Broadband Boondoggle is Risky Proposition

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March 9 , 2016

Broadband Boondoggle is Risky Proposition

Charles M. Arlinghaus

 

Changing state law to allow towns to borrow money to run their own internet companies is not about bringing service to the remarkably small number of consumers without access to broadband. It is a mistake that would expose property taxpayers to the same financial problems that plague government-owned networks across the country.

 

Today, in New Hampshire, there is a small list of purposes for which towns are allowed to borrow money. This government-limiting statute makes clear that long term debt is to be used sparingly and for core functions like government buildings and snowplows.

 

There is no legitimate government purpose in borrowing millions of dollars to be paid by taxpayers simply to compete with existing companies. However in the very few spots that don’t have access, town government is currently authorized to build infrastructure if they choose.

 

A proposed law would change that limited purpose. It would allow municipalities to build broadband for any purpose — not limiting it to those without access. The only possible excuse for the change is to allow government officials to use your money to build their own government-run company to compete with current providers.

 

Today, 93% of the state has access to broadband even under the new higher speed definition of broadband. Further, more than 98% of the state has access to mobile broadband. The number of those without service will decline as the federal Connect America Fund spends $25 million in New Hampshire to increase access.

 

For the last decade local government officials across the country have racked up huge debts running mediocre systems with high overhead and few subscribers. Locally, we are very familiar with the taxpayer-nightmare in Burlington, Vermont. The government-knows-best plan was a disaster from the beginning and ended its run in virtual bankruptcy settling a $33 million debt to the banks for $10 million and leaving taxpayers holding an additional $17 million default bag.

 

The best-named silliness is Utah’s UTOPIA. This plan, appropriately named after a fantasy world, saddled taxpayers in 11 Utah towns with $350 million in debt. To bail out the failed network, towns wanted to assess users and non-users a $240 per year tax — they fail, you pay.

 

I doubt any local official would be quite so blind as the local officials in Vermont, Connecticut, North Carolina, Utah, Tennessee, Louisiana and dozens of other communities across the country. But opening up that possibility creates an incentive for the official to think about empire building with no risk except to the taxpayer.

 

When a private company risks its capital, the potential for success is weighed against the possibility of going bankrupt, losing everything without recourse to your and my property taxes. The largest broadband companies in America spend between $35 and $50 billion each year to improve, expand, and upgrade their infrastructure.

 

High tech networks are continually updated at a rate towns can’t hope to compete with. The capital resources and incentives of a private company with national reach are probably greater than one town in one state.

 

Remember that the proposed change would allow towns to borrow money to build competing networks. They already have the power to borrow to serve the 7% of the population that has no service.

 

The question policymakers face is simple: does it make sense to allow government to borrow money which you and I have to pay back with our property taxes simply so they can attempt to compete with a business that invests hundreds of millions of dollars in our state to build state of the art networks in a high tech industry?

 

If we truly want to increase service coverage from 93% to closer to 99%, there are simpler, low-risk things we can do instead of repeating the mistakes of so many debt-ridden communities across the country.

 

Leave in the language allowing towns to serve unserved areas. Work with providers to target the $25 million the federal government wants to send here to ensure it goes to help someone instead of being wasted like the ridiculous “fast roads” project.

 

If a municipality has a proposal that current language doesn’t quite allow then the state can look at it and easily pass enabling legislation if it makes sense. What doesn’t make sense is to allow towns carte blanche to build their own doomed-to-fail internet companies on the backs of property taxpayers.

 

 

 

 

 

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Countering the Powerful Work Disincentive in Medicaid Expansion

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March 23, 2016

Countering the Powerful Work Disincentive in Medicaid Expansion

Charles M. Arlinghaus

 

The New Hampshire state senate is prepared to ignore economic research and abandon any real effort to include a work requirement in its expansion of Medicaid to able-bodied, childless adults. A proposal that began as a supposed compromise would currently abandon the supposed centerpiece of that compromise effort.

 

New Hampshire’s regular Medicaid has 139,000 enrollees. The effort two years ago to expand Medicaid to the previously ineligible category of childless adults expanded the Medicaid rolls by more than 49,000. As 100% federal funding expires, so does the expansion expire at the end of this year. Supporters of renewing the expansion were able to attract previous opponents by promising to improve the incentives in the program, primarily a work requirement. That promise turned out to be a predictable bait and switch on the part of the sponsors.

 

Traditional Medicaid applied to categorically eligible populations who could not work — children, the elderly, the disabled. The few times before the ACA that states expanded Medicaid to the population of able-bodied childless adults, they found that having public insurance discouraged work and looking for work. In most cases, a full-time job will raise a worker’s income above the level to qualify for Medicaid so he has a strong incentive not to work full-time.

