Friday, August 28, 2015

Kickers, Rainy-Days and Rising Seas

The news that $400 million will be returned by the State of Oregon to taxpayers has aroused me from my hibernating slumber.  Plus, it is going to be a rainy-day so it all just seems too perfect an opportunity to miss to moan about our ridiculous revenue policy in the state.  Fred Thompson and I have written in these pages extensively about the Kicker and its folly.

The kicker system is one-sided - in unexpectedly good revenue years the government has to shed excess revenue, but in unexpectedly bad revenue years the government has no way to make up of the lost revenue.  This system ensures the state will always have to endure painful and grossly inefficient cuts during lean times.  Which is just stupid.

Economies are cyclical, revenues are cyclical too (no matter how you rearrange the tax structure - sales taxes don't help).  What a good manager does (just like any household) is create a system where highly variable revenues don't cause highly variable spending.  A good analogy is a realtor who has an unexpectedly exceptional year - prudence requires stuffing some of that money in a savings account to have ready for those unexpectedly bad years.

So why doesn't Oregon behave the same way?  It is not a crazy thought - many states have rainy-day funds that are very effective in smoothing out fiscal spending.  The kicker should cause us to think about how we manage our budget as a state and our woeful performance on a vast number of metrics regarding public education as well as the condition of our roads should be enough to convince us that what we are doing is not working.

Conveniently, we are also seeing, quite dramatically the effects of a warmer planet.  It is too late to stop the immediate impacts like dramatically rising sea levels (something not inconsequential for a coastal state) but folly not to try and address the root cause.Similarly, we also need to repair and maintain our fragile transportation infrastructure.  Both of these facts seems to provide the perfect opportunity to sell a rainy-day fund and to sell a carbon tax by highlighting the good work that could be done with the revenues.

So I will restate a basic policy proposal I made a few months ago:

1. Convert the kicker into a permanent rainy-day fund for the state.

2. Institute a carbon tax with revenues dedicated to transportation infrastructure (including mass transit) and public education.

3. End the ban on self-service gas to lower the cost of retail gas and help offset the impact of the carbon tax.

Seems like a good referendum, eh?

Friday, July 24, 2015

Income Inequality and Max Lines

CityLab, the Atlantic's blog about urban issues, has a nice set of visualizations about income along fixed-route transit lines inspired by The New Yorker's New York City Subway Project.   Portland is one of the cities featured and here is a look at the line that represents perhaps the most income inequality - mostly because of the Washington Park stop that 'serves' the West Hills (ave. income $146,779) shortly after serving the Old Town neighborhood (ave. income $18,540).

Go there and click on the others for comparison as well as comparing across Atlanta, Chicago and Washington, DC.

Wonder how the installation of fixed-route transit affects gentrification of the neighborhoods served?  Well here is another CityLab article looking at a study that argues that gentrification is a small causal effect.

Thursday, July 23, 2015

Fred Thompson: Must Frankenfoods be Labeled?

Fred Thompson with another contribution:

 I get a lot of posts on Facebook about GMOs (genetically modified organisms). Most call for mandatory labeling of genetically modified foodstuffs. I have been reticent to speak out against it in this forum because, strictly speaking, my objections aren’t based on economic analysis. Indeed, the strictly economic arguments made against mandatory labeling by its opponents look to me to be weak, at best, and, at worst, paternalistic nonsense.

Rather, this looks to me like a free speech issue, which, perhaps, first of all comprehends the right to be silent. Now, I am a reasonable guy. I am willing to restrict first amendment rights to protect the public health and safety. But that willingness is grudging. You must show (provide plausible scientific evidence) that the restriction really would promote public health and safety, which opponents of GMOs cannot do. This is the Constitutional law doctrine of strict scrutiny, which the standard test the courts invoke when the rights enumerated in the first eight amendments to the Constitution are infringed.

