Oregon's Business Taxes

Chuck Sheketoff of the OCPP writes in the BlueOregon blog about a study commissioned by business interests and conducted by Ernst & Young that compares business taxes across states and finds that Oregon in the bottom 3 in both overall tax burden and in a measure of the ratio of taxes to state spending that directly benefits business.  I agree witch Chuck that the latter is absurd: spending on schools provides a direct benefit to business, for example, and is not included in that ratio.   But as a relative measure, I don't think it is too bad.  

This logic, however, works both ways - Oregon is the second highest income tax state in the nation and this surely represents an indirect tax on businesses who have to compensate workers to maintain a competitive real salary.  This then is a problem with the measure both in absolute terms and in relative terms. 

So while it is true that direct taxes on business are low and could probably be raised without loosing competitiveness as a place to locate business, one must be careful about the direct and indirect effects of the tax structure overall.   

A Permanent Rainy-Day Fund?

The Oregonian is reporting on a plan coming out of the state legislature to put in front of voters a plan to create a permanent rainy day fund. Friend of the blog Fred Thompson and co-authors have looked at this problem in the midst of the last round of budget woes (only a few years ago) and their analysis is interesting and raises some questions:

• Why not also relax fiscal rules and allow borrowing during economic downturns?
• Is $1.5 billion enough? Thompson, et. al., suggest it is in the right ballpark, but given the current revenue gap which might easily eclipse $4 billion over the next two and a half years, it might need to be bigger.
• Why build something on top of this ridiculous rule that depends on an economic forecast (as Paul Krugman says economic forecasting is slightly less respectable than witchcraft)? We are fortunate to have a talented and professional state economist in Tom Potiowsky, but I am sure even Tom would tell you that forecasting is simply very educated guesswork. Why not come up with something new and better?

Still, I am very, very supportive of this initiative, it is the right idea and needs to happen. I think that this puts the emphasis in the right place: spending stability rather than revenue stability (which is unachievable).

Steve Levitt Riding My Coattails Again

Mr. Freakonomics himself on left-handed presidents, something I have already covered. I had looked up the left-handedness of other presidents as well (and some notable competitors) but decided not to try and push it too far. I will say, however, that since left-handedness was something commonly 'corrected' until my generation, it is possible that the left-handed bias of leaders is actually stronger than the numbers suggest.

Economist's Notebook: Happiness and Prosperity

[Photo: Brent Wojahn/Oregonian]

The Oregonian reports on the new Business Week article listing Portland as the 'unhappiest' city in the country. One of the reasons they cite is our high unemployment rate, which begs the question are happiness and economic prosperity linked?

For a long time the thought was that happiness was dependant only on your relative economic position: if you are poor and are surrounded by rich people, you are unhappy. But if you are poor and are surrounded by poor people, you are less unhappy. So as a consequence poor within a society are unhappy, but poor societies are not more unhappy than rich and countries whose wealth grows do not become more happy. This general set of statements was known as the Easterlin paradox.

This view grew, in part, from cross-country evidence that suggested that poor countries as a whole were not more happy than rich. Figures such as this, from a leading development economics textbook, seem to support this view:

But new evidence from Stevenson and Wolfers, who did a comprehensive analysis of the evidence, much of it new and much better than was previously available, suggests that this is not (or is no longer) true. Perhaps this simply comes from the better data (their view) or perhaps is comes from the fact that information technology has made it easier for the poor in poor countries to see how the rich in rich countries live. Whatever the reason, they provide a pretty convincing analysis that happiness and absolute economic status (not just relative) are strongly linked. Here is a nice New York Times graphic from the article about their research that summarizes their findings nicely:

Notice that not only are rich countries happier, but the rich are happier than the poor in most countries and this happiness differential within countries seems most pronounced in the middle income countries, many of which have high income inequality. But Wolfers and Stevenson have also found that happiness inequality has fallen in the US at a time when economic inequality has risen. However, the happiness gap between the highly educated and the less-highly educated has risen, at a time when the return to skilled labor has risen relative to the return to unskilled labor. So the income inequality and happiness inequality link is fuzzy.