 

The most significant natural test of this theory came in Tennessee. Tennessee had expanded Medicaid to childless adults but quickly found it could not afford the costs. In 2005, 170,000 enrollees lost coverage. Academic researchers from Northwestern, Columbia, and Chicago studied the results. The National Bureau of Economic Research summary of the study said “they find an immediate increase in job search behavior and a steady rise in employment and health insurance coverage following the disenrollment.”

 

NBER’s summary concluded: “The findings suggest there is a powerful work disincentive from public health insurance eligibility.” A similar study by Dague also for NBER similarly found “enrollment into public insurance leads to sizeable and statistically meaningful reductions in employment.”

 

For New Hampshire’s purposes, these and other similar studies suggest that enrollment of childless adults will reduce job searches and employment for the population we newly cover.

 

There exists what researchers call a benefit cliff: one additional dollar of income costs the beneficiary thousands of dollars worth of benefits. They behave rationally by staying on the benefit side of that cliff, avoiding full-time employment that would put them over the edge.

 

To counter-balance that ill-effect, sponsors promised significant and meaningful work requirements of the kind that have made a big difference in welfare programs.

 

Consider that with meaningful work and job search requirements, our main welfare program called FANF has seen caseloads decline from 13,803 in 2011 in the midst of the recession to just 5,307 last month.

 

The federal government would prefer we not institute work requirements and has rejected them in other states. But in each of those other states, there was no risk to the feds in rejecting the requirement. The program was not dependent on them. They were just a stand alone wish.

 

The expansion bill as proposed earlier in the year would have made the program dependent on a work requirement. But sponsors instead imposed a “severability” clause which tells the federal regulators that they can reject our idea with no consequence.

 

Right now, our plan to “negotiate” with the federal government is to say “I know this is perhaps the last time in modern history you will want something from us but we don’t care. We will do everything you want no matter what. You don’t have to do anything we want. You don’t have to do anything we think is a good idea. But gosh it would be nice if you did.”

 

I believe the promoters of the expansion plan honestly believe that expansion will create a work disincentive. They also truly believe that a work requirement is good and important. Sadly, though, they don’t want to negotiate for it. They want to give up and not even try.

 

Making the clause “severable” is the same as neutering it. A more honest approach would be to remove it entirely and dispense with the fiction.

 

Better policy would be to admit to the “powerful work disincentive” that researchers have found and is just plain common sense. No state before us has gone to the federal government explaining that a work requirement is the only way of addressing one very serious problem with the program and that we simply can’t proceed without one.

Charles Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free market think tank based in Concord. He can be reached at [email protected]

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Pie in the sky train estimates will bankrupt us

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November 18, 2015

As originally published in the New Hampshire Union Leader

The Pappas-Van Ostern Express is a good example of bad math driving debt and leaving taxpayers with an empty wallet. Last week’s news release was not a new train plan but simply the old unaffordable plan with all the estimates revised down to make it appear cheaper but grotesquely unrealistic. This sort of new math is how governments go bankrupt.

Efforts to spend $300 million on a train that would require large annual operating subsidies have stalled. In an effort to revive the plan — or perhaps just to put out a news release — Executive Councilors Colin Van Ostern and Chris Pappas put out what they described as a “draft financing option.” Their goal is to jump start discussions that have lagged.

Pappas and Van Ostern have been the leading supporters of the train since their elections in 2012. And for Van Ostern, he has it at the heart of his economic development agenda in his gubernatorial campaign.

Their news release is not a new plan but rather a wildly optimistic reworking of already unrealistic numbers in a train study from a year ago.

The train would require a huge capital investment and then an annual operating subsidy. Underestimating each of these factors leads supporters to conclude the train is suddenly more affordable.

The Manchester option would require a total capital investment of $303 million. As the initial study did, the Pappas-Van Ostern plan counts on a capital investment from Massachusetts of $63.6 million. Given the significant budget problems in Massachusetts, their aid seems less than realistic as does the hope that the federal government would count the Massachusetts contribution as part of our local commitment to be matched.

The federal matching program supporters hope to tap is described as “chronically oversubscribed and thus extremely competitive.” But then again there is no financial cost to optimism.

If all goes well and Massachusetts rides to our rescue and we win the competitive federal process, supporters would then have us use about 75 percent of the state’s bonding capacity for one year on the train project. The annual cost of bonding, if all goes well, will be about $6 million.
At this point, supporters are merely guilty of optimism. Now the problems come in.