OK, you say, but you have a right to be informed about what you buy. The Uniform Commercial Code grants you that right, which ought to override mere commercial speech protections. Not a bad argument, say I. But, then, the question arises, is there a less intrusive (in the sense of encroaching on speech rights) way to satisfy your need to know? And, in this case there is. Sellers of GMO-free foodstuffs can satisfy your need for information by voluntarily labeling their products GMO-free.

Of course, I have some sympathy for the organic farmer who notes that they were there first – that their ilk have been producing GMO-free foods for thousands of years. It’s not their fault that the need for labeling has arisen. Presumably, however, it’s their customers who want this information, not the GMO indifferent, let alone the GMO lovers. Besides, as those who advocate mandatory labeling in this instance, almost certainly, correctly argue, the costs of labeling are trivial. I have heard some advocates of mandatory labeling claim that it is very hard (costly?) to prove a negative, but those who would want an exemption from the labeling requirement under mandatory labeling would probably still bear the cost burden (not the GMO users/producers). The only difference is that, under mandatory labeling, if the labeling regulations were effectively enforced, it’s likely that the GMO-free farmers (and their customers) would also bear the cost of the governmental regulatory apparatus.

Wednesday, July 1, 2015

Type 1, Year 1

Exactly one year ago, my older son was diagnosed with Type 1 Diabetes (T1D).  As with all such diseases, this one came completely out of nowhere.  It started typically, excessive thirst and frequent urination, and ended up with a four-day stay in the hospital.  He was healthy before and remains healthy to this day, in fact we caught it early enough that he was never sick with ketoacidosis, the potentially fatal complication from excessive sugar in the bloodstream.  We were lucky in that respect. 

The reality of a life with T1D is difficult, it means a lifetime of careful management of blood sugars, of always thinking carefully about what you are eating and how to dose the appropriate amount of insulin, of carefully managing the carbohydrate demands of exercising muscle tissues when he plays soccer. But the emotional toll is far worse. A parent never, ever wants to hear that their child has a potentially fatal autoimmune disease and, as an adult you mind immediately wanders to the next 10, 20, 50 years of your child’s life and you feel overwhelmed and panicked.  I spent a week in tears, trying to me strong in front of my son, but feeling crushing panic, sadness and despair inside.  I would take bathroom breaks to go and cry. 

Amazingly the center of strength in the family was my son himself.  Well, I imagine it is not amazing to anyone who has dealt with a similar issue – they know firsthand how amazingly resilient are kids.  He cried exactly once – when he was told the diagnosis – and has never felt sorry for himself save for a couple of moments here and there when the burden of having to deal with diabetes when his friends do not becomes too big a drag.  But from day one he took charge of his own care, began administering his own injections, calculating his carbs and testing his blood sugar.  He has risen to the challenge and his determination not to let it derail him has been an inspiration to us all. 

 In the past year I have never stopped marveling at how well he has dealt with such a life-changing event.  Modern medicine and technology has helped.  He now has a sophisticated insulin pump that attaches directly to his body and allows him to be active and avoid needles, injections and having to carry around too much equipment.  He can even swim with it, which is good because he likes to swim more than anything.  We have, as a family, adjusted to the new reality and are now used to counting carbs, making sure he has his bag with supplies and emergency glucagon and helping with pump changes that occur every three days. 

As an economist I marvel at how difficult this diagnosis must be for families without excellent insurance, stable jobs and local medical expertise.  We are incredibly fortunate to have the time, the resources and the help near at hand.  Something like this makes one appreciate the need for universal access to health insurance.  This is a disease that is unpreventable.  A bad RNG as my son calls it, referring to the random number generator code that determines the bonus prizes he gets in his favorite video game.  [This has led to the discussion of how it is not possible to program true randomness, and whether there is any such thing in the world anyway – but I digress] 

