Rhode Island Policy Reporter

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RIPR is a (paper) newsletter and a weekly column appearing in ten of Rhode Island's finer newspapers. The goal is to look at local, state and federal policy issues that affect life here in the Ocean State, concentrating on action, not intentions or talk.

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whole site RIPR back issues

Available Back Issues:

  • Aug 09 (38) - How your government's economic policies have worked against you. What a fake nineteenth century nun can teach us about the tea party protests.
  • Jun 09 (37) - Statistics of optimism, the real cost of your government. Judith Reilly on renewable tax credits. Review of Akerlof and Shiller on behavioral economics.
  • Apr 09 (36) - Cap and trade, the truth behind the card check controversy, review of Governor's tax policy workgroup final report.
  • Feb 09 (35) - The many varieties of market failures, and what classic economics has to say about them, review of Nixonland by Rick Perlstein.
  • Dec 08 (34) - Can "Housing First" end homelessness? The perils of TIF. Review of You Can't Be President by John MacArthur.
  • Oct 08 (33) - Wage stagnation, financial innovation and deregulation: creating the financial crisis, the political rhetoric of the Medicaid waiver.
  • Jul 08 (32) - Where has the money gone? Could suburban sprawl be part of our fiscal problem? Review of Bad Money by Kevin Phillips, news trivia or trivial news.
  • Apr 08 (31) - Understanding homelessness in RI, by Eric Hirsch, market segmentation and the housing market, the economics of irrationality.
  • Feb 08 (30) - IRS migration data, and what it says about RI, a close look at "entitlements", historic credit taxonomy, an investment banking sub-primer.
  • Dec 07 (29) - A look at the state's underinsured, economic geography with IRS data.
  • Oct 07 (28) - Choosing the most expensive ways to fight crime, bait and switch tax cuts, review of Against Prediction, about the perils of using statistics to fight crime.
  • Aug 07 (27) - Sub-prime mortgages fall heaviest on some neighborhoods, biotech patents in decline, no photo IDs for voting, review of Al Gore's Against Reason
  • Jun 07 (26) - Education funding, budget secrecy, book review of Boomsday and the Social Security Trustees' Report
  • May 07 (25) - Municipal finance: could citizen mobility cause high property taxes? What some Depression-era economists had to say on investment, and why it's relevant today, again.
  • Mar 07 (24) - The state budget disaster and how we got here. Structural deficit, health care, borrowing, unfunded liabilities, the works.
  • Jan 07 (23) - The impact of real estate speculation on housing prices, reshaping the electoral college. Book review of Blocking the Courthouse Door on tort "reform."
  • Dec 06 (22) - State deficit: What's so responsible about this? DOT bonding madness, Quonset, again, Massachusetts budget comparison.
  • Oct 06 (21) - Book review: Out of Iraq by Geo. McGovern and William Polk, New rules about supervisors undercut unions, New Hampshire comparisons, and November referenda guide.
  • Aug 06 (20) - Measuring teacher quality, anti-planning referenda and the conspiracy to promote them, affordable housing in the suburbs, union elections v. card checks.
  • Jun 06 (19) - Education report, Do tax cut really shrink government?, Casinos and constitutions, State historic tax credit: who uses it.
  • May 06 (18) - Distribution analysis of property taxes by town, critique of RIEDC statistics, how to reform health care, and how not to.
  • Mar 06 (17) - Critique of commonly used statistics: RI/MA rich people disparity, median income, etc. Our economic dependence on high health care spending. Review of Crashing the Gate
  • Feb 06 (16) - Unnecessary accounting changes mean disaster ahead for state and towns, reforming property tax assessment, random state budget notes.
  • Jan 06 (15) - Educational equity, estimating the amount of real estate speculation in Rhode Island, interview with Thom Deller, Providence's chief planner.
  • Nov 05 (14) - The distribution of affordable houses and people who need them, a look at RI's affordable housing laws.
  • Sep 05 (13) - A solution to pension strife, review of J.K. Galbraith biography and why we should care.
  • Jul 05 (12) - Kelo v. New London: Eminent Domain, and what's between the lines in New London.
  • Jun 05 (11) - Teacher salaries, Veterinarian salaries and the minimum wage. Book review: Confessions of an Economic Hit Man
  • Apr 05 (10) - Choosing a crisis: Tax fairness and school funding, suggestions for reform. Book review: business location and tax incentives.
  • Feb 05 (9) - State and teacher pension costs kept artificially high. Miscellaneous tax suggestions for balancing the state budget.
  • Dec 04 (8) - Welfare applications and the iconography of welfare department logos. The reality of the Social Security trust fund.
  • Oct 04 (7) - RIPTA and DOT, who's really in crisis?
  • Aug 04 (6) - MTBE and well pollution, Mathematical problems with property taxes
  • May 04 (5) - A look at food-safety issues: mad cows, genetic engineering, disappearing farmland.
  • Mar 04 (4) - FY05 RI State Budget Critique.
  • Feb 04 (3) - A close look at the Blue Cross of RI annual statement.
  • Oct 03 (2) - Taxing matters, a historical overview of tax burdens in Rhode Island
  • Oct 03 Appendix - Methodology notes and sources for October issue
  • Apr 03 (1) - FY04 RI State Budget critique
Issues are issued in paper. They are archived irregularly here.

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The Rhode Island Policy Reporter is an independent news source that specializes in the technical issues of public policy that matter so much to all our lives, but that also tend not to be reported very well or even at all. The publication is owned and operated by Tom Sgouros, who has written all the text you'll find on this site, except for the articles with actual bylines.


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Fri, 11 Dec 2009

Do banks help?

Banks are in the news again, and not really for the best of reasons. Congress is just getting rolling on debating the reform of financial regulation, and we're hearing a lot about, well, unhelpful banking practices.

"Overdraft protection" for example. This is a system where the bank will honor a check that might overdraw your account, but charge you a stiff fee for the privilege. You can appreciate the beauty of this scheme with an account holding $300 and two checks, one for $400, and one for $15. Without overdraft protection, one would bounce and you'd be dinged for that one, but the other would clear no problem. With overdraft protection, the bank can charge you for both checks, because the first one makes the account balance negative, and the second makes it worse. In essence the bank is giving you a small loan, at potentially astronomical rates. Peter Wasylyk, a Rhode Island attorney, is currently trying to organize a class-action suit against big banks for this practice. (He's also a state representative from Providence.)

What else? It was reported in the Providence Journal a couple of weeks back that local banks are not participating in a part of the federal stimulus package meant for them. This provision was meant to provide very low interest loans or credit lines to area small businesses. As of the end of November, only 13 Rhode Island businesses had received loans, from only four banks. Most of the other banks complained of too much paperwork, or simply ignored the program.

And, of course, we can't forget the enormous executive bonuses paid by the big banks (including BankAmerica) straight out of federal bailout money.

But why are they doing these things? It's not because they're evil, but because they feel pushed into it. Banks are an essential part of our market economy. We can't do without them. Ben Bernanke (and many others) call credit the lifeblood of the American economy. But banks are also economic actors. They have to attract good talent, they have to have their loans repaid, and they have to earn money. The problem we all face is that there are lots of ways to do these things, and only some of them are good for the rest of us. For example, a bank could make money by getting its branch security guards to confiscate the wallets of its customers. Presumably a bank that did this would start losing customers -- unless all the other banks were doing the same thing.

Fortunately, that kind of strategy is against the law, so you can walk into a bank secure that you'll be allowed to walk out again with your wallet intact.

