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  • Minimum Wage Increase Is Still Bad Policy

    March 10, 2014 12:45 PM

    Obama RacineFor the past two years, President Obama has proposed raising the federal minimum wage in his State of the Union address. The main arguments for raising the minimum wage have typically ignored economic arguments against it, and relied upon more politically charged arguments. This time around the argument is a bit different because progressives are now using new studies in economics as intellectual ammunition. Shortly before the State of the Union address, 600 economists signed a letter to the president endorsing a raise in minimum wage, citing the new studies. These studies have argued that moderately increasing the minimum wage would have a negligible impact on employment levels.

    Obama himself relied on these revisionist economists in his announcement of the executive order: “Just last month, 600 economists, including seven Nobel Prize winners, wrote the leaders of houses of Congress to remind them that the bill before Congress would have little or no negative effect on hiring, on jobs. So it's not going to depress the economy. It will boost the economy.”

    The mistake being made by using these studies is that 79 percent economists have not actually changed their longstanding consensus against a high minimum wage, and are skeptical of the new studies. The 600 signatories do not necessarily represent the field as a whole, and their suggestions, as such, should be taken with caution.

  • The "California Rule" and the "The Fall of Pacific Grove"

    March 6, 2014 3:36 PM

    In my previous post, I described the "California rule," which puts state governments in a legal straitjacket when trying to reform underfunded public pensions. Specifically, it places pensions in a privileged position relative to other types of compensation, like salary or health insurance benefits, by making them more difficult to change. This post highlights a real-world example of the California rule's dangers.

    The place is Pacific Grove, California, a town of 15,000 residents on the Monterey Peninsula's northern tip, with an annual budget of $11 to $12 million. In 2008, John Moore, a Pacific Grove resident and retired attorney, learned that the City of Pacific Grove had issued $19 million of pension bonds two years earlier, while at the same time it gave the police union a 30% raise.

    After making several requests under California's Public Records Act, Moore uncovered a tale of self-dealing by Pacific Grove and union officials to rip off California taxpayers. The result of Moore's investigation, "The Fall of Pacific Grove," was published in The Pine Cone, a Monterey County paper; it's now available online thanks to the California Public Policy Center.

    In 2002, the Pacific Grove city council adopted a 50 percent pension increase for public safety workers, after being told by the city manager that the increased benefit would cost around $51,500 per year. However, the city manager withheld from the council an actuary report that estimated the benefit at over $800, 000 per year. The hidden actuary report was not discovered until 2009. The results have been predictable and dire. Pacific Grove's pension deficit has ballooned to $45 million, plus $20 million in pension bonds, and is growing at 7.5 percent a year, according to Moore.

  • How the "California Rule" Holds Back Pension Reform

    March 5, 2014 12:52 PM

    These days, local governments announcing bankruptcy seems like routine in California. Since the onset of the 2008 financial crisis, many state and local governments have seen their pension funds take huge losses. Yet, many of the underlying problems that have made pension shortfalls difficult to address go back many years -- more than half a century, in fact.

    One major reason public pensions have been so difficult to reform is their having a special legal status above other kinds of employee compensation. A new Federalist Society paper by Emory University law professor (and CEI alumnus) Alexander Volokh explains how this strange situation came to be and offers some ideas for reform.

    One of the most important developments in public pension policy occurred in 1955. That's when the California Supreme Court created what became known as the "California rule" regarding the legal status of public pensions. The case, Allen v. City of Long Beach, concerned a challenge to a 1951 city charter amendment that increased the employee pension contribution and changed the formula for determining payouts.

  • To Enact Pension Reform, Make Good Policy Good Politics

    March 5, 2014 11:34 AM

    broken-piggy-bankIn my previous post, I looked at some basic principles that should guide state policy makers when tackling pension reform. Now, we turn to the politics. And in that regard, Rhode Island's 2011 pension reform offers a useful example for other states to consider.

    In his Brookings study, "Pension Politics: Public Employee Retirement System Reform in Four States," Drew University political science professor Patrick McGuinn looks at recent reform efforts in four states' experience in implementing pension reform.

    Two of these states—Utah and Rhode Island—enacted significant structural changes to their pension systems while the two others—New Jersey and Illinois—enacted more limited changes that were less innovative.

    Drawing lessons from those four states, he then outlines some basic principles for how to implement reform, citing examples.

  • Who Wants to See Their State Go Broke?

    March 5, 2014 11:30 AM

    Few people would raise their hands when asked that question. But actually putting a state's financing on sound footing is difficult in practice. That makes Rhode 's Island's pension reform not only unique, but also a good example for other states to consider.  Rhode Island got not only the policy, but also the politics right, according to Drew University political science professor Patrick McGuinn in a new Brookings Institution study.

    In other words, how pension reform is accomplished is as important as what the reforms entail. In his study, McGuinn offers some sound principles on the politics -- the "how" -- of pension reform. Another new study, commissioned by the Society of Actuaries (SOA), offers some basic principles on the policy -- the "what".

  • Obama FY 2015 Budget: Aviation Funding Recommendation Not Great, But a Step in the Right Direction

    March 4, 2014 3:23 PM

    President Obama released his Fy 2015 budget today. Like his past budgets, as I noted in a previous post discussing the highway and transit budget, continuing congressional gridlock means this package will almost certainly go nowhere. I'll leave more sophisticated and comprehensive commentary to the budget analysts, but I will highlight one additional transportation provision: airport funding. Exactly like the FY 2014 budget from the White House, the FY 2015 budget calls for cutting Airport Improvement Program funding to $2.9 billion and increasing the cap on the Passenger Facility Charge (PFC) from $4.50 to $8.

