Why is there so little emphasis on college cost containment?

Over the past 30 years one of the biggest issues policy-makers have been wrestling with is the issue of health care costs and health care access. Policy-makers have been gradually expanding access to health care starting with medicare and medicaid adding on medicare coverage of drugs, medicaid expansions by state and medicaid expansions for children. But even more prominent has been the emphasis on reducing healthcare costs. Over the years, cost-saving institutions such as HMOs have sprung up and the new health care law encourage competitive exchanges and evidence-based medicine as strategies to reduce costs.

Health care cost inflation pales in comparison with the cost of higher education. Between 1978 and 2008,  tuition has increased 9 fold while medical costs have risen 6-fold and inflation has tripled.

The cost of college dwarfs all costs including oil over the past 34 years. The last four years have made it worst as the recession has slowed medical inflation and the CPI but tuition has continued to sky-rocket as lawmakers push even more college costs off taxpayers onto students.

Health care policy started out much like higher education with little or no emphasis on cost. Doctors were beyond reproach and meddling in the work of medical industries was playing with human lives. But then along came evidence-based medicine which not only began to question to the efficiency of medical procedures but their efficacy as well. Higher costs procedures were often found to be worst for patient health. 

Up till now, higher education has dodged the conversation on both costs and outcomes.  Isn't it about time we started thinking about it?  Are the only options cutting instruction and dumping more costs on students?  





Combined Federal and State Tax Regressivity

There has been a fair amount of research done on the regressivity of Washington taxes. The Gates Commission report concluded in 2007, "Most people agree that fairness requires relative tax burdens on households (taxes as a percentage of household income) to be the same for all households, or higher for households with higher incomes (i.e., a progressive tax system). Correspondingly, a tax system that imposes higher relative burdens on households with lower incomes (i.e., a regressive tax system) is considered inequitable. Washington's tax structure is regressive. The lowest income households pay 15.7 percent of income for total excise and property taxes, while the highest income households pay 4.4 percent of income for the same taxes. Sales tax is the main cause of regressivity.

Our state's system is pretty much the opposite of the federal system. Despite all the recent rhetoric about tax inequality at the federal level, the fact remains that the federal system is progressive. According to the Congressional Budget Office, the top 1% pays an average of 31% of their income in taxes and the bottom 20%, pays about 4%. This includes the federal income tax, the incidence of the federal corporate, federal excise taxes and federal payroll taxes for social security and medicaid.

State taxes are quite regressive with top 1% paying about 1.8% of taxes and the bottom 20% paying 17% of their income in taxes.

When you combine the two results, the bottom line (the second chart above) is that the state tax system cancels out almost all of the progressivity of the federal system.  This is not true of taxes in other states. On average, taxes in other states are slightly progressive.

Washingtonians often seems themselves living in a "progressive" state. When it comes to paying for government, that is far from the case. 

The Federal Minimum Wage

Bloomberg Business Week on their opinion page editorialized in favor of raising the minimum wage to as a level as high as $9.80 an hour and with a CPI escalator.  Business Week writers argued that a "A low-wage bias is creeping into the economy" where in many cases minimum wage jobs are all that is available. The article argued that raising the minimum wage would have a "wage ladder" effect where employers would bump up salaries for slightly higher-paid employees too.

Throughout the United States, states have become passed minimum wages higher than the federal rate of $7.25 an hour. The variability of state rates along state border areas has given economists access to new empirical data from which to study the impact of the wage hike on employment. A team of Berkeley economists looked at changes in wages and employment in contiguous counties on both sides of state borders with variable minimum wages. The consolidated data showed little if any employment impacts from state who raised their minimum wage.

According to Business Week, "The Federal minimum wage was always meant to be a floor, not a ceiling. Today, someone earnings the minimum would have to work 749 hours to afford one year of health insurance premiums and 923 hours to afford a year's tuition at a public four year university.