In truth, that's what regulation is all about: laws that restrict the kinds of competition to the sort we approve of. We regulate insurance companies, barber shops, taxi cabs and gas pumps because we know that the free market works -- and works well -- when the players in it are given limits. The regulations align the social needs of gas customers with the incentives of gas station owners. Pumps are inspected so that gas stations can't make money by cheating. The result is that competition happens elsewhere, and so you get 5c off Tuesdays and reduced-price car washes with gas and the like. And you also get a price-sensitive market where the prices are advertised in big letters at the side of the road.

What has happened to our nation's banks is that the great wave of financial deregulation ushered in by Bill Clinton and his predecessors, and pushed along by Congressional Republicans has brought us a market where anything goes. In the drive to cut costs, banks came to rely on fees for their income more and more each year. The cutting costs was a good thing, but replacing income from loans with income from customer fees created the wrong incentives -- instead of developing new loan customers, banks looked to capture account customers who could be assessed new fees.

The result of almost 30 years of deregulation is that banks make more money with fees than they do by lending. And so lending just isn't that important a part of their business. This seems strange, but it was a view expressed to me by a banker I met recently -- a commercial loan officer -- who told me that among the front lines, this is a common observation.

These conditions are not healthy -- credit is the life blood of the economy, not customer fees -- but they are also not necessary. Unfortunately, they are stable. A bank that earned most of its income from fees in 2009 is likely to do the same in 2010, and so is unlikely to be enthusiastic about being forced to change. It took years for our banking markets to settle on some of these solutions, and so getting us from here back to something more sensible may well be wrenching.

But some kind of wrenching is clearly required, because banks are routinely not acting in the best interests of our nation or our state. If we want banks to act to help our economy instead of hinder it, we must give them rules to follow, whether that be at the state or the national level.

17:43 - 11 Dec 2009 [/y9/cols]

Tue, 08 Dec 2009

When it works...

I've lately been reading "Ground Truth" by John Farmer. It's a blow-by-blow account of the events of September 11, 2001, informed by a few bushels of recently declassified documents -- documents that either weren't available to the official 9/11 commission or they chose not to use. Farmer was counsel to that commission, so he was in a position to know what evidence was available.

What I am learning from the book is alternately depressing and enraging. Incompatible equipment and rules made interagency cooperation impossible. (And some of the "fixes" made in the aftermath have only made the situation worse.) Opportunities to capture or thwart the hijackers were ruined by bureaucratic turf warfare, poor planning, bad equipment and plans created for a cold war that was over.

Plus, most of the agencies involved lied about it after and classified the evidence of their performance, effectively thwarting any attempt to fix the problems in a rational way.

Now, I've worked in enough large corporations to know that these kinds of inefficiencies are endemic to all kinds of large organizations, not just government. I recall one company I consulted for that laid off several people from a profitable division primarily because there was a hiring freeze and they couldn't replace a business development guy who had left. Then there was the company that laid off every single engineer who worked there in order to outsource everything (key quote from the CEO: "If your job involves actually doing something, your job is at risk"). I was at another where the two chief engineers created incompatible software largely because they really didn't like each other. (One of these companies is still around and supposedly thriving.)

That said, if you yearn for good government, it's of very little comfort to know that private companies are often just as bad. So I figured this week it would be good to share some pleasant news about your state government, so you can have something to be thankful for.

The big news of the fall of course is health care. But the reform muddling its way through Congress takes a back seat around my dinner table to stories of the swine flu. The sudden emergence of the flu last spring, its odd behavior and unusual virulence have all combined to put us all on edge. I was at a meeting at a bank last week, and after everyone had shaken hands, the banker in charge passed out little bottles of hand sanitizer with the bank logo on them. On the bus, everyone looks when someone coughs, and I saw someone in a surgical mask while shopping last week.

On top of all that, there's a vaccine shortage. Given that it takes about six months to create usable supplies of vaccine, and that it's only been slightly longer than that since H1N1 was described specifically enough to make a vaccine, it's not terribly surprising that we're a bit short. But what you might not know is that your own little state is operating one of the smoothest distribution operations around.

I talked last week to a friend of mine, a physician who practices at clinics in Rhode Island, Massachusetts and sometimes Connecticut, and she told me that she has marveled at the differences. The shortage means that public health officials are trying to give priority to populations deemed at a higher risk than others -- pregnant women, children, etc. But at public clinics in Massachusetts, everyone who shows up has been given the vaccine and the guidelines go out the door, as do the long lines. There have been similar stories in other states, too. In New York City, thousands of doses were delivered to large companies with headquarters in the city (among them Goldman Sachs and Citigroup, which sparked some populist outrage) while hospitals were still waiting for their allotments.

But have you heard any of those stories from RI? My friend tells me she has not, and I have not, either. She instead told me about the regular bulletins she has been receiving from the Health Department, about the tight controls on who gets the vaccine when, and the efficient way things were organized when she showed up to volunteer for training as one of the school-vaccination team members. She also said, "It's amazing, there isn't even anyone to bribe -- I thought this was Rhode Island," though I think she was kidding.

It turns out that in matters of public health, Rhode Island punches above its weight. Statistics from the Trust for America's Health, a public health advocacy organization are a fairly comforting read. Of course there is plenty more to be done, but we don't do at all badly in the indicators they use to judge these things. Plus we're spending less to do it than many similar states. Data I got from the National Association of State Budget Officers says we're spending less per person on public health than any other state in the northeast, save only Vermont and New Hampshire, putting us just a bit above the national average, around 15th highest in the country.

One of the marvels of good government is that when it's good, it recedes from view -- the garbage disappears, the building permits appear, the insurance companies remain solvent, the vaccines are administered in the appropriate order. The departments that function well don't make it into the headlines. In a climate where public services are routinely belittled by the very people in charge of running them, perhaps this is politically unwise. Nonetheless, it is still something I'm thankful for.

01:01 - 08 Dec 2009 [/y9/cols]

Sat, 21 Nov 2009

Fixing banks -- Will it work?

I'm not really sure anyone remembers this, but we had a bit of a financial crisis last fall. Remember that? Banks too big to fail, but they failed anyway? Financial armageddon avoided via all-weekend meetings in New York and DC. Sunday evening announcements about who'd get billion-dollar bailouts the next day? Good times, those.

What's funny about it is that though we bailed out the banks, we didn't create any way to prevent banks and hedge fund operators from doing the exact same thing all over again. We added some conditions to some of the bailout money. Some of these have been honored in the breach, with executives at several bailed-out banks and investment companies awarding themselves a few billion dollar's worth of bonuses.

So it's with a mixture of pleasure and anxiety that I read that financial reform bills are making their way through both the House and the Senate. If congressional battles over health care reform ever get off the front pages, you'll be reading about attempts to reassemble a regulatory apparatus to protect our financial system from its excesses. That is, a year after the colossal bailouts of last fall, it's finally time to expend some effort to make sure they don't have to happen again.

Last week saw the presentation of an ambitious bill by Senator Christopher Dodd (D-CT), providing a kind of counterpoint to a House bill to do more or less the same, championed by Rep. Barney Frank (D-MA). The bills differ in important details, and both are fairly complex pieces of legislation. I'm optimistic that at last some of these issues are being discussed, but anxious because it doesn't seem to me that the solutions on the table are likely to be effective.