Nevertheless it appears that your college degree pays off both economically and in personal happiness, what a deal!

The Unemployment Poll: The Final Results

The poll is now closed and there is a pretty strong focal point: 12%. I voted for 11% at the inception and the optimist in me hopes I am right that it will remain below 12% (I was thinking of 11% as anything under 12%). What is striking is how many voted for 13% to 16%. I consider this people who think we will enter a depression, not just recession. Scary. February will eclipse 10% for sure so it is really a matter of how quickly we can arrest the fall. Each week brings new bad news about the breadth and dept of the downturn making me increasingly pessimistic.

The key to everything is the quick and orderly reorganization of the banking sector. I think the fiscal stimulus is inconsequential without sorting out the credit sector. I wish the Treasury would more faster and in a more comprehensive manner. I am not quite ready to jump on the nationalize now bandwagon (I fear you run the risk of killing solvent banks if you start to nationalize the insolvent ones), but show me the current plan will work - I have yet to see private willingness to take on toxic assets even with government support.

Enrollments in Economics Courses Surge

An NPR story yesterday about how students are flocking to economics classes. I don't know if it is happening here at Oregon State, but it might not matter because we are struggling here in the economics department to even cover the bare bones curriculum we currently offer - an artifact of the university's long and recently renewed underinvestment in core arts and sciences in favor of more applied areas. This is a good strategy for chasing grant money but horrible for undergrads. OSU gets lots of recognition for things like forestry and oceanography, but there is a reason it is the worst ranked school in the Pac 10 - it does not have strength in the areas that are fundamental to undergraduate education.

OSU gets another mention, this time in the New York Times, about a surge in undergraduate applications (up 12 percent and transfer apps up 31 percent). I am sure the temptation is to admit a large freshman and transfer class. But with budgets being slashed one wonders how they are going to find classes to take. Even if we find people to teach the classes we don't have the classroom space to do it in. My spring term International Economics course immediately filled up and I don't have any desks left to add more students. What a shame, has their ever been a better time to understand international economics?

Ah well, the reality is that the economic downturn is comprehensive and we are all going to have to deal with it as best we can. And if anyone out there wants to study economics at OSU, you will find a group of dedicated scholars and educators excited to have you join us. We will make it work, don't worry - if there is one thing economists are good at, it is dealing with scarcity. We are currently undergoing a comprehensive restructuring of the economics major to make it more flexible and to offer more options, so stay tuned, but for a look at what we currently offer, go here.

Don't Cut Schools Short: Oregonian Op-Ed

Here is my Op-Ed on the closing schools early issue published in today's Oregonian

Beeronomics Update: Doing it Yourself

A while ago I blogged about whether homebrewing was a cost minimizing strategy for the craft brew lover in these tight times.  In that post, I expressed doubt about the whole endeavor, suggesting that only for those who really enjoy the process would this be a worthwhile strategy.  

The final reckoning is upon us.  I got a total of 25 22oz bottles for a price of about $60.   Thus the cost is about $2.40 per bottle, a considerable savings over the $3.50 or so that a normal 22oz bottle costs.  Of course, a good economist includes opportunity cost and it does take a lot of time and effort to do this.  So, let's say about a dollar a bottle, which makes this about a break even endeavor.  

But my main objection was the assertion that the resulting beer was sure to disappoint.  A long history of homebrewing years ago taught me that.  But lo and behold, the final product this time is fantastic!  This is the first beer that I actually really and thoroughly enjoy just for the beer (and not for the fact that I made it).  In fact it is so good, that I would choose it over many of the beers I regularly buy in the store.   Part of this is, no doubt, due to my good friend who has tons of experience who guided me carefully through the recipe and the execution.  Nevertheless, I now consider the whole effort a tremendous success.  Save a few pennies and have 25 bottle of great beer to show for it.  Not bad. 