Supporters would have to believe that — unlike any other commuter train in existence — operations will more than pay for themselves and reduce the state’s annual costs below the $6 million bonding payment.
The closest analogue to the proposed train is the Portland-Boston Downeaster. It is remarkably successful by train standards, carries 530,000 passengers per year, but requires an annual subsidy of $8.4 million. Despite that, the Pappas-Van Ostern projection is that their train would be the best performing in the entire country — better than any New York train where the population density is extraordinary, better than all the other Boston trains in any direction, and exponentially better than anything seen or projected. Rather than covering 45 percent of its costs like most trains and the Downeaster, the PVO projection is closer to 90 percent.
That sort of optimism leads to financial problems. In planning for our own train, we would be more realistic to think of the $8 million the much-touted Downeaster loses. That raises the state’s annual need to $14 million each year.
Both last year’s plan and the PVO news release assume some offsets. The plan anticipated parking revenue of $500,000 to $900,000. The PVO release raises that to $1 million on higher fees.

As a discussion starter, the PVO release suggests local property taxes — through a local development district and supplemented by a local charge when that falls short — to cover $1-$3 million. I’m sure that will be very popular in Manchester and Nashua.
Even if they’re right about parking and local property taxes, they need $10-$12 million per year or double their estimate.

The policy goal is to aid commuters. The Downeaster moved 530,000 people for $8.4 million. The express buses in the I-93 corridor moved 550,000 people for just $750,000 — and didn’t require $300 million in capital costs.
Too often government loses sight of the policy goal and the most efficient way to achieve it.

Even worse, politicians are regularly tempted to use unrealistic numbers to make choices easier. Optimistic but unrealistic budget numbers created a huge hole, required a federal bailout, and led to the largest budget crisis in history. This is how it starts.

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The State Government Disagrees With Itself On Education

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Charlie Arlinghaus

October 28, 2015

As originally published in the New Hampshire Union Leader

The state is refusing to defend itself and the governor is attacking herself for having bad ideas. Welcome to the world of education funding where lawsuits make everyone weird and no one seems to be able to figure out which way is up.

The City of Dover is suing the state because an education funding law in place for years limits the amount their state education aid increases. To make matters more confused, Dover’s lawsuit stipulates that they do not and will not agree that the underlying system is constitutional only that there is an unconstitutional cap on a system that they don’t have an opinion on.

With much fanfare a few legislatures ago, the state passed a new education aid formula to govern the distribution of state education aid. It was said to be “more constitutional” but from the beginning it made concessions and alterations and had caveats.

About one-third of the $3 billion in school spending comes from state revenue sources. That is distributed through a complicated formula based largely on the number of pupils in a given district in a given year. The formula creates a number but that number is then modified to make sure no town loses too much funding or gains funding rapidly and to make sure there are no net donor towns.

The law was duly passed and reauthorized multiple times. The state’s Attorney General is charged with defending the state of NH and its laws in court. If we pass a law and are sued, they are the state’s attorney. But not this time.

The law was passed by both houses of the legislature. Capping increases has been voted for by Democratic legislatures, Republican legislatures, and divided legislatures. It was signed by Governor Lynch, supported multiple times by Governor Hassan. There is no evidence that the Attorney General or legal counsels for any legislative chamber or governor’s staff protested.

Today is a different story. The Attorney General has decided that it will not defend the law as passed and reaffirmed so many times. The governor who proposed caps in her budget and didn’t support legislative plans to eliminate them has had a change of heart. She announced she agrees with the Attorney General and that she hopes the legislature will “fully fund” what the districts want.

To “fully fund” would require $14 million for Dover alone and another $25 million for the other cities and towns. Presumably the governor’s next press release will include a proposal for just where that money would come from.

Fortunately for taxpayers, the legislative legal counsels have announced they will take up the baton cast aside by the executive branch and defend the law. Senate legal counsel Rick Lehman takes the position “the legislature passed the law, it should be defended.” He and the House legal counsel, Chuck Douglas, will be defending the law. If they are successful, Governor Hassan won’t need to figure out how to find an additional $40 million to pay for her press release.

The lawsuit underscores the serious issues related to education funding that have been ignored for most of the last decade. Our whole approach is and has been contradictory.

When a newly installed legislature passed a new formula in 2008 they trumpeted their constitutional nobility in contrast to the supposed compromisers and slackers of previous legislatures who made political calculations at the supposed expense of the guidelines set out by court opinions. Yet in doing so, they specifically made an exception for towns with excess property tax — the old donor towns.

The law also sought to exempt towns losing students from the law and not do too much right away for towns gaining students. In essence, the legislatures and governors made political decisions about how aid should be distributed as a practical matter — the same kind of decision lawmakers make on every subject under the sun.

