joseph Schumpeter in economics journals and forums. They could agree that the problem was a lack of business investment and a lack of opportunities behind that. But both could only flounder around the reasons behind the lack. Hansen proposed that it was the inevitable result of the closing of the American frontier (which happened about a generation before, really). Schumpeter insisted that the welfare state had sapped Americans of their entrepreneurial drive.

Neither explanation won any prizes for coherence, and it was left to John Maynard Keynes to point out that the real cause of a lack of good investments is a lack of consumer demand for stuff. He said that controlling credit markets is like being on the end of a string. You can always pull the string to tighten credit (raising interest rates), and it will slow the economy down, but you can't push on the string. Easing credit won't stimulate anything, only create the conditions where stimulus can work. If you want to stimulate the economy, you need people to spend money. Stimulus is what makes businesses want to consume credit, but credit itself isn't stimulus. Providing credit is only leading the horse to the water, and has nothing to do with making it thirsty, let alone getting it to drink.

Rhode Island is a small state, with comparatively small resources. We can't stimulate demand in other places for products and services made here. But we can stimulate demand in our own local economy, and we'll do that by getting money in people's hands who will spend it here. What would be valuable stimulus now is money in people's hands that must be spent, not saved. Preferably spent locally.

We have some huge public works needs: roads and bridges, but also affordable housing and schools, which always seem to come at the end of those lists. There are high hopes that an Obama administration will provide significant funds for these kinds of projects, but even if projects are "ready to go" on January 20, few are likely to be underway before summer. The stimulus these provide will be useful, but slow coming.

For a quick jolt, a government can just hand out money, but that, well, has some problems. The federal government tried it earlier this year: gave us all a tax cut and told us to go spend. I don't know about you, but I let down my country and my "stimulus" check went right into savings. Stimulus is diluted when people save it instead of spending it. The best way I know around this is the way that Congressional Republicans nixed when it came up last year: give money to people whose lives dictate that they will spend it. Now is the time to expand the child care subsidy, or to extend unemployment benefits for example.

We also have to watch out for anti-stimulus. That is, here's what not to do: slash payrolls at our big employers. Of course, we're poised to do exactly that. The cities and towns are responsible for around 30,000 jobs in the state, and they're all making plans to cut back because of expected cuts in state aid and limits on their property taxes. But this is crazy. The state must keep them solvent, not just because of all the employees, but because of their suppliers: local businesses who need the business. But this apparently isn't on the menu.

Economists used to claim that natural forces would keep the economy at full employment. The Great Depression put an end to that talk, except among economists who choose to ignore it. What we learned was that the private sector alone can't do the job of getting us out of jams like that. Without government to push where it can and pull where it can, the economy can just putter along with hundreds of thousands of unemployed people.

But what are we here in Rhode Island going to get to address the slowdown? Apparently only ideas that cost nothing. The people in charge of your state have concluded that the state is powerless, and because they think so, it is. Tax cuts and low-interest loans didn't get us out of the Depression. As usual, the lessons of the past are right there out in the open, waiting for us. But they won't be used by people who are willfully blind to them.

15:57 - 20 Dec 2008 [/y8/cols]

Sun, 14 Dec 2008

More taxing matters

Last week the Governor's "Blue-Ribbon Panel on Transportation Funding" issued its draft report about how we're supposed to pay for rebuilding our roads and bridges. The report says we need $639 million a year to rebuild our roads and bridges and to put RIPTA on a solid footing over the next ten years. This is about $285 million more than is going to come from the federal government or the existing array of taxes. This is a lot of money, even in these days of hundred-billion-dollar bailouts. It's enough dollar bills to blanket our sections of I-95 and 295 with them, including the breakdown lanes and bridge abutments.

The report isn't shy about revenue, which is a refreshing change -- not because I welcome paying more money, but because I welcome honesty from my public officials. It suggests a variety of tolls, taxes and fees to pay for the maintenance and reconstruction of what we've got. More about them in a moment.

The report recommendations are separated into the more frugal "Scenario 1" and the more expensive "Scenario 2". I gather that the intent is that we find some happy compromise between the two, but as I perused the report and its findings, I found it hard to imagine finding contentment anywhere between these two.

For one thing, only the expensive Scenario 2 envisions improving RIPTA service at all. Scenario 1 has it only that RIPTA gets to limp along at its current levels of service, removing only the constant sense of crisis.