Washington State already has the highest minimum wage in the country at $9.04 per hour. The Washington wage also has a CPI escalator which adjusts the wage with the Seattle Consumer Price Index. A prominent federal minimum wage bill sponsored by Senator Tom Harkin would raise the federal wage to $9.80 an hour.

Most of the strategies for improving living standards focus on education as the solution. For a large portion of the labor market, that makes a lot of sense. But our economy will always have a large, low-skill, low-paying labor market where education and skills will not lead to higher wages. For this sector, we have to focus on economic justice. The rest of us in society should pay a bit more for our services in order to ensure that all Americans have enough to live on.

Why do we tax business?

There is probably nothing more important to an individual or household today than a good, stable job. In countless surveys, nothing yields greater unhappiness than unemployment. There is good reason to believe that state policy-makers should focus on this issue above all others.


Creating and sustaining good jobs is all about competitive advantage. It means producing high quality goods at the lowest possible cost. It is simply about productivity. Taxes may not be the most important factor in global competitiveness but they are a factor that policy-makers can actually control.


Why do we tax business?  There are a couple of theories that are used to justify business taxes. One theory is benefits received. We tax business to insure that the price of goods reflects the social costs are spent on creating that good. These costs would include water, sewage, public safety, environmental protection and a skilled workforce. Many of these goods are goods that corporations receive for free but somebody has to pay for them - taxpayers. 


Another theory is ability to pay. Businesses should pay their share of taxes based on their ability to pay taxes. Since business owners make a lot of money, we can indirectly tax them by taxing their business.


Economists say that taxes have the effect of creating inefficiencies in both the process of production and in the distribution of goods. Taxes will change the mix of goods produced. Taxes create a deadweight loss in our economy by reducing the consumer and producer surplus by more than the actual amount of the tax itself.  


In general, taxes are most efficient when they fall on those who have the most difficulty avoiding them.  Big corporations can and do spend an enormous resources shifting avoiding taxes and the government spends enormous amounts of resources  trying to make rules to stop them.  They also spend enormous amounts of money on lobbyists to get them special tax breaks.


But most importantly, in a global economy business taxes can reduce competitiveness. They either reduce the amount of capital invested in a company or they increase the price of the good. In today's hyper competitive markets, small price differentials matter.


What if we created a serious competitive advantage for Washington by simply eliminating all business taxes. We could replace the taxes by fees on specific services and progressive taxes on individuals.


Many of the benefits received by businesses are already captured by specific fees on those services. The costs of sewage, water, electricity, and roads are already charged directly to businesses based on actual usage. Supply and demand for the specific service determine the price. We could extend this approach to directly charging businesses for additional services like education. Or perhaps we could even charge a large proportion of those services to individuals who earn money from companies rather than the companies themselves.


You can't tax a corporation; you can only tax a person  Ultimately all of the earnings of businesses go to individuals in the forms of interest, dividends, profits or wages. Rather than trying to indirectly get at that revenue through business taxes, why don't we just tax the income those individuals earn. The tax is thus based on the individuals ability to pay. There is no distortion on the productive process, no change in the mix of goods produced and no competitive disadvantage in global competition. The deadweight loss to the economy from business taxation is eliminated. 


If this is such a good idea why haven't we done this already?  I would venture to guess is that  policy-makers have never offered this specific trade-off.  Given the condition of our economy today, perhaps now is the time to look at it.

The Deficit and the Great Recession

I've thought about this for awhile, and I've come to the conclusion that the solution to the current deficit versus growth problem is pretty simple. Right now, the problem is growth. We appear to be finally in a nascent recovery. The stock market broke 13,000 for several days now. Unemployment claims have moved downward to an average which will bring down unemployment Fourth quarter economic growth is now measured at a healthy 3%.

Let me stress the word nascent. Now is still not the time to focus on deficit reduction. A contraction of government spending could send growth down into low digits and continue our economic stagnation. We need to maintain our current level of spending with longer unemployment benefits, the payroll tax deduction and maintenance of key safety net programs that will boost spending.