The lawsuit seeks not just to abrogate a law but also to have the court appropriate money — a function expressly limited to the legislative branch. It seems like that would have been worth defending.

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A Tale of Two States: Economic Recovery in Massachusetts vs New Hampshire

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October 2015

Joshua Elliott-Traficante

Summary[i]: Despite historically leading the region out of recessions, the New Hampshire has become a laggard in comparison to Massachusetts. While Massachusetts recovered from the recession in terms of both employment and job numbers more than two years ago, only as of June 2015 has New Hampshire done the same. If New Hampshire had matched Massachusetts’s recovery speed, there would be 27,000 additional jobs in the state today. This piece looks at three work force metrics: the number of jobs in the state, the number employed residents, and the size of the labor force.

Jobs:[ii]

Proportionally, both New Hampshire and Massachusetts lost roughly the same amount of jobs in the last recession. Massachusetts hit bottom first in October 2009, with the total number of jobs in the state falling by just over 4 percent. New Hampshire reached its lowest point a few months later in January 2010 and lost just over 4.6% of its jobs. There the similarities end.

jobs1

 

After hitting bottom, Massachusetts experienced a job creation growth rate averaging 1.6% per year, over the last five and a half years, far outpacing New Hampshire’s .9% per year average. While a .7 percentage point difference in growth does not sound like much, compounded over five and half years yields the yawning gap seen in the chart above. With that higher growth rate, Massachusetts was able regain all of the jobs lost in the recession by September 2012. New Hampshire on the other hand needed an additional two and a half years to recover all of the jobs lost. The state did crest prerecession levels in both December 2014 and March 2015, only for it to fall back below in the following month. Only as of June 2015 have job numbers stated above prerecession levels for more than a single month. If New Hampshire experienced the same growth rate in job creation Massachusetts did, there would be an additional 27,000 jobs in the state today.

 

Employment:

In terms of employment, which measures the number of state residents that have jobs (regardless of where the job is located), New Hampshire made out slightly better than Massachusetts did in the recession, experiencing less severe losses on a percentage basis.

Employment1

Despite losing more proportionally, Massachusetts recovered faster, averaging growth of 1.4% per year, and returned to its pre-recession employment level in June 2013. New Hampshire however, only averaged .66% growth per year. That lower growth rate meant New Hampshire only returned to its pre-recession level of employment in February 2015, nearly two years after Massachusetts. The fact that the number of employed returned to prerecession levels before the number of jobs after Massachusetts did, indicates more people are commuting to other states for work than they did before the recession.

Labor Force:

With the mediocrity of the recovery, many analysts have used changes in the size of the labor force as a better measure of the general labor situation because the traditional unemployment rate fails to account for those who have given up looking for work. Although mild by national standards, both New Hampshire and Massachusetts saw declines in their respective labor forces as first the recession and then the mediocre recovery wore on. After hitting their lowest points in Spring 2011, both states saw minor albeit steady improvements.

jobs1

Massachusetts returned to its prerecession high in March 2012 and saw accelerating growth beginning in late 2013 that continues to the present. New Hampshire’s Labor Force largely held steady and only recovered fully in May 2015. In recent months however, New Hampshire has experienced sustained growth, though not nearly as dramatic as south of the border. Some of this slow recovery in Labor Force growth is connecting to the ageing of the state, but the recent growth spurt in the last few months shows that this is not the dominant factor.

More Commuters?

With those upticks in Labor Force and Employment growth rates, it would seem as though New Hampshire is finally experiencing real economic growth. Unfortunately that does not seem to be the case. That growth in the Labor Force over the last 11 months represents more than 7,000 additional New Hampshire residents actively searching for work, with the number Employed growing by roughly 10,500. That means both those new entrants into the Labor Force and people who are currently unemployed are finding work. However, there is only a muted corresponding increase in the Jobs numbers, which only increased by 3,600 over the same eleven months. What accounts for these ‘missing jobs?’ Even when taking into account the self-employed and agricultural workers[iii] the difference between Job creation and Employment growth means upwards of half of the newly employed are finding work in another state, likely Massachusetts.

Conclusion:

While it is tempting to judge a state’s economic health based on the unemployment rate alone, doing so can be misleading. New Hampshire has an incredibly low unemployment rate, but it only just recovered all of the jobs lost in the recession.  In contrast, Massachusetts has seen strong job growth, propelling it back to precession levels two and a half years before New Hampshire. Had New Hampshire simply replicated this growth rate, there would be more than 27,000 additional jobs in the state. Despite the recent improvements over the last nine months in both Labor Force and Employment numbers, the lack of a corresponding increase in Job numbers indicates more people are commuting out of state for work. Given Massachusetts’s growth it is likely that most of those new commuters found work there.

