The answer boils down to housing and mobility…

October 26, 2010

Daraius

In the social circles that I often move in and amidst the cacophony of sounds one hears in most establishments that serve adult beverages , many individuals upon finding out what I do for a living ask me “when is the unemployment rate going to fall?”  After giving my usual two handed speech which leaves many individuals looking somewhat bewildered, I tell them it boils down to the housing market.

The goal of increasing the homeownership rate has been on the agenda of both the Republican and Democrat parties for many decades.  Both sides cite studies that supported the notion that increasing the homeownership rate will ensure stability in the communities as many homeowners mow their lawns on Saturday morning (not too early), crime would go down, and essentially all of the societal ills ascribed to a transient population would be eliminated.   As a result, many communities resisted through zoning or other means building additional rental units and pushed builders to build single family homes or townhomes.

However, we have traditionally been a nation built on mobility-“Go West Young Man” was a motto well into the 20th century.  Moreover, this credo of mobility has enabled the workforce to move to where the jobs are and has resulted in the US economy enjoying continued growth and prosperity.   The great recession as it is now being titled had its origins in the housing crash and as a result profoundly changed the mobility of the workforce.

In regions of the country that are experiencing a nascent economic recovery, finding skilled workers has been challenging and in many  cases these positions  remain unfilled as ideal candidates are stuck in other regions of the country with a house they cannot sell. To be clear, it is often not the case that they cannot sell their home; it is more likely that if they are able to sell their homes they would still owe a substantial amount to the bank. It has been stated that at least 20% of the homes are underwater in terms of their mortgage in the US.   In this credit conscious society, abandoning your home to the bank, often referred to as a strategic default will not only affect the individuals’ ability to borrow again, but will affect their ability to get a job. The amounts are non-trivial often amounting to tens of thousands of dollars or more.

As a young child when I came across a deep hole, I would toss a rock in it and wait for the familiar splash of water, letting me gauge how deep the hole was.  I suspect that when it comes to the housing market, many people are on the edge of that hole waiting for the sound of the splash.  However, outside of the fact that the number one asset of most individuals has lost anywhere between 10% and 50% of its pre recession value, the lack of recovery in this market will continue to prevent labor from moving where it is needed and this one of the many reasons why unemployment will continue to remain persistently high in many locations for the foreseeable future.

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Posted by Daraius Irani

Examining the immigration debate from a workforce-economics perspective

September 13, 2010

Dr. Daraius Irani

Immigration has been a contentious issue since the Pilgrims landed at Plymouth Rock and declared this land their land.  Therefore, it is not unusual that the issue of immigration has been raised recently, most notably with the passage of the law in Arizona requiring police officers to check the immigrant status of individuals.  Many politicians from around the nation have proposed ordinances for their states or localities declaring them a non-sanctuary site or emulating the new law in Arizona.

Arguments against the most recent influx of undocumented immigrants range from jobs being taken away from American workers to undocumented immigrants leeching off the system and/or bringing crime into the area.  In addition, there has been a dramatic increase in the number of births by undocumented immigrants in the U.S., prompting many to question whether the 14th Amendment, which grants citizenship to those born in the United States, should be altered.

According to a recent Wall Street Journal article, undocumented immigrants accounted for 1 in 12 births in the U.S. in 2008.  While there is room for debate on immigration, a fundamental fact remains; a vast majority of these individuals come to the United States to work.  Moreover, we as a nation have become increasingly dependent on these individuals to ensure that we have low-cost produce year-round, gardening services, house cleaning and other low cost services.

While many of us may criticize these individuals for not speaking English or argue that they are taking jobs away from Americans, English-speaking U.S. citizens are generally not lining up around the block to take these jobs, even in these tough economic times.  I suspect that the United Farm Workers “Take My Job” campaign has resulted in very few current field workers being displaced by unemployed U.S. workers.

Photo Credit: Flickr User Scazon

While the Arizona law was considered to be very reactionary and a vast majority of its statutes were dismissed by a federal judge, Utah has proposed a novel solution.  Rather than try to expel undocumented immigrants, Utah proposes to issue a guest worker visa instead.  This guest visa would be similar to the Bracero Program implemented by the U.S. and Mexico between 1942 and 1964, which allowed individuals from Mexico to work in the U.S. and then return to Mexico.  While the proposed law in Utah would face challenges—mainly that states cannot issue visas—it does offer a practical solution based on the premise that many firms would not be able to function without these workers.