I have learned to be patient with those who don’t know the difference between Type 1 and Type 2 Diabetes, as I was completely ignorant of it prior to my son’s diagnosis as well.  For the record, they are entirely different diseases common only in the fact that they both involve your body’s ability to deal with sugar.  T1D is an auto-immune disease where, for reasons still unknown, your body’s immune system decides to attack the cells in your pancreas that produce insulin – eventually destroying them all. Insulin is the hormone that allows your body to process the sugars in the bloodstream and move them to the cells where they are converted into energy.  The key with T1D is that the body processes the insulin just fine; it just doesn’t make any itself.  My understanding of T2D is that the body commonly does not process insulin effectively so even though the pancreas is making it, the body cannot metabolize the carbohydrates.  Thus, while people with T1D can essentially eat as they normally would, taking insulin injections to match the amount of carbs, people with T2D often have to heavily restrict carb intake.  So yes, my son can have the cake at the birthday party, but thanks for asking. 

I write this all here because after a year of minimal blogging I felt I should explain the inactivity.  My inattention to the blog has a lot to do with time – management of my son’s diabetes at first was very time consuming.  It also has to do with energy, when my son switched to his pump I was waking up three times in the night to check his blood sugar for three months.  But largely it has to do with priorities.  I am chair of the OSU economics department, I am a full-time professor, I have numerous ongoing research projects, I am writing a textbook and I am, most importantly a dad who puts his kids ahead of anything else.  So the blog suffers and I regret it, but not that much.  I keep it alive because I do hope to return to regular blogging someday – it is something I enjoy a lot. 

In the meantime, I hope you can all enjoy the podcast Jeff Alworth and I have begun.  This allows me to take a two-hour lunch break and record a conversation primarily about beer but also about the business and economics of brewing.  Please check it out. 

I thank you all for your support of this blog.

-Patrick Emerson

Friday, June 19, 2015

More Adventures in Non-Linear Pricing

From an ice cream cart in PDX.  Very good ice cream though...

Question, clearly a good incentive to get 2 scoops, but does the pricing actually dissuade you (psychologically) from buying 3?

Tuesday, May 26, 2015

Fred Thompson: The Political Economy of Oregon’s ‘Clean-Fuels’ Program

Another dispatch from Fred Thompson:

A quick Google search suggests that the phrase “politics makes for strange bedfellows” first appeared in an ancient Sanskrit text and was probably in fairly wide usage when Charles Dudley Warner in My Summer in the Garden (1870) punned “raspberries are sprawled all over the strawberry-beds: so true is it that politics makes strange bedfellows.

Economics has its own special version of this trope, which goes to an explanation of the shape and kind of government regulation of business, especially at state and local levels: bootleggers-and-Baptists coalitions. In the canonical example, bootleggers and Baptists partnered to provide the support needed to keep the Deep South legally dry after the repeal of the Eighteenth Amendment in 1933. The Baptists were ‘agin drinkin’ and the bootleggers needed the states to protect them from legal competition to stay in business. Moreover, both found it easy to demonize their opponents, the liquor lobby.

Nowadays the most common example of this phenomenon occurs where industry partners with environmentalists to obtain a special competitive advantage. Here in Oregon, it is perhaps best exemplified by the so-called ‘Clean-Fuels Program,’ which joins the environmentalist good guys with ‘local clean fuels producers’ against out-of-state fossil fuel interests.

The best thing about this Program is that it will raise motor fuel costs. Clearly the way to discourage carbon emissions is to make them more expensive, which the Clean Fuels Program does, albeit in a very roundabout way.

Beyond increasing prices at the pump, the efficacy of Oregon’s Clean Fuels Program depends upon the aggressive deployment of biomass on the assumption that the use of biofuels is carbon-neutral, that plants pull CO2 back from the air when they grow, offsetting the carbon emitted from burning them as fuel, which is all true. But diverting a cornfield or a forest to produce energy means not using it to do something else, like make food or store carbon. Consequently, using biomass to produce energy could change land uses, food supply and ecosystems without actually affecting climate change.