    AIP currently provides major airport infrastructure grants. These funds come from a variety of taxes and segment fees. However, while user-based to an extent, AIP funding is complex and less transparent, features that are generally undesirable in user fee frameworks -- in addition to relying on some non-user revenue (see page 20 of the AIP Handbook for a breakdown of revenue sources). AIP funds are also not segregated by facility, leading to wasteful grants to low-value airports.

  • "The bill doesn't come due until well after the legislators who wrote the check have left office"

    March 4, 2014 1:24 PM

    Thus describes an Illinois state Senator the challenge states face in reforming their public employee pension systems. Given that reality, it's astounding reform would ever succeed. But succeed it has, in states with very large pension shortfalls that threaten to blow up their budgets.

    Staring into the financial abyss, it seems, can help politicians overcome their strong temptation to offer generous benefits to their supporters -- government employee unions in the case of pensions -- and passing off the bill to future generations. Yet, government unions will defend their benefits even in states in extreme financial distress, as the recent Rhode Island pension settlement shows.

    On February 14, Rhode Island officials reached an agreement to end six legal challenges to the state's 2011 pension reform, the most far-reaching in the nation to date. The agreement scales back some of the savings in the 2011 reform bill, but  preserves most of them. Governor Lincoln Chafee and State Treasurer Gina Raimondo invested considerable effort and political capital in crafting and enacting the 2011 pension reform. So why did they agree to scale back any of it?

    Because they had to. The state was forced into negotiating by a judge, ruling on a union legal challenge to the pension reform legislation. As Drew University political science professor Patrick McGuinn describes the decision in a new Brookings Institution study, "Pension Politics: Public Employee Retirement System Reform in Four States" (which points to Rhode Island's reform as a model):

    In December 2012, a Superior Court judge ordered the unions and the governor/treasurer’s office into mediation to resolve the dispute—an extremely unusual (and perhaps even unconstitutional) move.

    In effect, the judge ordered the Chafee administration to negotiate with the unions to amend a law that had already been passed by the legislature and signed by the governor.

    While legally dubious, the February 2014 agreement may be the least bad option in terms of achieving sound policy -- which in the case of Rhode Island means preventing a budget meltdown. If a judge is willing to order the state government to renegotiate a law already on the books, who knows what might come next in court?

  • Bad Highway Policy Is a Bipartisan Affair

    February 28, 2014 11:18 AM

    Two major pieces of surface transportation policy news dropped this week. President Obama is readying the release of his budget, which will contain over $300 billion in transportation funding. Across the aisle, Rep. David Camp, R-Mich., the powerful chairman of the House Committee on Ways and Means, released a sweeping proposal to overhaul the U.S. tax code, which includes a component that would direct $120 billion in tax savings into the Highway Trust Fund.

    The president's latest budget is far from surprising, as it differs very little from his previous surface transportation proposals. Of the combined highways and transit spending ($278 billion), he proposes to allocate 25 percent ($72 billion) to mass transit -- a mode that makes up about 5 percent of trips.

    Thankfully, neither proposal has any chance of being enacted, at least as standalone comprehensive packages. Unfortunately, most of Congress's "business" is recycling and repackaging previous proposals, which means some aspects might well find their ways rolled into future legislation. With the current highway bill, MAP-21, expiring at the end of September 2014, Congress will begin the reauthorization process in the coming months. It is likely that some of these bad ideas will pop up again.

    First, the president's budget. He wants a $302 billion, four-year transportation bill. Half of that would supposedly come from tax reform, amounting to a massive bailout of the Highway Trust Fund. This is par for the course for President Obama, who has long advocated eliminating the Highway Trust Fund in favor of a slush fund that would enable additional gimmicky projects such as high-speed rail and urban streetcars.

  • Minimum Wage Increase to Wipe Out 500,000 Jobs

    February 19, 2014 5:51 PM

    "Boosting the federal minimum wage as President Barack Obama and congressional Democrats are proposing" would "cut employment by roughly 500,000 jobs, Congress' nonpartisan budget analyst said Tuesday"; the Congressional Budget Office predicts that a minimum wage increase will result in "fewer jobs, especially for low-income workers; higher costs for business owners and higher prices for consumers. The study was unveiled as the Senate prepares for a March debate on a plan by Sen. Tom Harkin, D-Iowa, ramping up the minimum in three steps to $10.10 by 2016." (Source: Associated Press).

    Raising the minimum wage also drives up unemployment among young people and unskilled workers. This CBO report comes on the heels of an earlier CBO report that predicts a fall in employment of about 2 percent over the next decade due to work disincentives contained in the 2010 healthcare law. Obamacare has caused layoffs in the medical device industry, and will wipe out many jobs. It is also replacing full-time jobs with meager part-time jobs in community colleges, restaurants, and other sectors.

  • Growing Support for Road User Charges Will Be Highlighted at March Conference

    February 18, 2014 11:55 AM

    I've written about the importance of charging road users for their road use for some time. Moving toward a truly user-pays system will require significant reform. For U.S. highways, federal and state fuel taxes provide the bulk of the funding. While the idea behind levying an excise tax on gasoline to fund roads was rooted in user-pays, political developments and new technology necessitate the move away from user taxes and toward more direct, and distance-based, user fees.

    Recently, road usage charges became an issue in the Virginia gubernatorial race, with some Republican activists trying and failing to paint the Libertarian candidate as a big-government tool for broadly suggesting that the state investigate the viability of replacing fuel and sales tax road funding with a user charge. Oregon has become the first state in the nation to introduce a user charge pilot program and many others are investigating similar programs. High-tech user charges such as all-electronic tolling and GPS-based charging systems are increasingly being seen as the next logical move for road revenue collection.

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