Because it's the 21st century and because I remembered to charge my battery, I'm writing this on RIPTA bus 66, on my way home from Providence to South County. I'm sitting in the front, looking back, and I see two empty seats as we leave Providence, but we'll probably fill them up at the CCRI stop. The report proposes increasing the gas tax, and offers a "vehicle-miles traveled" (VMT) tax based on how many miles you drive in a year (part of Scenario 2), and suggests tolls on the interstates, too. I support policies that discourage driving, because driving is polluting, cars are expensive, and our roads are congested. But policies to discourage driving only make sense if there are alternatives. To raise taxes on driving without providing alternatives is what we students of government call really obnoxious public policy, and this is precisely what is envisioned by Scenario 1.

After that, I couldn't help notice that "frugality" is only for the suckers who ride the bus. I guess they figure we're used to it. For example, both Scenarios envision the complete reconstruction of the Sakonnet River Bridge. This project was originally introduced to us some years back as a choice between a $70 million repair job and a $170 million replacement. The replacement cost is now estimated at $210 million, but for the life of me I don't know why anyone would believe that number. The I-Boondoggle improvement to 195 was originally supposed to cost $150 million, and if you count the borrowing costs, its final tab will be closer to $1 billion. Do people imagine that cost inflation is only for bridges with funny names?

In other words, we're going to get another gold-plated replacement bridge, purchased on the basis of an unrealistic cost estimate, either way. Just what we need. Meanwhile, we only get better bus service in the unlikely event that the legislature agrees to the the whole menu of tax increases. (Note: We're at CCRI now, and the last seat is filled. Only one person standing, though.)

Then I looked closer at the tax proposals. The panel's intent was to make drivers pay for roads. This is an OK principle, but as usual, the details matter. Because all the proposed taxes are based on driving, none of them relate to the income of the people who have to pay them. So the owner of the '09 Jaguar will pay the same tax increase as the owner of the '92 Saturn.

In Scenario 2, the report talks about "redirecting" some funds from driving-related fees, like car sales taxes and registration fees, that currently go into the state's general revenue. Again, in a philosophical sense, you can see a good case for this kind of thing, but in a practical sense, they're suggesting taking money that is already going to help pay for educating your children and nursing home care -- not to mention the state police who patrol the highways -- which seems slightly presumptuous to me.

At this point, it's not at all clear if any of these proposals are going to go into the Governor's budget this year. He convened the commission, but is under no obligation to follow its recommendations. But the report will set the terms of debate over the budget this spring.

Meanwhile, that wasn't the only tax news of the week. Over at the "Governor's Strategic Tax Policy Workgroup", convened to discuss reforming the entire tax system, the "Individual Taxation" sub-group seems poised to recommend one of three alternatives for reforming our state taxes on individuals. Unsurprisingly, all three of the options involve substantially lower taxes on people at the top end of the income spectrum and all three will require people in the middle to suck it up and pay more.

This is perfectly in keeping with the business-first, trickle-down economics that has marked this Governor and this Assembly, so it should surprise no one. Come hell, high water, or global financial crisis, they will say tax cuts for rich people are the solution for all our economic ills. And if the state needs more revenue, to pay our bills in a responsible way, they'll suggest taxes so broad that they hit everyone, no matter their ability to pay.

Remember this when you're next told that "shared sacrifice" is how we're going to get through this financial and budget crisis.

15:01 - 14 Dec 2008 [/y8/cols]

Sat, 06 Dec 2008

Issue 34 out

Missed today's mail pickup, so it will be in Monday's.

• Housing First, a new approach to homelessness (that appears to be working), by Eric Hirsch
• A look at the proposed ALCO TIF deal, by Judith Reilly
• Book review: You Can't Be President: The Outrageous Barriers to Democracy in America by John MacArthur

Didn't you mean to subscribe already?

18:30 - 06 Dec 2008 [/y8/de]

Affordable housing is still a problem

I was looking over some data about homelessness last week. It seems that the number of homeless people using shelters from July 2006 to June 2007 was about the same as the year, before, which seems like good news only until you compare it to the years before that. Shelter nights in 2006-2007 were up over 70% from 2000. The most recent year's data is still being compiled, but with unemployment up and rents not down, there's no obvious reason to think things have improved.

Homelessness is a complicated thing, with many reasons behind it, but high rents are a principal cause. Right now, the median rent for a one-bedroom apartment is about four times what a disabled person receiving Social Security (SSI) support receives. Sure, those people aren't necessarily shopping for median apartments, but show me the units that rent for $200 a month, which is about what they can afford. And that isn't the only problem.

During the crazy price run-up between 2000 and 2006 buying property in order to rent it became less and less feasible. From tax assessor data, I see that you could easily find a duplex in South Providence for between $225,000 and $280,000 in 2004. But the RI Housing rent survey from that year says that rents in the area averaged only around $750 or $800, not enough to cover a typical mortgage. The owners of these houses, where they decided to rent at all, had to push the envelope of the rental market.