The financial debacle of last year was attributable not only to out-of-control financial speculation, but also to unconscionable lending practices necessary to feed that speculation. That is, investors were making tons of money speculating with derivatives based on mortgages, and so that drove up the demand for mortgages past the supply of safe borrowers. But rather than accept that limit, Wall Street geniuses invented arcane math that persuaded them they could safely ignore common sense.

(And yes, you'll hear people blame bad lending on the Community Reinvestment Act, which is supposed to make loans more available in poor neighborhoods, or on Fannie Mae and Freddie Mac, the mortgage giants designed for a similar goal. But there are few facts to support that perspective. Most of the troubled lending was at institutions not covered by the CRA, and Fannie and Freddie lost market share during the heights of the bubble, since their loans were held to a higher standard than loans from private brokers and lenders.)

In addition to forcing the supply of loans to tinker with, the other thing banks and hedge funds did was to increase the leverage of their investments. By a variety of supposedly-sophisticated strategems, investors figured out ways to parlay very small bets into very big investments. If you only have to put up a million dollars in order to bet a billion dollars, then if you win, you're a genius.

The problem is that leverage works great in reverse, too. That is, if you lose your bet, you don't have the billion to pay back and you're in deep trouble. In a nutshell, that's what happened last fall to AIG, Citibank, Lehman Brothers, Merrill Lynch and all the rest.

Both the Frank and Dodd bills attempt to address questions of leverage. They both allow the regulating agencies (they disagree about who that agency is) to set standards for leverage, and allow intervention of various kinds if the standards are violated. This is well and good, but it's hard for me to imagine it working well in practice. Mostly these regulations seem to be an invitation for firms to hire even more engineers to invent new forms of credit derivative designed to mask the size of the original investment.

Part of the reason the regulations are written like this is that Dodd and Frank both want to leave the essential business of "financial innovation" untouched. Both bills seem motivated by the idea that this is something valuable and worth protecting. Thus there are no provisions for confining derivative purchases to certain exchanges, where they can be regulated directly, as we do now with stock purchases. What this means is that the laws will be in place for regulating leverage, but the only way to actually do it is for the regulators to stay abreast of all that innovation, which seems exhausting and improbable.

But really, who does financial innovation serve? The evidence seems fairly clear that it mainly serves to fuel the casino economy of Wall Street and has little or nothing to do with the real economy of goods and services.

The bills also fall a bit short on the consumer end. There are provisions for increasing oversight, but some of the simplest solutions are off the table. For example, in September, the Obama administration abandoned a proposal to have banks offer consumers "vanilla" versions of their products. A vanilla checking account would be a basic account, with no "overdraft protection" that charges you $39 when you bounce a check, and a vanilla loan wouldn't have hidden interest rate changes. Unfortunately, banks make billions by hiding these kinds of scams, so those simple reforms disappeared in favor of doing the same thing with audits and regulatory scrutiny.

I'm in favor of the simple-but-crude school of regulation. I'd rather have a simple system that perhaps makes innovation harder but is safe over a more complicated regulatory system that depends on intrusive auditing and a sophistication race between regulators and bankers. It would be irresponsible not to address the problem of restoring trust in our financial markets, but as they say, humility is a virtue.

12:56 - 21 Nov 2009 [/y9/cols]

Sat, 14 Nov 2009

Are they serious?

Last week, Congress finally passed an extension to unemployment benefits, after about five weeks of debate in the Senate. The final vote in the Senate was 98-0, but the bill had to overcome three Republican filibusters along the way. In other words, zero Republican Senators were brave enough to vote against the bill, but dozens cooperated in delaying and stalling it.

In other Congressional news last week, Republicans in the House trumpeted a new bill to be their version of health care reform. It's an assemblage of some old ideas: limits on malpractice lawsuits, eliminating barriers to interstate competition in health insurance, promoting healthier lifestyles, and creating "risk pools" where people who have been denied coverage for pre-existing conditions can have a second try.

The problem, of course, is that few of these ideas have anything like evidence in their favor, even if some of them sound plausible. There are states with lots of insurance competition, states with lots of joggers, and also states with strict limits on malpractice lawsuits, and you know what? Medical costs routinely drive people into bankruptcy in those states, too. Essentially, this plan is good for healthy people who already have insurance, but no one else.

The Congressional Budget Office agrees with me. They scored it, as they have scored all the Democratic plans, and according to their score, the plan would be more expensive, and cover fewer people than the Democratic plan it's meant to "improve" upon. According to the CBO, about 17% of Americans don't have coverage, and after ten years of the Republican plan, they predict that about 17% of Americans still won't be covered.

The CBO report essentially tells us that the Republicans are not serious about solving this problem, just as the legislative shenanigans in the Senate showed us they are not serious about providing unemployment benefits to people who need them. These are serious problems. Our economy, our government and our families are being devastated by a health care crisis brought on by decades of spiraling prices. We also face two wars, a maimed economy and the prospect of drowning our coastal cities before the century is out.

Really, "serious" hardly begins to describe it, but in the face of all that, we have a minority party on the national level that seems utterly uninterested in anything except maneuvering for partisan advantage. (Abetted, of course, by a small number of Democratic senators and representatives who imagine that "centrism" is a higher good than addressing actual problems.) This is simply not a serious way to govern.

At the state level, the picture isn't really so different, in some ways. Our state is facing a nearly unprecedented fiscal crisis at both the state and municipal levels, brought on by years of poor policy choices combined with the tanking economy. And yet, there are a large number of legislators who simply are not serious about addressing it. The problem here is that party labels are little help in understanding the action.

So here's my guide to telling whether someone is serious about solving our problems, or if they're just posturing. First test: if they say anything like "we can't raise taxes" -- they're not serious.

Now I don't like to pay taxes any more than anyone else. But people who say stuff like this want you to ignore the fact that -- even in the face of a still-escalating budget crisis -- we're still planning to cut the taxes of our wealthiest citizens next year. No joke. In fact, your leaders are planning a more expensive cut this coming year than in the past year, but it only benefits people who earn more than about $200,000 a year.

Second test: If they talk about "spending less" and won't say how, they're not serious. You'll hear a lot of talk about unions and labor contracts, but little of that is serious, either. You can only get just so much blood from any particular stone. I have no doubt the Governor will try to squeeze more from state employees, but we're looking at deficits of around a quarter of the entire state payroll. State employment is already lower than it's been in a couple of decades. Can it go lower while we still pretend we're not cutting services?

Third test: watch out for the "big idea." We've seen lots of magic bullets proposed and passed -- early retirements, Medicaid waivers, off-books borrowing -- and their record is pretty mixed, at best. Putting your hopes in a single leaky basket is another sign of not being serious. Over the past week, the Governor has floated the idea of selling the Central Landfill in Johnston, and Rep. Douglas Gablinske (D-Bristol,Warren) suggested selling our bridges. Privatizing these state assets would give the state a shot of cash, but money doesn't fall from the sky. A private bridge operator would immediately establish or raise tolls to pay for their investment. A private landfill operator would either raise the rates cities and towns pay or dump so much trash so quickly the landfill fills up. Long term, the only people who would benefit would be the new owners, and the Wall Street financiers who always seem to net millions off deals like these.

Our state took several years to make this catastrophe. We did it with policies and laws that were popular at the time, but that have not served us well. Getting out of trouble will be long, slow work. I do not believe the task is hopeless, but it will take serious work and serious people to carry it out, not facile analysis or magic bullets.