There are numerous studies citing the economic benefits or lack thereof of undocumented immigrant workers.  It is still unclear from these studies whether these immigrants provide more in taxes than they draw in government services.  However, there are a couple of points worth noting regarding immigrants:

  • A quarter of engineering and technology companies started in the U.S. between 1995 and 2005 had at least one foreign-born founder.
  • In 2005, immigrant-founded companies produced $52 billion in revenue and employed 450,000 workers nationwide.
  • Almost 80 percent of immigrant-founded companies were in two industries: software and innovation/manufacturing services.
  • In Florida, Hispanics were the leading immigrant group in terms of the number of companies founded.  In Massachusetts, Israelis led.  In New Jersey, the leaders were Indians.

While we may find it easy to blame immigrants for a variety of economic and societal ills, the overall contribution of immigration has been a vastly positive experience for the U.S., both in terms of economics and society.

Photo Credit: Manny Proebster

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Posted by Daraius Irani

Slots and Maryland, too little too late?

July 27, 2010

Dr. Daraius Irani

Recently the Board of Public Works approved the purchase 5,000 video lottery terminals (slots) and while I cannot feign that I have not followed the debate for the last several years, I began to wonder if Maryland’s foray into the world of organized gaming is too little and too late.  The underlying reasons for introducing slots into Maryland was to provide an additional source of funding for the state and perhaps provide a spark for economic redevelopment programs for the City and Western Maryland.

Maryland had slots from 1943 to 1968 and while many question the reasonableness of reintroducing slots into Maryland, I question why are we only considering slots?  Why not table games? Especially, since we are one of the last states in the region to even consider slots.  Go big or go home, I say.  It also strikes me odd that Maryland is proposing one o f the highest taxes on slots in the region, or is this part of the “if you can dream it, we can tax it” motto Maryland is trying to shed?  Or do we want to remain in the shadows, only tolerating the newly proposed slot palaces.  We need to go to “11” on this

Once the slot palaces or emporiums are up and running, Maryland could realize significant tax revenues as well as additional employment opportunities for individuals.  However, the challenges to realize those significant tax revenues are

  • Neighboring states are upping the ante by introducing table games which may make Maryland’s slot palaces less attractive and the trek north and west to Delaware and West Virginia would continue.
  • The slot palaces could serve to only rearrange the discretionary spending of Maryland households and as a result other forms of entertainment, eating and drinking establishments could see a decline in their activity resulting in a little or no overall gain in economic activity.

There are those who argue that exploiting a vice to finance state government is not in society’s best interest.  I would argue that we already exploit vices for those purposes-cigarette taxes, liquor taxes and the lottery just to name a few.    I firmly believe, we are not going to balance the state’s budget on the backs of gamblers, but I truly believe that gambling can serve as an economic redevelopment tool.

If someone asked me, which two places in Maryland would you put slots (aside from Cecil County); I would say the Rocky Gap Resort and Pimlico in a heartbeat. Many people pass by the Rocky Gap Resort as they whiz by on Route 68 going to Deep Creek and other points west.  Imagine if there were a fully functional casino (oh the dreaded C word) located at the resort.  People from other states might want to visit and leave their money at the crap tables in Rocky Gap.  Pimlico with all of its storied history is, and this depends on whom you ask, either distressed or in transition (to what I do not know).  It would not be a stretch to allow a casino at a horse track that already has gambling in the form horse betting.  Putting slots near the Inner Harbor and Arundel Mills could displace economic a activity for those locations and not serve as a tool for economic developments.

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Posted by Daraius Irani

The ARRA…what was its effectiveness?

June 29, 2010

Dr. Daraius Irani

As an economist studying government data releases, I sometimes feel like Lou Loomis waiting for Danny Noonan’s ball to drop in on the 18th hole in Caddyshack, especially when it comes to the question of the effectiveness of the stimulus package and the US economy. While I have certainly proffered on more than a few occasions my expert opinion regarding when we should experience recovery, I have only been recently asked whether I think the American Recovery and Reinvestment Act (ARRA) has been successful.

I agree that the outgoing and incoming administration had to do something, with the prospect of:

  • one in ten Americans unemployed (and twice as many underemployed),
  • one in five  American households underwater in their home value,
  • eleven trillion dollars in wealth wiped out,
  • falling economic activity,
  • and a seized financial sector.

The question is, was ARRA as it was passed the thing to do? I believe that a fundamental flaw of ARRA is that it tried to be all things to all people–a little tax relief, a little bit of R&D, a little bit of government spending–you see the pattern.  However, it has been recently suggested that we need an ARRA “part deux.”