Supporters of the Clean Fuels Program correctly note that it does not require any deployment of biomass, nor does it score fuels with the assumption that all bio-fuels are carbon neutral. As the Oregon Environmental Council explains: “The Clean Fuels Program ... gives the oil industry options to either blend low-carbon biofuels or purchase credits from clean fuel providers for fuels ... propane, natural gas, sustainable biofuels, biogas and electricity,” which on the face of it sounds like a pretty smart arrangement,

However, whether it is or not depends on the carbon scoring. Unfortunately, the scoring used by DEQ (which they wanted to change but were prevented from doing so) ignores the ecological opportunity cost of alternative fuels.

It is also the case that the local producers supporting this program are almost entirely in the biofuels/biomass business. Moreover, they strongly opposed the DEQ’s rescoring to better account for ecological opportunity costs. Consequently, most of the purported gains from the Clean Fuels Program come from substituting biofuels for fossil fuels. Scoring of electricity is equally biased since it ignores the fact that, at the margin, electricity is produced by burning fossil fuels. None of the other options available are currently competitive with gasoline/diesel fuel, which is a pity.

IMHO, Oregon, like BC, needs a carbon tax, but getting there is far more likely via substitution of motor fuel taxes. In Oregon a portion of taxes collected on motor fuels is earmarked for county roads and municipal streets and thoroughfares, but that proportion has been cutback to protect state-responsibility highways, and municipalities and counties have very few degrees of freedom with respect to increasing revenue. Clackamas County, for example, has 1400 miles of county roads, they have enough money to budget for about half of the routine maintenance needed to keep to roads from getting worse. It costs about 25K/mile to chip coat the roads to fill fissures, which, if left open, allow the roads quickly to deteriorate. A badly deteriorated road can cost as much as $400K/mile to rebuild. Only 20% of the roads are in good or better condition. The rest are in fair to poor condition.

The legislative leadership had worked out a compromise that might have been practicable – a substantial increase in motor-fuel-taxes, combined with indexing it to inflation, and further study of applying the weight-use-mile tax to personal vehicles (which is now monitored on commercial vehicles using GPS devices), in return for allowing the so-called ‘clean-fuels’ law to lapse. Then the young Turks in the D party rammed thru an extension of the ‘clean fuels bill’ in the face of 100 percent R opposition and that of a handful of Ds, on the assumption that the Rs would have to hold their noses and pass an increase in motor fuels taxes anyway, that their allies at the municipal and county levels as well the Association of Oregon Industries would demand it. Right now the Rs are hanging tough and refusing to support an increase unless the Ds repeal the ‘clean-fuels’ bill. We'll see how that turns out. In theory, Ds need only one R defection in the Oregon House to get what they want and there are Rs in Portland metro who should cave. I say, in theory, because there are also Ds who are predisposed to defect in the other direction, folks who would rather have the clean-fuels bill than a transportation package.

I don’t doubt that the Oregon Economic Council are the good guys. But this is not good legislation and the OEC’s business allies aren’t necessarily good guys either (for that matter, neither are a lot of the supporters of a transportation package). The question isn’t really who to get in bed with, but what’s the greater good for Oregonians.

Tuesday, May 19, 2015

Oregon April Unemployment Falls to 5.2% on 7,200 New Jobs

Wow.  Another stellar jobs report out of Salem.  7,200 new jobs in April on a seasonally-adjusted basis led by health care, manufacturing, and professional and business services. Yay, finally, no more cheerleading about the great growth in leisure and hospitality.

[Ed. note: use of the serial or 'Oxford' comma, discouraged by my grade school teachers, has apparently become the norm based on the bridges comma worksheet my third grader brought home yesterday.  I shall adjust the Oregon Economics Blog style guide accordingly.  However, old habits die hard and let's just say this blog is 'lightly' edited, so don't expect me to be to beholden to all the latest fads in grammar!]

Where was I?  Oh, yes, jobs = good.  The April unemployment rate is now down to pre-recession numbers matching the rate of July 2007.