16:00 - 14 Nov 2009 [/y9/cols]

Fri, 06 Nov 2009

Too much forgetting allowed

In 1660, Mary Dyer was hanged on Boston Common. Her crime? Being a Quaker. Her execution was part of a tragic and shameful chapter in our nation's history. So why is there a statue of her in front of the Massachusetts State Capitol east wing? Proponents of removing "Providence Plantations" from our state's name might ask themselves this question.

The statue was erected in 1959, and it wasn't put there because the Massachusetts legislature approved of her execution. No, it was put there because legislators there thought it important that people remember the example of her courageous life, her devotion to freedom of conscience (she traveled back to Massachusetts in protest of the law and was executed), and the heinous laws under which she was put to death.

After all, what, is memory for? It's not just for wallowing in nostalgia; it's the way we avoid making the same mistakes over and over again.

As for ourselves, so also for our society. Our nation's history is one of mistakes made and rectified -- of lessons learned and addressed -- sometimes with statuary, and other times with court decisions, regulations and laws. Why do we regulate barbers, pharmacists, and insurance companies? Because of bad experiences we've had with head lice, quack remedies, and insurance fraud.

We sometimes forget these lessons, and guess what happens then? We get to learn them again.

In the name of "modernization", the 1990s saw the almost complete disassembly of the financial regulatory structure erected in the wake of the Great Depression. The Glass-Steagall rules separating investment banks and insurance companies from commercial banks were eliminated, interstate banking was allowed again, and rules regulating commodity, energy, and financial investments were loosened or erased. And presto, we got a series of speculative bubbles -- in tech stocks, energy, and credit derivatives -- the last of which maimed the economy of the entire world, with as yet no certainty it can be rebuilt.

In other words, there is altogether too much forgetting allowed in American public life.

Last week, one of the many bills passed in the Assembly's mad two-day session called for a referendum in 2010 on whether to remove "and Providence Plantations" from the state's official name. The argument is that this refers to a shameful episode in our state's past and that it should therefore be excised.

Now it is true that "Providence Plantations" originally referred to Roger Williams's grand experiment with freedom of conscience -- the cause to which Mary Dyer sacrificed her life. There is nothing shameful about that. In fact it's a source of honor, and we should all be grateful that the tenet became a principle of our nation's laws. (Plus, Roger Williams is one of the few historical figures I know about where learning more about him has led to more respect rather than less.)

Less fortunately, it is also true that slavery was an important part of colonial life here. By 1755, over 11% of the state's population were black slaves. Slaves were widely used in agriculture and as household help here, just as in other parts of the colonies. Bristol and Newport merchants played an outsize part in the slave trade, too. Sad to say, there is plenty shameful about this part of our history, and to many people, the word "plantation" conjures up associations with slavery. But one can agree with that while still not wanting to eliminate the word from our lives.

Senator Harold Metts said this change will "pay some respect to our ancestors who were forced into slavery, and will stop serving as a constant reminder to present-day Rhode Islanders of our painful past." He may, perhaps, be right about the second part, whether you take the word to refer to the original settlement, or to the slave-holding plantations that came to exist here. But I say instead that it is precisely because it is a constant reminder that it should be preserved. It's the preservation of reminders like this that show respect, not the elimination of them.

Mary Dyer's likeness sits in front of the Massachusetts capitol not because people wanted to forget, but because it's important to remember. We honor her sacrifice by commemorating it with the statue -- and with the first amendment.

By all means, let us move on from the ugly racial divisions of our past. It will be a great day when race becomes irrelevant to our society. But let's move on in our thoughts, our actions and our laws, not by forgetting, denying, or erasing the shameful parts of our nation's history. When the referendum rolls around a year from this November, I'll vote no -- to preserve our state's original name, and all the memories of its history that name evokes.

15:49 - 06 Nov 2009 [/y9/cols]

Fri, 30 Oct 2009

How many towns is the right number?

After years of talk, it seems like initiatives to consolidate municipal services and schools are actually moving, slowly, but perceptibly. The legislature has convened a commission to talk about it, which is interesting, though the kind of thing that only occasionally presages real action.

On the other hand, Senator Frank Ciccone, vice-chair of the Government Oversight committee, says he's going to introduce quite a dramatic bill in January, revoking all the city and town home rule charters in the state and creating five county-wide municipal and school administrations. I'm glad he's doing this, not so much because I agree with him that such a dramatic change is a good idea, but because change will only happen when someone proposes it. His efforts are far more likely to make a positive difference in your life than the commission's.

There are two reasons widely cited for consolidation. Actually, that's not quite true. There's one widely cited, but pretty questionable reason, and another seldom cited, but likely very important reason. They lead to very different conclusions about what needs doing, and I don't expect the commission to reach those conclusions.

The widely cited reason is just the desire to achieve economies of scale. Thirty-nine cities and towns means thirty-eight police chiefs (Exeter doesn't have one), thirty-nine public works chiefs, thirty-six superintendents of schools and so on. Proponents of consolidating services long for a situation where there's just one, and slaver over the possible savings.

But what kinds of savings are actually possible? Look at schools, for example. Around the state, the average overhead of school systems is about 6% of revenue. That means that about 6 cents of every dollar goes to administration. But in larger school systems, like Fairfax County, VA, the overhead is also around 6%. Why should we imagine we can do so much better?

Sure, if all of the state was one school district, we could do away with 35 superintendents, but you can bet we'd need a bunch of new deputy superintendents. You only achieve economies of scale when there is excess capacity, and if it can't be used in the current configuration. Where there's slack, there may be savings. But do you know that there's slack in your town's management, or do you only think that because you hear it on the radio? I'm not saying there is or isn't in your town, but I am saying it's worth being skeptical.

In other words, the savings found by combining public works departments are pretty speculative. There will doubtless be some, but will it be enough to be worth the fighting? Maybe.

However, there's that other reason you don't hear as much about. When a family moves from Cranston to Exeter, Cranston loses a little of its tax money, and Exeter sees an increase in the demand for its services. For most services, Cranston can't cut expenses as fast as they lose dollars. This isn't because of unions, but simply because of arithmetic. A hundred fourth-graders in a school make four classrooms. But ninety-nine students also make four classrooms. Just because you've cut the students doesn't mean you can cut the payroll, and the same effect is apparent with police, fire protection, sewers and more.

On the flip side, many studies have shown that the new residents of a town like Exeter seldom pay enough in taxes to cover the services they demand. This is especially true since most services cost more to provide way out in the burbs, where people are far apart from each other. It's why towns invented developer impact fees.

But what this means is that when people move from one town to another, the town they move from feels pressure on their tax collections and the town they move to feels pressure on their services. The result is that taxes can go up in both towns.

What's more, in the town that's growing, the demand for new tax dollars can be partially met by new residents the next year. New residents and inflation mean the town's costs are going up 3%, but that's OK because the town council thinks there will be 3% more new residents the year after, too. Growth allows towns to artificially hold down their taxes -- until the growth stops.

The paradox of Rhode Island town finance is that today, the places with low taxes are the suburbs where the services are most expensive to provide, while the places with the highest taxes are the cities, where services are cheapest. It's the movement of people, and what it does to the tax rolls in towns, that bring us to this peculiar, and probably not stable, spot.

Another way to look at this is that the only way consolidation of town services will actually reduce pressure on taxes is if the taxing and planning functions are also part of the consolidation plan. Not until town finances can be partially insulated from the effects of people moving a short distance will we see these kinds of pressures relieved. Unfortunately, this is not likely to be on the commission's agenda. They're more likely to be studying the obstacles to combining public works departments and school systems. This is useful, but it's just not going to save the dollars you might hope, and will cause a lot of yelling along the way.