If Massachusetts, a state that lost a congressional seat in 2010 because its population was not growing fast enough, and that has notoriously difficult regulations and high taxes can both increase their labor force and add jobs, New Hampshire can certainly do better.

Click here to download a pdf version of this paper

 

 

[i] All data used in this piece was taken from the Bureau of Labor Statistics Establishment Survey (Jobs) and Household Survey (Employment and Labor Force) for New Hampshire and Massachusetts.

[ii] Jobs vs Employment: ‘Jobs’ counts the number of paid positions based on where they are located. Employment’ counts the number of people employed based on where they live. The employment figure for New Hampshire counts every state resident that has a job, regardless of where the job is located, while the jobs figure for New Hampshire counts the number of jobs based here, regardless of who fills it. For example, someone who lives in New Hampshire, but works in Massachusetts, would show up in the New Hampshire employment number, but their job would be counted in the Massachusetts job number. The Labor Force measures all of the people either employed or looking for work.

[iii] Both the self-employed and those who work on farms are not counted in the Jobs survey, but are counted in the Employment survey. It is possible that all of those ‘missing’ jobs in the last eleven months are people who started their own businesses or found agricultural work in the state. However, there is no evidence of a very quiet boom in either farming or self-employment, so this does not seem to be the case.

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The State Surplus That Isn’t

Charlie Arlinghaus

October 7, 2015

As originally published in the New Hampshire Union Leader

Pay no attention to the surplus behind the curtain. It’s not real. Despite advertised claims, the state did not run a $73 million surplus. It ran a barely $1 million surplus. The difference between press releases and reality comes entirely from the state’s reckless refusal to adhere to its rainy day fund law.

This week the governor announced a supposed $73.2 million surplus. Leaders in both parties took to the public square to praise their own fiscal responsibility in helping create such an enormous “surplus.” In reality however, the two-year state budget did not create a massive surplus. It just barely broke even.

These wonderful press releases were created by government starting out on third base and pretending they hit a triple. The budget did not raise $73 million more than it spent — the traditional definition of a budget surplus. Instead, budget writers started the budget with $72.2 million carried forward from the previous budget, ensuring a “surplus” by their definition as long as they didn’t deficit-spend by too much.

Under the state budget law, any money left over at the end of the budget is automatically deposited into the state’s rainy day fund — officially called the revenue stabilization account — to protect against future economic downturns. New Hampshire’s rainy day fund is considered by most regulators, financial analysts, and state officials to be woefully underfunded at $9.3 million, just two-tenths of 1% of the state’s biennial operating budget [general and education funds].

But the state budget law is a farce. Lawmakers routinely flout it. The $72 million that should have been deposited into the rainy day fund was preserved by temporarily suspending the rainy day fund law. It left it available to be easily spent without the restrictions the law would have placed on money deposited in the rainy day fund — the law has been suspended regularly for the last decade.

So the real surplus for the budget is just $1 million. That’s not necessarily bad management. Or is it?

Revenues for the biennium came in ahead of the budgeted amount by $57 million. Knowing that, you’d think we would have a $57 million surplus, not just one. That suggests the executive branch overspent its authority by $56 million. But it may be worse than that.

The governor attributed the not-really-$73 million surplus to her “working closely with state agencies to responsibly manage their budgets.” That is at it should be. The chief operating officer of the state has a responsibility to manage and to manage to budget. But some of that management appears to be problematic.

Notably, the state Department of Health and Human Services reported that they did not spend $20 million earmarked for services for the developmentally disabled even though there are more than 100 people remaining on a waiting list for services supposedly because of lack of funds.

This is perhaps the only area of state government where there is broad agreement between both parties about it being a significant priority. Surely a CEO “working closely with state agencies to responsibly manage their budgets” would have noticed a huge lapse in a universally agreed on priority and one which she herself kept advocating for increased funding throughout the budget process.

With that as a priority for her, and eliminating the waiting list a long held priority for the entire management of the HHS department, how does $20 million slip through the cracks?

The more cynical among us might argue that eagerness to have a press release with a big surplus number puts undue pressures on the process.

The state’s largest department — HHS is close to half the state budget — is always under extraordinary pressure to reduce spending without reducing services, particularly as the budget draws to a close and managers are worried about overspending in other areas. It’s clear that the pressure the one department is under would be less burdensome and perhaps lead to better outcomes if someone were working closely with other agencies to responsibly manage their budgets.

The state’s needs to modernize and improve the transparency and utility of its reporting on spending so people inside and outside state government could notice these odd lapses developing when central management misses them.