So what of the future?  Well, Oregon, which relies heavily on trade is still benefitting from the strong link with Asia and the forecast is brightening in the short and medium run (though I am still a long run skeptic, but in long-run I mean a time period I am unlikely to see)  Which leads us to the TPP.  I am in favor. Partly this can be explained by my being an economist and understanding the fundamental gains from trade that benefit all participants.  But I am also an international development economist that believes that the future of growth and prosperity in the lower income world comes from economic integration with the high income world.

Thursday, May 14, 2015

Time to Sound the Drum for a Rainy Day Fund...and a Few Other Things

The latest Oregon budget forecast predicts a $473 million kicker refund to Oregon taxpayers.   This when Oregon's economy is going strong and we could finally start to address things like having the lowest high school graduation rate in the country:

This blog has sounded off about the kicker many times before, with both and Fred Thompson and I arguing for its demise, and in it's place a permanent and significant rainy day fund to stabilize state spending.  Doing so would allows us to better achieve things like protect and enhance our transportation infrastructure that at serious risk of significant deterioration.

If I were governor, this would be my agenda:

1.  A bill that would convert the kicker to a rainy day fund.

2. A bill that instituted a carbon tax for all carbon fuels, including gas, and used proceeds to fund transportation infrastructure with rebates for low-income households. Included in this bill would be a repeal of the ban on self-service gas to offset the increased price at the pump.

3. A budget that significantly increased funding for K-12 education dedicated to class size reduction and an increase in contact hours.

4. I would also increase funding for public research universities (conflict of interest alert!).

To me, these are the three pillars of a sound long-term state economy: solid transportation infrastructure, an talented and educated workforce, and an active and innovative research and development infrastructure.

Tuesday, May 12, 2015

Fred Thompson: Oregon’s State and Local tax System Is Exceptional

Another contribution from Fred Thompson:

Previous blogs have focused on Oregon’s personal income taxes, property taxes, the apportionment system for business income, the weight-use-mile tax, now paid only by commercial vehicles, but under study for personal vehicles as well, local user fees, and the lack of a sales tax, all of which make Oregon weird and semi-wonderful.

Most people who pay attention to tax matters know that Oregon’s tax eccentricities have given it the nation’s most progressive state and local revenue system and one of its more expansive, that Oregon’s economic growth over the past fifteen years has outstripped the nation by a wide margin, and that its overall tax/fee burden over the same period has been relatively restrained. It is less commonly known that the administrative costs of our tax system are also among the lowest per-dollar-collected in the county, but that is also true, as is that fact that more of our state and local tax payments are offset by the IRS than in any other state. This post will note a couple of our fiscal idiosyncrasies, which aren’t so well known, but which probably deserve greater attention than they get.

Oregon is one of a handful of states with a death tax (estate and/or inheritance tax)

Our estate tax generates approximately $200 million each biennium, approximately 1.4 percent of General Fund revenues. It is tied to the federal estate tax and levied on the net assets (all real and tangible property in Oregon plus stocks, bonds, business interests, retirement plans, IRAs, etc. regardless of their location) of deceased Oregonians (residents) in excess of $1 million (the feds exclude $3.5 million). The state rate is progressive and tops out at 16 percent. We also have an inheritance tax, which is levied on the real/tangible property located in Oregon formerly owned by deceased non-residents. It doesn’t generate much revenue (less than $40 million per biennium). In both cases, it is suspected that the tax gap (the difference between legal liabilities and actual payments) is quite large, but at present we have no way of knowing this for sure.

The estate tax is one of the most progressive aspects of our tax system. If we are serious about this tax, we must make an effort to understand it better, perhaps in cooperation with the handful of other states that collect this tax.

At the other extreme, Oregon’s most regressive and discriminatory tax by far is state-sponsored gambling. We know that most of the state government’s gaming revenue (more than $1 billion in the 2015-17 budget cycle) comes from about 100,000 or so problem gamblers.  While there is relatively little Oregon-specific information on the identity of these folks, evidence from elsewhere suggests that they are disproportionately poor and ill educated. It is also the case that it costs the state almost as much to collect this revenue (not including the payout to winners) as the state nets, which is damn inefficient.