After growth appears to have stabilized, the problem for economic policy-makers should shift to inflation. All the money pumped into the economy will begin to tighten. This is now the time to begin cutting the deficit. You do this for two reasons. One to slow economic growth and prevent inflation. The other is to ensure that current generation pays its economic debts rather than shifting them to our kids.

The Eurozone Crisis - Things are not always what they seem

The popular story that has circulated in the richest countries is that this is a morality tale. The extravagant behavior of the Irish and Mediterranean Countries led to the crisis. Rather than working,they danced, rather than saving and investing, they spent. (known here as the Zorba the Greek Syndrome).

After the fall of communism, Germany, France, and other more developed countries sought to integrate Eastern Europe as well as countries on the periphery like Greece, Italy, Greece and Spain into the European economy. The Euro was created to avoid currency fluctuations and improve stability in trade.

The problem was that there was a European monetary system but separate fiscal systems in each country. This worked out fine until the stress of the great recessions exposed the weakness of the alliance. The nations on the periphery failed to manage their economies, spent more then they could afford and failed to invest. This led to a huge debt that would be difficult or possible to pay back. Follow this link to a comic version of the story

Consequently, the banks who had purchased government bonds from those countries were facing potential defaults from the peripheral countries. The potential of huge losses spread fear of a contagion that would lead to widespread bank failures throughout Europe and a double dip recession. Only through the generosity of the richer countries could Europe be saved from the proliferous periphery.

Here's the problem, with the exception of Greece, the debt problems of the peripheral countries was not much worse and in some cases better than the wealthier European countries. Furthermore, the moral faults of those nations was clearly misplaced. Investment and capital formation was as great or greater and the work ethic actually appears stronger (see the above graphs).

Then what was the cause of the crisis? The answer appears to be quite the opposite. The alternative explanation is that the adoption of the Euro resulted in a flow of capital to the periphery to take advantage of the cheaper labor and new markets. When the recession hit, the capital reversed it's direction leaving a massive current accounts deficit. Since all of the counties had one currency, they were unable to devalue their currency to balance the outflow. I'll cover more this in my next blog.

Productive and Unproductive Labor

I'm definitely guilty of overusing the above graph but what it illustrates so well is the level of greed that motivated the leaders of the world's investment banks. Their bonuses were so large that they eventually exceeded the net income of their companies bankrupting the companies and allowing them to escape with billions as they helped bring down the world economy.

This is an example of a problem that is ill-described in traditional economics - the problem of unproductive versus productive labor. In the case of the financial crisis, it appears that a larger and larger proportion of our nation's output was siphoned off to a growing parasitical class which used their very rich human capital to create new financial instruments and marketing techniques which in fact created no wealth. In fact, they appeared to have destroyed a lot of human, physical and financial capital in a process that added nothing to our society.

The concept of productive versus unproductive labor has a history in Marxist economics. In Marx's complex and unfinished work, Theories of Surplus Value, in Chapter 4, Marx lays out a description of what he believed added value to the economy and what appeared to subtract value from society.

Marx made a couple of big mistakes here. One was that capitalists (or today's entrepreneurs or managers) didn't add value, only labor did. He assumed that the creativity, acumen and management ability of a capitalists was no different than any other kind of labor. There is considerable evidence that the risk-taking and management expertise of capitalists is perhaps a different factor of production than other forms of labor.

However, his analysis of finance capital appears particularly germane today. Thomas Philippon in an article last month "Has the U.S. Finance Industry Become Less Efficient?, argues that, "Surprisingly, the finance industry has become less efficient: the unit cost of intermediation is higher today than it was a century ago. Improvements in information technology seem to have been cancelled out by increases in trading activities whose social value is difficult to assess."

The sad part of Phillippon's analysis is that wasted capital in finance does not seem to have diminished as the great recession has dragged on. The question appears to be, Have we learned anything?