So bravo for Senator Ciccone, who at least has the honesty to put forward an idea that will actually make a big difference. People who insist we should hold the line on municipal costs by consolidating services shouldn't discard it out of hand, but welcome his contribution, and look for the ways to make his idea better.

21:02 - 30 Oct 2009 [/y9/cols]

Fri, 23 Oct 2009

Why are people still losing their homes?

Reports out this month tell us that the foreclosure crisis facing our nation has not even peaked yet. Nationally, one property in every 136 were in some kind of foreclosure proceeding in July, August or September -- 937,840 properties. According to RealtyTrac, a private concern tracking them, foreclosures are up 5% from the spring quarter, and 23% from the same time last year.

The hardest hit places in the country are the places that have boomed the fastest over the past decade: Nevada leads the list with one foreclosed property for every 23. Arizona and California aren't far behind, with 53 in both.

To my great relief, our state appears to be bucking this trend, and foreclosures seem to be declining slightly in Rhode Island. We've seen the rate decline 6.3% since the spring, and about 2.75% since the same time last year. The rate here is still nothing to brag about: one foreclosure for every 290 properties, still high enough to be devastating to many neighborhoods.

In fact, the whole list is dismal, except way down on the bottom, one bright spot: Vermont. Last quarter, while Rhode Island was seeing 1,554 foreclosures, Vermont saw 62. This comes out to about one foreclosure for every 5,023 properties.

So how did they avoid this crisis? I read one news account that attributed it to innate Vermont thrift, and how that kept people from overextending themselves. We policy wonks have a technical term for that kind of analysis: dumb. We are blind if we ignore cultural differences between states, but we're also blind if we stop looking for reasons beyond a stereotype like this. Besides, New Hampshire yankees are every bit as legendarily thrifty. They're right next door, too, and they saw 1,944 foreclosures in the last quarter, 1 out of 306 properties.

So what's the story in Vermont? It seems to be a long one, but not too complicated. Their real estate market never flew as high as ours, and there are several reasons why. The permitting process for new construction is quite onerous in Vermont, even by Rhode Island standards -- did you know that you're generally not allowed to build at all on prime agricultural land there? Also, Vermont has an interesting tax on the capital gains from resale of land. If you keep real estate for more than five years, there's no tax, but if you flip it quickly, the tax is quite high. (It can be 90% of the gains if you're flipping very quickly.) This tends to keep speculators away and housing costs down. Vermont has had a crisis in affordable housing, but housing inflation there was half of ours between 2000 and 2006. In other words, we should envy their "crisis".

There's more. Vermont also has an interesting limit on mortgage fees and interest rates. It's a little complicated, but basically if a bank wants to charge you more than a certain amount of interest they have to give you a list of banks that charge less. They even require the list to be on a colored sheet of paper so it doesn't get lost in the piles of paper generated by mortgage closings.

One of the regulations I find most interesting is a modest couple of lines in regulation B-96-1 of the banking code. This declares that to do business, a broker must sign an agreement with the borrower that he or she "represents the interests" of that borrower. In other words, if a borrower goes bust, the broker can be involved if it seems the mortgage terms might have something to do with it.

Thomas Candon, the Deputy Banking Commissioner in Vermont, told me he thought this was an important part of keeping lenders in check, along with language in the banking legislation preamble prohibiting "unconscionable lending practices." According to him, both of these have been to court a few times, and both have resulted in the termination of several abusive lending practices in Vermont. It's harder to get a mortgage in Vermont, but as we've seen, this isn't all bad.

The result of all this is lots of complaints by Vermont banks and real estate agents, who point to the millions earned by their peers in other states and wish they could pull in the big bucks like that. But the other result is that as of now, Vermont really doesn't have a foreclosure crisis at all. Their economy didn't fly high, but over the past decade, it has grown faster than in New Hampshire, Massachusetts or Connecticut, even if those others outpaced them in one year or another. Slow and steady isn't just one of Aesop's morals.

Despite the gravity of the foreclosure crisis, it's remarkable to me that even now, a year and a half after it set in, there has been essentially zero helpful response from Congress or the state. Hamstrung by "conservatives" whose fealty to free market principles demands they stand by as unconscionable lending practices brought our economy to its knees, simple proposals such as changes in bankruptcy laws or allowing judges to change mortgage terms ("cramdown") have failed.

In the department of better late than never, Congress is right now debating the creation of a consumer protection agency for finance. A bill to establish such an agency is being marked up in its House committee this week. After that, it goes to the Senate Banking Committee, where Senator Jack Reed is the second banana. If you agree with me that abusive lending practices played a huge part in precipitating the financial crisis, it would be worth telling him so, before the bill is heard there.

21:55 - 23 Oct 2009 [/y9/cols]

Fri, 16 Oct 2009

Gambling with our future

I saw Michael Moore's new movie, Capitalism, A Love Story, a week ago. The movie was a little messy, but -- like his other movies -- is filled with interesting stories about our country that you never see on the news. For example, there were the companies run as cooperatives, like an industrial bakery in California and a robotics factory in Wisconsin. In those companies, decisions are made collectively, and both are profitable, despite decent pay for the workers, and relatively modest pay for the executives. There was the sheriff of Cook County, Illinois, announcing that he would no longer evict people because of foreclosure just on the say-so of the banks. (He said he would still evict people for whom the bank actually had the paperwork.)

It's a good movie, partly because it's funny and partly because it's really not that funny. There's a lot of human tragedy portrayed in it, which isn't too surprising, since that kind of thing is pretty much everywhere you look. For example, there's plenty of tragedy to be found in the boarded-up houses in South Providence, not very far from the homeless shelters bursting at the seams. There's tragedy in the way our manufacturing heritage has been systematically dismantled by the very people in charge of it. High wages so often get the blame, but the behavior of the executives who closed profitable factories in order to open more profitable factories elsewhere is routinely disappeared.

America today is a land of contrasts like this, brought to us by free enterprise, and our collective unwillingness to moderate it. Free enterprise is an amazing and efficient way to organize an economy to produce things we all need, but there are good things -- affordable housing, clean air and water, public transit -- it just does not or cannot provide. Of course, it does provides the opportunity for an individual to amass unimaginable wealth, at least in theory, presumably why lots of us put up with the contradictions.

One big problem with free markets is that there are a lot of clever people out there looking to make money in them, and these clever people can do wonderful things for all of use, but they can also distort some useful things, too, which isn't so helpful. The "market" drives them in both directions. For example, Moore's movie makes much of "dead peasant" insurance policies, where a company buys life insurance on its employees, not for its employees. This is a distasteful practice, to be sure, but it's also a perversion of the whole concept of insurance.

Insurance was invented as a way to share risk. I have a health insurance policy, but I'm not using it much right now (knock on wood). This means that I'm essentially paying someone else's medical bills with my premium dollars. I do this in the hope that when I or someone in my family gets sick, someone else will pay our bills. (This is what makes it so laughable to see signs at health reform protests about not wanting to pay for other people's bills. Most of those people -- the healthy ones who have insurance -- already are paying other people's bills when they pay their health insurance bills.)

So that's the point behind insurance: sharing risk. The idea is crucial to protecting the finances of many people's lives. But what the companies do when they take out dead peasants policies is nothing more than gambling. They are betting that the health data available to them from their employee health plan are better data than an insurance company has.