Monday, April 6, 2015

Fred Thompson: Oregon’s Measure 50 And Declining Assessment Quality

Another contribution from Fred Thompson:

Measure 50, which was enacted in May 1997, did the following:

1.     Locked existing statutory property tax rates in place;
2.     Rolled residential property tax assessments back to whichever was less — assessments for the tax year beginning July 1, 1995, reduced by 10 percent, or for the tax year beginning July 1, 1994; and
3.     Limited future increases in tax assessments, except for new construction or additions, to a maximum of 3 percent per year.
4.     Set the maximum assessment equal to whichever was less: the previous year’s assessment plus three percent or real market value.

Looking at detailed data from Multnomah County, it is clear that under Measure 50 assessment quality is deteriorating, with most of the deterioration occurring after 2008, when, according to the Case-Shiller index, the median Portland home lost nearly 30 percent of its value.

Unanswered Questions

That assessment quality materially deteriorated in Oregon after 2008 raises the question: can something be done about it, without at the same time sacrificing the tax stability and predictability brought about by Measure 50? The League of Oregon Cities argues that the variance in tax-assessment ratios is driven primarily by differences in the rates at which properties have appreciated since 1994 and that this problem could be fixed by adopting California’s system of resetting assessments to market value upon resale.

In contrast, Measure 50’s architect, tax-activist Bill Sizemore, claims that this device, if adopted, would simply make things worse. Oregon’s bien pensants are predisposed to question anything Bill Sizemore says, but the California data tend to support his claims.

Oregon’s tax assessors are equally concerned with the ongoing deterioration in assessment quality and many of them also support reassessment on resale, but with a twist. When new construction occurs in Oregon, the property is given an assessed value based on its market value, but County assessors use what’s they call the “changed property ratio” to calculate the new assessed value. The “changed property ratio” is simply the ratio of the sum of the county’s tax-assessed value to the sum of its real market value, i.e., the countywide average (or mean) assessment ratio, existing at the tax census date. Each year, the ratio is updated. A property’s new tax assessment is its market value multiplied by the changed property ratio. For example, a new residence built in Multnomah County the 2014-15 tax year would be assigned an assessed value equal to 73 percent of its market value (as shown in the following table). Several county assessors have proposed resetting assessment to market on resale using the changed property ratio to calculate the new assessment. They argue that this would preserve the benefits associated with Measure 50, promote assessment quality, and largely forestall the lock-in problems associated with California’s Proposition 13.

Testing these Claims

My colleagues, Kawika Pierson and Robert Walker, and I simulated the effects of implementing the League of Oregon Cities’ reset proposal and of implementing reset using the changed property ratio for all unchanged, single-family residences in Multnomah County from 2003-2012. We calculated mean assessment ratios (the ratio of tax assessed value to market value) and standard deviations for each year and compared the results of the simulations with actual outcomes. The results are shown in the following table.

This table shows that, during 2005-8, when market values were increasing faster than three percent per annum, the standard deviation of assessment ratios actually declined in Multnomah County, when new construction is excluded (although it increased somewhat relative to the mean assessment ratio). After 2008, when market values were falling, it increased substantially (both absolutely and relatively).

Had tax assessments been reset on resale of properties using the changed property ratio, they would have fallen faster before 2008 and increased more slowly after. Both are improvements over the status quo.

In contrast, reset to market would have increased horizontal inequality in tax assessments during both periods. Much against our inclinations, we have to count this one for Bill Sizemore. Indeed, if anything this simulation probably underestimates the effects of reset to market, insofar as it implicitly presumes that tax assessment would have no effect upon transactions. That is surely not the case. The evidence from California indicates that lock-in tends to increase with gap between assessed value and market value, which, if instantiated, would make worse an already bad outcome.

Bottom line: go with the county assessors’ proposal not that of the Oregon League of Cities.