We shouldn’t rush to judgment on the inexplicable $20 million shortfall. But when spending comes in just a bare $1 million under the wire only because of a significant error in a bipartisan priority, questions ought to be asked.

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Populism and The Hatred of Hedge Funds

Charlie Arlinghaus

September 30, 2015

As originally published in the New Hampshire Union Leader

Politicians are tempted by the siren song of populism which sacrifices sensible policy for applause lines. They should be careful of the unintended consequences of their eagerness to attack evil hedge fund managers.

For about a decade some politicians have been attacking managers of private equity firms for making too much money. The term hedge fund is thrown around less as a description of a particular investment vehicle and more in disdain for people we are supposed to detest — those “hedge fund people” who don’t do anything except play with money.

In reality, hedge funds and other categories of private equity funds are simply individuals and institutions who pool their resources and use a manager — usually someone with an ownership interest — to decide how to invest their money. Popular mythology suggests these are idle rich people gambling — the equivalent of a dog track for bored Wall Street investors. The truth is quite different.

Hedge funds — pooled resources — are as mainstream as mutual funds and 401k plans. According to a KPMG study, institutional assets — pension funds, college endowments, and the like — account for 65% of assets being managed and continue to grow as a percentage. Increasingly, pension funds — including our own state retirement system — make these investments a growing part of their portfolio.

This pooling of capital, whether from individuals or institutions, is a critical part of the economy. Entrepreneurs with a good idea rarely have the capital, the financial resources, to bring their idea to market. We depend on them finding someone or a group of someones willing to risk their capital and potentially lose it all or make a significant capital gain. One random rich guy with a lot of other things on his plate can only investigate so many projects and invest in a few things. A pool of investors, most of whom are institutions, can bring together more resources and hire the best managers and researchers.

The managers are the ones directing capital, often sharing in the risk, and performing a critical economic role of putting those willing to assume significant financial risk in partnership with those who have ideas but not the capital to implement them. Those managers do very well, sharing in the significant capital gains that are the reason the investment pool or hedge fund is organized.

That often annoys the rest of us and makes targets out of the hedge fund managers.

The manager is usually paid a salary but will also share in the capital gain. It is typically the case that the active manager will receive a 20% share of the total capital gain while the passive investors — like the pension fund — share the other 80%.

Populists are able to marry popular annoyance at the manager and supposed tax reform by claiming the tax treatment is unfair. Capital gains, largely because of the risk involved in capital investment and the critical importance of capital to any economy, are taxed differently from salaries. Long term capital gains are taxed at 20%.

Populists would have us tax the capital gains of the manager — usually called carried interest — at the higher wage rate and the other 80% at the lower capital gains rate. The same money would be treated differently because we don’t like the manager who earned it.

This is of course ridiculous. Carried interest is capital gains, pure and simple. If it’s a gain for the 80% passive investors then it is for the other 20% as well.

We know that raising capital gains taxes will hurt the economy. When Bill Clinton — yes that Bill Clinton — cut capital gains taxes in 1997, he cut the rate by 30% yet capital gains tax receipts grew by 18% per year for the next three years because of increased economic activity. The same was true of the 1981 and 2003 capital gains tax cuts and the reverse was true of the 1987 capital gains tax hike.

Raising the capital gains tax is simply bad for the economy. Pretending the manager’s share of the capital gains aren’t really capital gains isn’t fooling anyone. It isn’t as if economic reality is changed simply because you relabel it.  If Bill Clinton’s capital gains tax cut and the other two in the last 35 years each led to greater economic activity, what action should we take on capital gains taxes if we want economic growth? Go ahead, I bet you can figure it out.

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Averting Grave Danger By Doing Nothing

Charlie Arlinghaus

September 23, 2015

As originally published in the New Hampshire Union Leader

You’ll forgive me if I don’t care that much about what happened with the budget or the budget deal. The government spent almost three months setting up this giant pitched battle between light and darkness and in the end nothing changed. The governor signed a budget that is more or less what the legislature passed and she vetoed. What was the point exactly?

Remember the irresponsible budget that was so unbalanced that the governor felt she had no choice but to veto it? The business tax cuts were called irresponsible and a threat to our future. They could only go forward if balanced by about $100 million of tax increases. And the rest of the budget was a disaster ignoring critical priorities in at least five different areas, would “present a danger to our state’s future,” and was “unbalanced, dishonest about what it funds.”

Obviously the Republican legislature disagreed with the Democratic governor about her strong rhetoric. But compromise seemed impossible. It also turned out to be unnecessary. The final so-called budget deal included almost no changes of any significance.