Well fine. I buy a lottery ticket from time to time; what's the problem with gambling? Just this: they're betting in the same market that other people use for things they actually need. The bets on those life insurance policies affect the rates charged to everyone else, and if the companies are winning those bets (and the practice wouldn't have spread unless it was easy to beat those odds) the rest of us pay higher premiums.

You see the same issue in other markets. Housing gamblers ran up the prices in the poorest neighborhoods of our state, leaving prices far out of the reach of the poor people who live there. Currency gamblers have a tremendous effect on the money we use to buy stuff. The leveraged buyout artists who engineered all those corporate takeovers over the past 30 years gambled with the future of their companies, risking their employees' jobs on something beside the price and quality of the products they made. And, of course, the banks and hedge funds who are credit market gamblers were betting with bank credit. When that market broke last year, many businesses who actually needed credit lines to expand or just to stay afloat sank instead.

The point is that housing, risk sharing, jobs, bank credit and money are important to all of us. Risk is an unavoidable part of our system, but reckless risk isn't. When we allow people to gamble recklessly with these things, we make life much harder for the rest of us whose comfort, careers, and even lives depend on them. Gambling can be a good time, but none of us should be forced into a casino against our will.

And of course there's one more thing: in 21st century America, you can be vilified simply for bringing obvious stuff like this to other people's attention. That, of course, is Michael Moore's great crime. But this is no way to run a country -- or a state. Fixing problems demands honesty in their evaluation. This is important not because it might be a triumph for my favorite ideology or yours, but because if you don't get the diagnosis right, your solution won't work, and the problems won't go away.

18:03 - 16 Oct 2009 [/y9/cols]

Fri, 09 Oct 2009

Arbiting arbitration

When the legislature comes back into session later this month, rumor has it they may pass a law saying that when teachers and school committees can't come to an agreement through negotiation, they can submit their dispute to arbitrators for settlement. The arbitrator's decision would be legally binding on both the committee and the union, so it's called binding arbitration.

This would be a welcome development to many. Right now, when there is no agreement in a labor dispute like these, things enter a kind of legal limbo, where there are essentially no rules. Thus you have the East Providence school committee declaring that if they simply refuse to negotiate, they can let a contract expire and then ignore it entirely. On the other side of the coin you have the impasse with the Providence firefighters, whose contract terms remain in force until a new contract is signed, according to a clause in their old Cianci-era contract. They therefore have an incentive to stonewall negotiations. (I'm not saying they've done that -- I don't know -- but I am saying the deadlock isn't entirely to their disadvantage.) Neither outcome seems particularly beneficial to me.

The fact of the matter is that municipal employee unions exist. We can't wish them away, and we shouldn't try to legislate them away, either.

Why not? There are decent economic reasons having to do with prevailing pay and keeping a floor on wages in the local economy. But at least as good a reason is that one of the important lessons of history is that in most wars, both sides lose.

To me, the binding arbitration process seems as good a way as any to resolve these kinds of conflicts. In binding arbitration, two sides present their "last best" proposals to a neutral panel of three arbitrators (one chosen by each side and one chosen by both) who decide between them. The arbitration statute spells out the permissible grounds for a decision, too, so it's not as if arbitrators can just make stuff up.

What's more, we have some useful experience right next door, in Connecticut, where binding arbitration has been the law for teachers for 30 years.

But wait, Connecticut has binding arbitration; Connecticut also has about the highest-paid teachers in the country. Are these facts related?

Well, no. The binding arbitration law in Connecticut was created in 1979, in response to a dramatic teachers' strike in Bridgeport the previous fall. The teacher union went out on strike, but a judge ordered them back to work and when they didn't go, had them all arrested. According to differing accounts, somewhere between 265 and 274 teachers were arrested and held for two weeks in an old WWII POW camp in Windsor Locks.

The strike happened because Bridgeport teachers couldn't come to an agreement with the administration, and there wasn't any other way to force the issue. And that's really the point behind binding arbitration: to force two sides to negotiate. The real hope is that no contracts have to be arbitrated, and that both sides will see arbitration as a risk they don't want to take.

But still, could binding arbitration be why Connecticut teachers are among the best-paid in the country? Not likely.

In 1986, despite seven years of binding arbitration law, Connecticut teachers were only 19th in the country in surveys of teacher pay. The average teacher salary then was around $13,000, and it was not hard to find teachers moonlighting as weekend bartenders, editors, writers, and construction workers, where they were paid more than their "main" gig.

As a result, teacher recruitment was challenging, especially in Connecticut's urban districts. Which is why 1986 saw Governor William O'Neill get behind passage of a law specifically designed to push up teacher salaries. The "Education Enhancement Act" that year increased teacher qualification requirements, but it also set a minimum salary for teachers of around $20,000, and provided $300 million in new state funds to Connecticut's 160-odd school districts to pay for these increased salaries.

In other words, it was the stated policy of that state's Governor and Legislature that teacher salaries needed to go up, by a lot. Tom Murphy, the spokesguy for the Connecticut Department of Education put it to me this way, "We're first or second in the nation now, and that's a good thing if you're interested in recruiting good candidates." He boasted to me that they now get lots of good candidates moving in from Rhode Island. (I know a couple, too.)

In other words, the imposition of binding arbitration didn't push up teacher salaries in Connecticut, the former Governor did, and he did it on purpose.

Does arbitration in Connecticut favor teachers? There, too, the evidence doesn't really say so. In 2004, one of the Connecticut teacher unions (the CT Education Association) put out a report on the subject. By their count, between 1994 and 2003, 75 contracts went to arbitration (out of 638). In judging those contracts, arbitrators chose the school board's side on 379 of the 756 issues, and 377 times in favor of the teacher unions.

According to their deputy director, Patrice McCarthy, The Connecticut Association of Boards of Education's position is that they think binding arbitration is fine and shouldn't be repealed, but they wish the grounds on which the arbitrators decided things were a bit more expansive, with more of an emphasis on the financial health of the town doing the negotiating. These might be workable ideas, but remember that the whole point is that arbitration be a distasteful alternative to both sides.

So that's the issue. In the papers and on the radio in the coming weeks, you'll hear that binding arbitration is actually the fifth horseman of the apocalypse, all foam and fangs and ghastly mien, come to ravage your children and your school budgets. Just remember, though, that in the state right next door, this same guy has been quietly planting daisies for the past 30 years, and there hasn't been a single teacher strike since he arrived.

23:37 - 09 Oct 2009 [/y9/cols]

Fri, 02 Oct 2009

The Real Structural Deficit

As we teeter back and forth between layoffs and no layoffs of state employees, it gets hard to keep track. Last week, the AFSCME Council 94 local presidents who rejected the Governor's offer relented and agreed to put the Governor's offer before their memberships for a vote. To recap, this offer would have some unpaid work days this year and next, but would offer extra vacation days further down the line, or compensation days upon retirement, and it would put off a pay increase. The more controversial part of the proposal involves allowing managers to reassign employees to different state departments where the employees might be represented by a different union.

The AFSCME local members are voting on the proposal this week. While we wait to see how this turns out, I think it's worth looking at part of the "structural deficit" that plagues our budget.

The structural deficit is just the fancy term for the deficit next year (and the years after). It's an acknowledgement that revenues and expenses do not match, despite what we may have done or not done to patch it together for the current year.

Obviously, the structural deficit is due to the decline in tax revenue. I've written before that this decline was first self-inflicted, and then made worse by the tanking economy. But part of the structural deficit that gets no attention is even more important and that's the unwillingness of your leaders to say what, exactly, we are sacrificing. It's sort of a candor deficit.