Cheers! 

Crisis in Higher Ed: The Sky is Falling!

Okay, not really, but I did arrive at the stairwell in my building at OSU the other (rainy) day where a sign advised me to use an alternate route due to the ceiling falling in big chunks.  Yikes.  Here is the offending ceiling.

Um...can we have some of that stimulus money devoted to higher ed construction please?  At least it is not a repeat of a few years ago when the ceiling started leaking right on the department chairperson's desk.  

Oh and by the way, I am Captain Danger, laughing in the face of death -- I used the stairs anyway. 

Newspapers in Peril

The San Francisco Chronicle, the Chicago Tribune and the Seattle Post-Intelligencer are all among newspapers teetering on the brink of collapse. They are also papers in a twon with competing dailies. Today, another newspaper from a two-paper town announced it will close - tomorrow. Denver's Rocky Mountain News is shutting its doors.

This comes on the heels of this shiny new downtown office building the Denver Newspaper Agency (the entity that publishes both the Denver Post and the News in a joint operating agreement) built just a couple of years ago.

Does this portend the demise of dailies in one-paper towns? I sure hope not, I don't think we, as a democratic society, can afford for that to happen. Remember, the free market does not provide an efficient level of public goods and, to me, the media's watchdog role is a public good.

While I am talking about newspapers, is it now a common thing for newspapers to employ their own working reporters as columnists? I was surprised to see Anna Griffin's byline recently as I thought she had moved to being a full time columnist for The Oregonian. I prefer her as a reporter as I find her columns to be strange and incoherent - as if she is trying to rant like a columnist, but it does not come naturally. Anyway, I think it is dangerous for the reputation of a newspaper to have the same person reporting and opinionating on the news.

Oregon Unemployment in January at 9.9%

The rapidly deteriorating Oregon economy just keeps getting worse. I was assuming a rate at at least 9.5% and hoping to avoid double digits, so we at least managed that, but it will be worse next month and will probably remain on its upward trajectory at least through the summer.

The job losses are everywhere, even in education and health services which for a time was the lone positive sector. It is just horrible everywhere you look.

Oregon's Gas Tax: 90 Years Ago Today

On this very day in 1919, Oregon became the first state in the union to impose a per-gallon gas tax. [HT: Greg Mankiw]

Given the cost associated with the release of carbon into the atmosphere, it is time to consider a new gas tax that aligns the price of a gallon of gas with its true costs, both private and social. It is certainly better than a beer tax!

Obama's Speech

Perhaps I am getting just too cynical but here are three things that caught my attention from last night's speech to a joint session of Congress by President Obama:

1. The cost of the war in Iraq will now be a part of the official budget of the federal government.
2. The Obama administration intends to slash the federal budget over the next couple of years.
3. The Obama administration intends to bring the war in Iraq to a relatively swift conclusion.

Hmmmm...methinks I see a connection.

Okay, to be fair, just because military operations will cease does not mean we will stop spending lots of money on Iraq and putting the cost of the war in the budget is definitely the right thing to do. So perhaps I have just become conditioned over the last eight years to see accounting tricks everywhere...

Early School Closures and Economic Growth

Yesterday, I cited research from Maryland that shows that the loss of school days has a measurable impact on performance on aptitude tests. There is also a very strong link between scores on aptitude tests and economic growth. Below is a graph from an article by Eric Hanushek, perhaps the leading expert on the economics of education, and co-authors:

Though a measure of years of schooling has a weak impact on growth this is largely due to the fact that years of schooling and education are not the same thing (for many reasons like the fact that grade repetition is common in developing countries). So measuring education by aptitude tests uncovers the very strong link between education and growth.

Portland Home Prices Plunged in December

The latest Case-Shiller numbers are out.  I'll keep it simple and show the data in a graph.  Ouch.  Economists debate about how much people's attitudes about their own economic situations are relative to those around them, so in case yours is highly relative, I include San Francisco.  These are the December numbers, so we are two months behind, and there is evidence that the incredibly low prices are starting to bring investors back into the market.  But here in Portland, on average, homes are back to being worth what they were in September 2005.  Wow.  