The final deal is essentially the legislative budget that was vetoed. The supposedly catastrophic tax cuts are not just included but accelerated. If the last budget was “dishonest about what it funds” — and of course it just plain wasn’t — no changes whatsoever were made to what it funds and how it funds them. If the vetoed budget was a danger to the future so is this because the non-compromise doesn’t change how it funds substance abuse, higher education, or anything else.

Two things happened and only two things — go look at the very very short compromise amendment. First the dreadful tax cuts have a more or less meaningless recession trigger. The first half of the cuts happen no matter what. The second step happens if revenue meets the conservative revenue projections for the whole budget. If we don’t have a recession, we’ll make the revenue estimates. Other than that, they are reduced by the same modest 7% reduction as previously planned — from 8.5% to 7.9% — but in two steps instead of three.

If the old cuts are ridiculous, dangerous, and unpaid for, how is this less so? The simple truth is that no one believed the old modest cut was dangerous, even the politicians writing those words.  This budget battle was really only about words that had no meaning to their author.

The other change was that the 2% state employee pay raise was written into the budget along with language restoring the legislative oversight committee. This compromise was a concession on the part of the governor to the legislature. The raise itself, negotiated at the bargaining table albeit with no legislative input, was always going to happen and was offered almost immediately after the veto. Restoring the legislative committee is a retreat from executive branch authority.

And that’s all that happened. The executive branch ceded back to the legislature some of its traditional authority in exchange for the pre-negotiated pay raise. The supposedly horrible business tax cuts are still there, there are no changes to spending, and whatever might have been dishonest — other than the dishonest charge of dishonesty — remains.

So why did we waste three months of our policy life on nothing? I don’t know and frankly I don’t think they do either.

Policymakers did learn a few important lessons — or at least I hope they did.

The most important lesson is that no one much cares. The budget battle or debacle did not occupy anyone’s mind in the general populace. No one much took any notice. They are to used to politicians squabbling about this and that, battling press releases written by operatives who don’t live in the same world the rest of us do filled with meaningless and exaggerated rhetoric having the same significance as the overuse of exclamation points and semicolon winks in a teenager’s text messages.

The reason no one cares is that people are fundamentally sensible. The boy who cried wolf is background noise and the budget would eventually sort itself out in ways that had as little impact on anyone as the original version would.

The grave “danger to the state’s future” has been magically averted by doing absolutely nothing. Thank goodness I wasn’t paying attention.

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Governor Should Leave Aside the Fictitious Rhetoric in Budget Debate

Charlie Arlinghaus

September 9, 2015

As originally published in the New Hampshire Union Leader

The state doesn’t have a budget and no one seems to care much. Most of the issues supposedly dividing the sides will be resolved easily or delayed until next year.  The real dispute is over the Republican plan to cut business taxes and the governor’s fictitious criticism of it. Misleading rhetoric is used to cover a philosophical disagreement.

In the absence of a budget both sides will make claims that the other party is delaying critical services or causing uncertainty but in reality there are no crises and no threats to any agency’s funding. In the event of a cash flow issue caused by the general language of the temporary budget resolution, the fiscal committee can meet and make an accommodation as it did a few weeks ago for state parks.

Agencies and local communities know that when the budget is eventually resolved it will look remarkably like what passed the legislature and everyone will be made whole. Because of that there will be virtually no public outcry or angst over the lack of a budget.

Even at political gatherings during the summer season, the groups most likely to care about the subject, no one seems to notice. The lack of even the mildest public concern and the continued unremarkable operation of state government at the same level as last year allows us to recognize the only real issue separating the two parties.

Republicans included a cut in business taxes to be phased in over three years. Democrats would rather the government spend the money. The governor claims, quite nonsensically, that the cut isn’t “paid for.” She’s quite simply wrong and is justly ignored because of it.

Philosophically, Republicans believe tax rates matter. Our corporate income tax (the Business Profits Tax) is among the highest five states in the country at 8.5%. To be in the top 10, we’d need to be at 5%, to be in the top half we’d need to be at 6.5%. Even Massachusetts has gotten below us at 8.0%.

The legislature would phase in a lower rate to move us back below Massachusetts. To make it manageable, they would dedicate the natural increase to rate reduction to keep revenues flat.

The governor has claimed these cuts are not paid for yet the official documents of the respected and bipartisan Legislative Budget Assistant prove conclusively that the budget is in fact balanced. Their “surplus statement” published regularly throughout the budget process is accepted government-wide as the official proof-of-balance document. No one disputes their published numbers.