It's fine, that is, to say we must do more with less, but it's little better than a comedy skit to claim we can do it year after year after year. At some point, grim reality interferes. And yet, you don't see anyone -- Governor or legislator -- saying "We're going to close the Department of Elderly Affairs," or "We're going to have a moratorium on bridge repairs," or "We're not going to be doing any enforcement at DEM this year." Instead what happens is that a little more maintenance slips by, a little more service is put off, the work backlogs grow a little bigger, the enforcement divisions lose another tooth.

And we take on more debt. Since 2002, state debt has more than doubled, if you count the 'off-books' GARVEE debt taken on by the Department of Transportation. As of fiscal year 2003, Lincoln Almond's last budget, state debt was around $1.25 billion. By the end of this fiscal year, it will be over $2.1 billion, plus another $550 million or so of GARVEE bonds, with another couple hundred million to come. These bonds were issued in order to build the fancy new bridge in Providence, and to replace the Sakonnet River bridge, and a couple of other big projects. In a purely technical sense, they are not general revenue debt (so needed no referendum) but in a practical sense, they are every bit the load on the state budget as any DEM open space bond.

For the managers and directors of state departments, most of whom don't belong to a union and who serve at the pleasure of their superiors, there is tremendous pressure to say, "Yeah, we can get it done," even in the face of perpetually declining budgets. But you can see the results in records of departments' performance, published each year in budget documents.

A number of the performance measures are silly choices, seemingly designed only to make the department look good. The Department of Transportation claims highway fatalities as a measure, for example, which are only tangentially related to any department activity. But some departments have chosen realistic measures of their capacity. And pretty much wherever they measure capacity, you can see it going down. For example, you'll see that the percentage of large air pollution sources getting their annual DEM inspection on time has declined from 57% in fiscal 2003 to 32% in fiscal 2008. (The numbers in this document after 2008 are only estimates, and optimistic ones at that.) The notes mention that this poor performance has caused the goal of 100% to be changed to 50%. No doubt you'll find that reassuring.

In addition, there are fewer neglect and abuse cases getting timely treatment from family court, fewer successful investigations in the fire marshal's office, higher caseloads in the public defender's office, and fewer municipal comp plans getting timely review. These numbers are from before the huge wave of retirements a year ago, so there's no reason to think they've improved. Anecdotally, I hear only stories of gloom and work backlogs from state employees I talk to.

The truth is that it is fundamentally dishonest to pretend that our government can sustain the losses of people and resources year after year without suffering the consequences. But why don't you ever hear about this? It's because in many cases, the programs hardest hit are popular, or exist to save money. Environmental protection, for example, enjoys broad popular support, even if people grumble about permitting. Transportation projects, too, are popular, and maintenance is about saving money, as are such controversial programs as Medicaid for the poor. What's not popular is paying for all this, but I thought that's what the "tough" decisions we're always hearing about are supposed to be for.

Last week, testing results showed that science education in the state seems to be falling behind. Test scores showed our children not performing particularly well on the NECAP science assessment tests, either compared with the other states that administer this test or with our own record of previous years. The Governor termed the results, "unacceptable," and promised action of some sort. That's great, but when the dust settles, who will be left to act?

18:09 - 02 Oct 2009 [/y9/cols]

Fri, 25 Sep 2009

Running amuck without housing

Last week saw another chapter in the saga of the floating homeless encampment. First this camp of up to 80 homeless people was Camp Runamuck under a Rt 195 bridge in Providence. Then they moved to East Providence. Then, with their numbers dwindled to around 20, to some commercial land in Providence. Now they're going to have to move from there, since the land isn't zoned for, um, protest camping.

It's a fascinating story, especially to hear about the camp's success with experiments in self-government, and there is some dark amusement available in wondering where they'll pop up next. But the tale of this doughty band tends to obscure some darker currents going on in the background.

For one thing, does anyone wonder why these guys are still camping? Told to leave one spot, they go to another rather than disperse. Told to leave that one, they still hang together. It all seems a jolly outing from the news reports, but it's not like the welcome sign is hanging from our bridges. Our state has homeless shelters, doesn't it?

Well, we do. But a funny thing has happened due to the foreclosure crisis and the recession during the past year. That is, our shelters are mostly full. According to the Coalition for the Homeless, there are as many people in the shelters this month as there usually are in mid-winter. And it's still nice outside. What will happen when it gets cold?

That's easy: The shelters will become overcrowded. I saw a graph of the numbers of homeless people in the shelter system in Rhode Island over the past couple of years, and it's been going up so fast you couldn't even see the usual summertime dip in the count. Last February saw 43% more homeless clients in shelters than one year before that, including an increase of 13% in the number of homeless children.

Many people are homeless because of mental illness or substance abuse problems. But these are not problems that appear as suddenly as this wave of newly homeless people has. So what's the story? One way to explain it is that people have lost their jobs. But this only explains one side of the problem, and homelessness has two causes. It's not just people with suddenly less money than they once had. It's also housing that costs too much.

Put more simply, the issue is that our housing market has not provided the volume of housing units at low cost that our friends and neighbors need. The slump has not yet brought prices down significantly. RI Housing data I saw this week says that most sellers seem to be holding out for high prices, even though the occasional bargain can be had on foreclosed property. For many people, it's difficult to find housing less expensive than the housing they're already in, and so those people are at serious risk of homelessness when a disaster strikes.

It was not always this way. Fifty years ago, there were single-room-occupancy (SRO) hotels available for people whose housing needs were low and means modest. There were also boarding houses and worker hostels. These weren't always particularly nice places to stay, but any of them were better than sleeping in the open in December, and all of them were cheaper than an apartment. But these forms of housing have mostly gone the way of the telephone booth, and there is little beside the shelter system to take their place.

Why are these gone? Mostly money. Ultimately, the reason why there isn't much housing for poor people is that there simply isn't enough money in it. It's more profitable to rent apartments than it is to rent single rooms, so there are no more SRO hotels. And it's more profitable to build condos for the upper end than it is to rent apartments, so even apartments have become scarcer than they once were.

The SROs didn't disappear so very long ago, either. There were at least a couple in downtown Providence through the 1970s, and New York City was fighting their conversion to apartments well into the 1980s. (A very small number did survive there and in San Francisco.)

Building codes and labor costs are among the common explanations why housing costs are so high, but they do little to explain the expense of housing in structures that weren't built recently, and they do nothing to explain the disappearance of these alternative forms of cheap housing.

What does explain this loss is a market whose pressures push developers to aim at the top of the income spectrum, and planning and zoning authorities who give in to those pressures far too often. Gentrifying neighborhoods bring in more property taxes, but at the expense of SRO hotels and other low-cost housing. And it's not as if this process is only in our past. As far as I can tell, the hunger for property tax revenue now drives almost all municipal planning decisions, so these problems will persist until the rules of the game are changed.

Markets are wonderful things some of the time, but they simply don't deliver the social goods unless the prices are right. Housing for poor people will always be a problem until such a time that the market changes, or until we decide to change it. Until then, Camp Runamuck and its successors will always be with us.

15:57 - 25 Sep 2009 [/y9/cols]

Fri, 18 Sep 2009

To get out of a hole, the first step is to stop digging.

It was a relief to see last week that the Governor and the state employee unions have come to an agreement (maybe) about how to achieve the savings in operations that the Assembly put into the budget in June, but it's a sign of how far gone things are that the amount in question was only a small fraction of the likely deficit in our budget.