Beeronomics: Experiments

This poster from Rogue's Green Dragon Pub in Portland, where they propose raising prices to post-tax levels for a day, made me think of a scheme I thought about and quickly dismissed as too hard to pull off. How could we know the real impact of a beer tax on Oregon's breweries? Run an experiment. Have Rogue, Deschutes, McMenamins, Full Sail and a number of independent pubs raise prices in a randomly selected half of their pubs for a week (by how much to replicate the effects of the tax is a matter of debate). Then switch back to old prices and raise them in the other pubs for a week. Examine sales data for all the different types and prices of beers to understand the price and cross-price elasticity of demand (how sensitive quantity demanded is to price). Not a perfect experiment, but far better than any other data we have. If you could get retailers to do it as well, then we would really be cookin'.

If any brewery owners want to give it a try, I volunteer my expertise in studying the data...

Do Days in School Matter?

YES.

Oregon lawmakers' cavalier attitude toward early school closures suggests that the marginal impact of days in school on student learning is small. But where are the facts? I have yet to hear or read a quote from one single lawmaker about the marginal impact of school closures, so I decided to go find out for myself.

Understanding the marginal impact of a day in school on student performance is complicated by the fact that school closures are not usually random. For example, if we looked at the impact on Oregon students of the 2003 shortened school year we would have trouble disentangling the effects of the short school year with other effects of the economic downturn in the state like decreased provision of social services, increased unemployment and other disruptions that could hamper student performance. Therefore we could not plausibly attribute any decreased performance to school closings alone.

Two researchers in Maryland, however, use a clever strategy to isolate the effects of school instruction days on student performance by looking at weather forced closures of schools - snow days - on assessment scores. The strategy works because tests are administered in April, before the districts can make up snow days by tacking them on at the end. The fact that snow days are random events and are different across Maryland's school districts allows for a plausible counter-factual: the performance of kids not affected by snow days. But this is not all, the researchers use a panel of data - multiple years variation in school days that allow them to control for differences across schools as well. In other words, they are looking at year over year differences in a specific school's performance based on snow days.

The results are presented in this paper (and some similar results by one of the authors is presented in another related paper). Unfortunately, the measures are a bit crude: they see only the percent of children that pass or fail statewide assessment tests in math and reading. They find that for each lost day of school, the pass rate for 3rd grade math and reading assessment tests fall by more than half a percent. So a loss of five school days (like what is being contemplated in Oregon) would lead to a three percent increase in the failure rate. This is shocking in and of itself, but consider the reduced performance for all students, including those well above the failure line and the implications for the overall performance loss - the total loss of learning - is truly profound.

Now there is a caveat: schools that know they are loosing days can strategize to maximize learning at the end of school, but remember that Oregon already has one of the shortest school years in the nation (and in the industrialized world) - so we are already trying to squeeze as much learning out of the short school year as it is, it is therefore not clear to me that more can be squeezed out of an already dry stone.

It is simply astounding to me that the Governor can talk about positioning Oregon to become a leader in green technology while at the same time disinvesting in Oregon's human capital. I have news for him - Oregon will be a leader in green technology not because of a few selected tax breaks, but because we lead in technological innovation. And we will only lead in technological innovation if we have smart people and excellent schools and universities, this is the lesson of Silicon Valley.

It is time to have a real discussion of the costs to the state of expediency in budget cuts. The obvious alternative to a shorter school year is increased class size. So what is the impact of class size? There is some debate: Hoxby (2000) finds no measurable effect, Hanushek (1998) agrees, but Rivkin, Hanushek and Kain (2005) (in a much better test) find positive, but quite small increases in student performance from reduced class size. The conclusion is inescapable - a shorter school year imposes a much greater cost on Oregon's children than increased class size.

It is time for the Governor and lawmakers in Salem to wake up and start making smart, informed decisions rather than off-the-cuff ones.