According to RI Housing, the average rent in the state has gone from $750 in 2000 to $1175 in 2006, and then down to $1,142 in 2007. Meanwhile, the cost of an average multi-family home (statewide) went from $108,000 in 2000 to $285,000 in 2006, growing almost three times as fast. The prices have cratered since then, though it's a little hard to tell because the number sold in the poor neighborhoods of the state has soared compared to previous years.

What's more, because many landlords were buying only to resell, they were not that interested in tenants, preferring to apply new paint jobs and other cosmetic work to boost resale price. Tenants tend not to make a sale easier, so apartments stayed empty pending a sale. The practical effect was to withdraw a large number of rental units from the market. Rentals were expensive *and* hard to find during the bubble years.

Of course the downside to this kind of investment is that you don't want to be holding the ball when the music stops. A lot of foreclosures in the poor parts of our state have been investors walking away from deals gone bad by falling prices, leaving what tenants they have to be evicted by the bank. In a theoretical economics sense, this *is* the market correcting itself. The problem is that the corrections appear to take some time, and the human cost is pretty high while we're waiting.

Where does this leave us? In John Steinbeck's "Grapes of Wrath," he wrote about starving farm workers watching as surplus fruit was dumped on the ground and spoiled with kerosene to keep the fruit prices from collapsing. How different is that from where we are today? A homeless person walking over to Amos House in South Providence will pass more than a handful of boarded up and vacant houses on the way.

Figuring out what to do about this is not easy. It's clear that the market isn't working to provide housing to people who need it, but the only fix policy makers in our state have been behind is to build more affordable units. This isn't a terrible idea, and the people who get to live in them are made happy, but we can't possibly build our way out of the affordable housing crisis. The available money is too small and the market is too big. Reshaping the rules that govern that market is the only way we're going to put this behind us.

When you mention the possibility of regulating the housing market, many will gasp some economics pabulum about rent control. The evidence about rent control is much more mixed than most economists would have you know, but it's controversial and difficult to make it work right, and there is quite a lot we could try besides simple price controls. For example, making it harder to withdraw rental units from the market, or offering tenants a right to stay in their homes through a sale.

A more interesting possibility would be to privilege rental income and discourage speculation income. For years, our state has cut capital gains tax rates, to encourage investment. But the kind of investment this encourages (to the extent that it encourages any at all) is the buying and selling of enterprises and real estate, not the income derived from managing them. Our state does not suffer from a shortage of savings or investable funds, as the real estate bubble itself has shown us. Capital gains tax cuts solve a problem we don't have, and create revenue problems we don't need.

Let's instead lower the tax rate on income from residential rentals and help pay for it by putting the capital gains tax rates back where they belong, equivalent to the taxes on other kinds of income. According to IRS reports, RI residents earn about $190 million in rental income each year. Cutting the income tax in half on this would cost us around $5-6 million, far less than the capital gains cuts cost us. It would also be a great idea to enact an anti-speculation land gains tax, like they have in Vermont. This won't raise any revenue at all while we're still in the dumps, but I've lived through two housing bubbles in the past 20 years, and that's quite enough for me, thank you very much. Now is the time to ensure that we don't have to go through it all again.

18:26 - 06 Dec 2008 [/y8/cols]

Mon, 01 Dec 2008

The Jevons Paradox

Via a friend, here's a provocative look at the Jevons paradox. What's that? It's the propensity for the economy to use more of a resource once the consumption of that resource is made more efficient. For example, when James Watt made steam engines more efficient, consumption of coal in 19th century Britain went up, not down, because the efficiency gains were offset by increased use. To draw out a comparison that should be obvious, there is no real reason to expect that the development of green technologies alone will inevitably lead to a cleaner and cooler planet.

Along with the Jevons paradox, there is this other economics sucker bet that says that long-term the price of oil is not going to go up. That is, the history of pretty much every commodity out there is that long-term, the price declines. Now oil plays such a central part in the economy that it might be the first commodity to break the rule, so I wouldn't go too far out on a limb with this, but what it tells me is that the people who say our salvation will be that peak oil will mean a rising price of oil which then provokes increasing use of green technologies which will then reduce warming and pollution are probably wrong in multiple ways.

We're not going to get a cooler planet without green technology, but we're also not going to get it if we rely only on technology to save us.

09:17 - 01 Dec 2008 [/y8/de]

Ads and the like:

Rhode Island 101
(A funny book you should own)