According to the budget deal signed this spring, the Governor was supposed to come up with $68 million in savings that hadn't been specified yet. He chose to take the bulk of that from payment already promised to city and town governments, and by giving state employees 12 unpaid days off. They objected, and now it seems they'll still take those days, but there will be the opportunity to get some of it back in the future.

I'm glad the public employee unions have come to an agreement to forestall layoffs, but I continue to wonder what other shoes are going to drop soon. In November we'll have the semi-annual revenue estimating conference, and knowledgeable people I've spoken to are working on the assumption that we'll be looking at a deficit in the hundreds of millions. Again.

What to do about this debacle? How do we get out of the hole we're in? How about we begin by stopping the digging? The fact is, we're making the hole deeper even while we wonder how to get out, and that seems a bad strategy, at least to me. Even now, while the Governor is withholding $32 million in local aid from cities and towns, we are in year 4 of a 5-year tax cut aimed at the richest Rhode Island taxpayers. In other words, official state policy now is dedicated to the idea that the single worst thing we could do is to stop these tax cuts.

Is this evidence of serious thought? How sure are you that revoking those cuts is worse policy than shutting down libraries and cutting schools? Municipal budgets are (or were) already balanced under terrible circumstances this spring, with three communities being forced to exceed the 4.75% property tax limit and 11 more barely remaining under it. Overall, we're looking at 3.5% increases across the board. Now those same communities are looking at further cuts.

I was also amused to read about a House hearing this past week to look at why federal stimulus funds received by the state supposedly haven't been spent fast enough. As of now, seven months into the program, only about 8% of the funds have been spent. This isn't good, but spending highway money isn't the only way to stimulate the economy. How have we done on others?

Contrary to popular belief, the economics of John Maynard Keynes was not all about government. He described his own theory as conservative, sort of saving capitalism from its own excesses. His big point, the one that gets him remembered, is that investment can't drive an economy. You won't get investment from investors simply by providing the money in the form of lower taxes or low interest rates. You get investment when there are real business opportunities for investors to invest in. And business opportunities require customers who want to buy.

Before Keynes, it was thought that we could get out of the Depression by lowering interest rates, and with tax cuts to wealthy people. Roughly speaking, that's what Hoover tried. Keynes pointed out that raising taxes and interest rates could decrease investment, but that business people aren't dumb, so who is going to start a new business when no one can buy? In other words, lowering taxes and interest rates will only work to increase investment if sufficient demand exists to provide business opportunities. He said that, absent those opportunities, making investment easier is like "pushing on a string."

For real stimulus, you want to put money in the hands of people who will spend it. But what have we done along those lines? We're raising property taxes, which fall heaviest on poor people and in the middle, and cut taxes on rich people who save most of their income. We're laying off and cutting the pay of state and municipal employees. We've hardened welfare rules yet again, making that program even less useful to poor people.

In other words, at pretty much every choice point, we've taken money from the people who will spend it -- the opposite of stimulus. Even if DOT got all the federal stimulus money out without following its legally-mandated bidding requirements, we'd still be in trouble because they'd be working against every other lever of government. The Finance Committee will cast about for scapegoats, but they are working against the stimulus they claim to support. If they believe that stimulus is important, let them show it by changing our state's depressive economic policy.

23:07 - 18 Sep 2009 [/y9/cols]

Fri, 11 Sep 2009

Economic acts of God -- or not.

Events are changing too fast in our state's budget debacle for a weekly columnist to keep up, but the Governor's threat of layoffs brings up a chapter in our history that I wish would get more attention.

Here in 2009, it's possible to look around the wreckage of our industrial economy and wonder what happened to all our factories? In a way, it's pretty obvious, really. Competitive pressures forced many companies to leave for cheaper wages. We all know that. But what seldom gets any attention is the extent that this was the result of conscious policy choices by your governments.

For example, did you know that until the 1980's, it was considered illegal to close a unionized factory just to move to cheaper labor costs? A 1981 Supreme Court decision and a 1982 ruling by the National Labor Relations Board made it clear that reducing labor costs alone was not enough to justify abrogating a union contract. But time is capable of eroding judicial decisions as well as rocks, and only a few years later, Ronald Reagan's new NLRB appointees and new Supreme Court justices clouded or retracted those decisions, creating loopholes quite large enough to move factories through.

But, you say, what about the competition from foreign factories where the labor costs were so much lower? How could a high-cost US factory compete with the low-cost Asian factories? In return I ask where those factories found the financing to open in the first place? For the most part, they were financed by the company moving the production, either directly, or by using production contracts to secure financing.

In many cases, American companies would have found little competition for their products from Asia, even if it was easy for them to move production there. For example, it beggars belief that a Chinese company would ever have found independent financing to make a US soldier doll to compete with Hasbro's G.I. Joe. Who besides Hasbro would ever have financed something so crazy? China is where they are made only because Hasbro chose to move production there.

Certainly there are cases where a foreign competitor has prevailed over an American company. Ask anyone in Detroit, for example. But does anyone seriously claim that Toyota has surpassed General Motors as the world's largest car company only because its cars were cheaper? True, this is a popular claim among union-bashers, but back issues of Consumer Reports say otherwise.

The other important obstacle to moving production elsewhere was import restrictions. But the free trade movement of the Bush I and Clinton years took care of most of those. India and China are much more prosperous places today than they were 30 years ago, and that's no small thing, but it wasn't an accident, either.

There's much more, I'm sorry to say. For another example, remember all the leveraged buyouts of the 1980's? Think of the corporate carnage as buccaneers like Carl Icahn and T. Boone Pickens bought companies by mortgaging them to the hilt, and then selling off and liquidating the pieces? Tens of thousands of people were laid off at a time in some cases, and the wreckage included many research and development divisions, corporate futures sacrificed on the altar of the short-term bottom line.

Corrupt financiers Ivan Boesky and Michael Milken supplied funding for many of these escapades, but did you know that most of the transactions were driven by bad tax law? Corporate profits and dividends were taxable, you see, but if a company uses its revenue to make debt instead of dividend payments, those are a cost, not a profit, and thus a way to evade taxes. RJR Nabisco was bought in 1988 for $25 billion, borrowed against the company assets. Servicing this debt ate up all its profit, which reduced its $682 million 1987 tax bill to less than zero in 1988. So there were no dividends to shareholders. The company was still sending out about the same amount of money to investors, but by calling it "interest" instead of "dividends" they saved hundreds of millions in taxes. Everyone was happy, except for the government who got less tax revenue on pretty much the same business, the 2,300 employees who were promptly laid off to trim costs, and the crippled Del Monte division, sold off in pieces to raise cash.

What's the point of dredging all this up? Just this: Rhode Island's current fiscal crisis is largely one that was chosen for us. Some of the choices were made in Washington, while others were made on Smith Hill. A tax policy that raises taxes on people who spend most of their money and lowers taxes on people who save is a recipe for recession and that's exactly what our state government has chosen, time and again. This is hardly all. We've chosen dozens of other policies that seemed designed to make our economy worse, from de-funding higher education to extravagant highway investments that provide only tiny improvements to travel times.

But through it all there is one constant. It seems there will always be economists, pundits and politicians willing to tell you that our economic condition is some kind of act of God, that international competition, deteriorating conditions for manufacturing, and declining real wages are as inevitable as the tides. Certainly some economic phenomena are beyond our control, but the events I describe here were all conscious policy choices. Elections matter, and this is why.

19:06 - 11 Sep 2009 [/y9/cols]

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