Competing schools of thought: Tax Breaks & Government Spending

The Tax Breaks Approach: On one hand, many conservatives argued voraciously that tax breaks and tax cuts were what this country needed to get back on its feet.  It is likely that households receiving these tax cuts and tax breaks would have saved them rather than spent them.  In turn, these savings would have then served as funds that banks could lend to clients to start businesses, expand businesses or just stay in business.  The only flaw in this scheme is that banks were not lending due to the financial crisis and even if they were, many businesses were seeing precipitous declines in their revenues as consumers cut back their spending due to their fear of losing their jobs.  So this may not have presented itself as a viable solution in the face of the severe economic contraction we experienced and are still experiencing.

The Government Spending Approach: On the other hand, many liberals, for lack of a better term, were advocating government spending as the panacea to all of the economic ills that bedeviled this nation.  I will reluctantly raise my hand as a keen supporter of this approach with the caveat that not all government spending is equal.  Arguably, this crisis could have afforded the government the opportunity to invest in much needed infrastructure investments ranging from high speed rail to rebuilding bridges to bringing classrooms to 21st century standards, all investments in our collective future, which by the way is when the bill will come due.  Moreover, our nation would have had the tangible benefits of these infrastructure investments and the future generations who are paying for it would have been benefiting from it.

What does this all mean? However, the criteria for government spending under ARRA was “shovel ready” which eliminated many projects and focused the funds on projects that in some instances were little more than repaving a section of road.  We have saddled future generations with the cost of these investments, but we will have left no tangible evidence of those expenditures for them to benefit from and enjoy.  Moreover, the tax relief came in the form of hiring credits as well as actual tax cuts, but their impact has been negligible.  The fundamental flaw of the current ARRA is that it tried to appeal to a broad political spectrum but failed to focus on its primary mission of moving the economy forward.  I would argue that unless the next ARRA is tightly focused on improving the nation’s infrastructure, then we should reject it and demand better.

Check out two past blog posts on the ARRA:

“Economic Stimulus Plan + Towson University” (Bobbie O’Connell)

“The American Recovery and Reinvestment Act analyzed by TU Experts” (Thomas Rumeau)

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Posted by Daraius Irani

Is Maryland the tax hell that many in business portray?

May 6, 2010

Dr. Daraius Irani

It is often said that first impressions last for a lifetime.  In the past, many believed that Maryland had the motto “If you can dream it, we can tax it” as its tax policy while also being surrounded by states that had the perception of lower taxes and perhaps a more business-friendly climate.  Unfortunately many individuals believe that Maryland still abides by this motto.  This may actually be more perception than reality.

Admittedly, recent actions by Maryland’s government have done little to dispel the notion that Maryland is a high-tax state with the increase in sales tax and the millionaire’s income tax rate as well as the proposed tax on computer services.  This even crossed political lines with the so-called flush tax enacted by Maryland’s former Republican governor.

While many pundits recommend lower taxes to state policy makers, many feel this is a far too simplistic approach.  According to the Tax Foundation, an ideal tax policy should yield a tax system that is simple, transparent, stable, neutral to business activity and pro-growth.  In this tax system, tax payers would ultimately base their decisions on the economic merits of their transactions and not on the tax implications.

Many institutes publish lists and articles that rank states according to their tax climate, effective tax rates and the burden of government as a means to gauge a state’s tax system and business climate.  Such studies often show conflicting statistics because they rarely compare “apples to apples”.

  • According to the Tax Foundation’s “2010 State Business Tax Climate,” Maryland ranks 45th worst in the nation in terms of its business tax climate, as compared to 25th in fiscal year 2006.
  • However, in a 2010 Ernst and Young report “Total State and Local Business Taxes,” Maryland was ranked 11th in the nation when considering the total effective business tax rate.
  • Moreover, over the period 2005 to 2009, only 17.5 percent of the change in taxes was borne by businesses in Maryland as compared to a national average of 46.7 percent.  In fact, in only one other state was this share lower.

As you can see, measurements and analyses are not without their own shortcomings and detractors.  Some food for thought,

  1. These analyses do not account for the possibility that high taxes may also result in high levels of public services. For instance, there is a high degree of correlation with Maryland’s number one public school ranking in the US with its purportedly high tax rate.
  2. Many other states rely on fees rather than taxes. For example, while South Carolina is a fairly low income tax state, it relies heavily on user fees to finance the state expenditures.

While all of these indices and measurements provide valuable information, they still do not provide the answer to the question of whether Maryland is a high tax state.  To determine the answer, perhaps the more fundamental question of whether the current tax policy in Maryland meets the standard of an ideal tax system should be examined.

So, while this blog did not answer the question of whether Maryland is a high tax state or not, it did illustrate one fact: that the analysis of state tax policy should not be based upon changing the relative rankings, but supporting a tax policy that favors no one, is easy to understand and encourages business to grow and engage in transactions for their economic merits and not their tax implications.

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Posted by Daraius Irani

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