So the cuts are paid for. What the governor really means is that in the future the government will have less money from the lower rate than they would from the higher rate. The legislature is not as exercised about this fact as she is. She believes the legislature should raise other taxes by around $90 million to make sure government has more money in the future.

The governor is trying her best to create the impression of austerity forced on the state by an eagerness to forego taxes. The real numbers tell a radically different story. Current estimates have the two-year budget that ended June 30 spending $4.42 billion in general and education funds, the operating part of the budget paid for with general taxation. The supposedly austere legislative budget she vetoed would spend $4.67 billion, an increase of $254 million in spending.

The supposedly irresponsible cuts allow for an undeniably balanced budget that allows spending to climb by $254 million. It’s hard to see those as “unpaid for” or as causing holes in our future.

Each side will cite economic research showing their conclusion and ignore research showing the opposite. Those of us who think business taxes are too high are persuaded by Robert Reed’s research in the National Tax Journal on “The Robust Relationship Between Taxes and U.S. State Income Growth” which found “taxes used to fund general expenditures are associated with significant, negative effects on income growth.”

The other side of the debate believes increased government spending will be better for the economy than more competitive rates. This is a philosophical disagreement. At some basic level, this is the fundamental debate policymakers ought to be having for the next few years.

Debate the issue at hand but be honest about what’s happening. The need for fiction suggests you don’t really believe what you’re saying.

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Debt and Isaac Newton’s Law of Political Mechanics

Charlie Arlinghaus

September 2, 2015

As originally published in the New Hampshire Union Leader

Political candidates insist on talking about trees and trust you will ignore the forest. The federal budget mess becomes a bigger and bigger problem because they know you don’t care about the big picture and can be counted on to ignore their pathetic record. The federal budget cannot and will not be balanced simply because it doesn’t have to be balanced and you don’t care that your politicians don’t care.

Last week the Congressional Budget Office released its semi-annual budget report and no one particularly noticed. It was a shame because the numbers suggest growing debt and endless deficits don’t have to be the accepted norm and might easily be erased.

Yet did any of the myriad presidential contenders wandering aimlessly about the state take notice and use it as the starting point for a discussion of responsibility? Not a one. Not only that, they didn’t because you don’t want them to because you find discussions of reality boring.

Almost every American and certainly every politician believes in theory that it is a bad idea for the government to spend more than it takes in. We and they accept that growing debt, fueled by deficits are theoretically bad. At that point, we stop talking about it and they do absolutely nothing in Washington about it and we don’t care.

The recent report suggests that the task is not Herculean. In the fiscal year that ends September 30, the federal government will spend $3.7 trillion. Over the next ten years, federal spending is projected to grow at an annual rate of 5%.

If the rate of growth were held to 3.1% instead of 5.0%, the budget would be balanced in ten years. The budget would still grow. It would grow faster than the rate of inflation. Spending would increase by more than $1.3 trillion. This isn’t anything resembling a cut. It isn’t even a freeze. But it is completely beyond the reach of the people we send to Washington.

In the last 45 years, we have run deficits in all but the last four years of the Clinton administration. Actually, I’m a little surprised there hasn’t been at least one presidential candidate mentioning that fact to us.

The budget was balanced then because it became a political fight between a Democratic president and a Republican congress to see who was more serious about living within our means. Today there is a similar bipartisan consensus in the other direction. Neither Republicans nor Democrats want to be forced to do anything in particular. There are no goals and no targets and no requirements to do much of anything about the problem except a small amount of hand wringing at election time.

When politicians are not forced to do something, political forces push them to do nothing. Isaac’s Newton’s first law of motion restated Galileo on inertia finding: every object persists in its state of being unless compelled to change by force impressed. This may be the foundation of classical mechanics but it is in fact all you need to know to understand political mechanics.

Political inertia compels politicians to keep doing what they are doing unless forced to change. The federal government rarely requires any change. Budgets don’t have to be balanced so they aren’t. They can’t be without some external force applied to the amorphous gravitational blobs who serve as politicians.

The 1994 elections served as a bizarre and irresistible force acting on the political universe. A group of Republicans attacked the atrophying Congress for not acting quickly enough to balance the budget. The switch to Republican control was something that hadn’t happened in a few generations and shocked the survivors.

The new legislators thought they had a mandate. That mandate and unexpected victory acted as a force on the incumbent president who figured re-election was only possible by absorbing the new force.

Today, there is no force, just an agreement to not change too much. One possibility is for all of us to force them to talk about slowing down spending growth but voters don’t seem to care too much. A better choice is legislation with forced and declining deficit targets like the old Gramm-Rudman law. If the target isn’t met then everything without exception gets limited proportionately to reach the target.

If we don’t force them to do something, they will keep doing nothing.

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