Does the Oregonian Not Care about Facts?

I realize there is a lower standard for opinion pieces then for news stories, but I imagine (and would hope) that The Oregonian would refuse to publish an opinion piece that claimed, say, that immigrants spread disease and are predisposed to crime. This claim has no basis in fact and has no place in a newspaper (unless it is in an article that then rebuts be presenting the evidence).

So why are they publishing this opinion piece that makes outrageous claims that are factually incorrect? In it the authors states: "the quality of education being delivered to a majority of students is closer to remedial high school rather than college." [Emphasis mine] There is absolutely no basis in fact for this statement. He goes on to state that half of students in college should not be there.

But what really gets this economist is the absurd claim that there is no real value to a college education and the only reason businesses want college degrees is it makes it easier to 'winnow' applications. Where to start? It is remarkable that businesses would find more applications such a burden and would pay 75% more for a college graduate than for a high school grad just to escape having too many of them. This is clearly an absurd assertion. We live in a world of market determined wages and businesses are not going to pay more for workers that do not have a higher marginal product. The college wage premium is real, huge and increasing precisely because a college education is valuable and ever more so in an increasingly global economy. See the graphic to the right (courtesy of the NY Times) - this is an empirical fact that contradicts the entire premise of the opinion piece.

Higher productivity means growth, so the conclusion we immediately draw from graphs such as this is that we should try and get more kids in college, not fewer, if we are interested in the future health and prosperity of the state and the nation. More college educated kids means a more productive workforce and thus more surplus to devote to many of the private and social needs of the population.

But the real question is why The Oregonian would print such an opinion piece? They should not promote the spread of ignorance. They should instead strive to raise the public debate, not lower it. What's next, a piece on how the Holocaust never happened, or that left-handers are superior beings?

Sam Adams and Self-Fulfilling Prophecies

Mark Larabee's story in The Oregonian on Wednesday about Sam Adams's effectiveness post-scandal brings up a point about self-fulfilling prophecies. There is an echo chamber feeling in many local government types and business people and saying essentially 'I worry about his effectiveness because lots of people are worried about his effectiveness."

This is clearly a self-fulfilling prophecy: because I worry about his effectiveness I will be less responsive to him and in so doing, I make him less effective. So I confirm my own perception.

Though this is a self-fulfilling prophecy, the impacts are real - no less so when the situation is a crisis of confidence in the nation's banks than in the Mayor of Portland, Oregon. In the end Adams is less effective. But it also means that if people would simply move on, the mayor could be completely effective tomorrow. And, yes, I am leaving out citizens and voters who at this juncture are less important than the bureaucrats we have elected.

What is best for Portland? I think clearly moving on and making the Mayor effective is the first best solution at this point - regardless of what you think about his past behavior

Beeronomics: One More Comment About the Beer Tax

Usually taxes such as these are proposed to address some external costs. But the problem with making the leap from a beer tax to alcohol and drug abuse (and related crime and treatment) is that this is an external cost only associated with a small minority of beer drinkers. In fact as I mentioned in my earlier post, moderate beer consumption may actually cause a positive externality, suggesting (economically) government may wish to subsidize moderate consumption.

Other taxes are different. Take a gas tax, there is a large and recognized cost associated with the release of carbon into the atmosphere and it doesn't matter how much you drive, when you drive or how fuel efficient your car is - the carbon content of a gallon of gas is the carbon content of a gallon of gas. When you consume a gallon of gas in any manner of use, the cost to society is the same. Thus a tax on gas is purely Pigovian. We all pay a price that reflects the costs we impose on society.

Not all sin taxes are like beer taxes, the effect of cigarette smoke are harmful for even moderate smokers and also for those around them. So a tax is much more efficient in addressing the external costs here. But Beer is simply not the same thing. As a occasional and very moderate drinker of beer I impose no external costs - so making me pay a higher price is not Pigovian but simply an arbitrary, and distorting, tax.