Montgomery County (Md) Politics

A commenter asks,

You’ve mentioned many times that Montgomery is owned part and parcel by the teacher’s unions. . .what aspects of county government do they control, and how?

Don’t take my word for it. Take theirs.

“It was the Unions that put Duchy in office n it was the Unions that took her out. Justice served!” read a text message forwarded at 1:24 a.m. Wednesday by John Sparks, head of Montgomery’s firefighters union.

Trachtenberg netted support from public employee unions four years ago but later challenged what she considers unsustainable compensation packages. The cost of government salaries and benefits have soared over the past decade in Montgomery and are a key driver of ongoing budget problems in the wealthy county.

That was 2010 and it was the firefighters’ union that threw her out. But four years earlier, it was the teachers’ union that put her in.

Political observers say the incumbents could be facing tough reelection battles. Four — Floreen, Subin, Phil Andrews (D-Gaithersburg-Rockville) and Marilyn Praisner (D-Eastern County) — failed to capture endorsement from the county’s influential teachers union.

The candidates backed by the teachers’ union won, leading someone an observer to comment.

MCEA was upset that Floreen and Subin had supported delaying a 2003 cost-of-living increase that was due to teachers under their contract because of budget problems. As a result, Leventhal and challengers Elrich and Trachtenberg made the Apple Ballot, while incumbents Floreen and Subin were excluded. The Apple candidates won the top three slots, while Floreen earned the fourth seat and Subin lost. Subin’s loss was particularly notable because he was a 20-year council veteran and the long-time head of the council’s education committee.

The author concludes,

So what does the Teachers’ emergence as Montgomery County’s dominant political force mean for the future? With property tax growth slowing down, the next county council will face tough budgetary decisions. Public schools account for half of the county’s budget and would be an obvious location for cuts. But don’t expect any action there: the county’s politicians have learned that those who cross the Teachers Union once are unlikely to be given a second opportunity.

An increasing share of that budget is going to pensions and non-teaching staff who are union members. Actual classroom teachers are badly over-worked.

Because spending per student is by far the highest in the state, the WaPo constantly refers to Montgomery County as a high quality school system. However, the average outcomes in the County schools are mediocre. Students from the wealthiest parts of the County (three high schools in particular) produce good test scores, and the rest do not. Other school districts in Maryland get similar outcomes with students of similar backgrounds while spending much less money per student.

I know relatively little about Education Secretary Betsy DeVos. But I see the teachers’ union as an enemy, and they see her as an enemy. Ergo, I am inclined to view her in friendly terms.

The Economics of a Border-Adjustment Tax

Timothy Taylor writes,

Most countries around the world and all high-income countries other than the United States have “border adjustments” in their tax code, but a key point to recognize is that border adjustments are typically part of a value-added tax–not the corporate income tax.

. . .the Trump administration proposal for revising the corporate income tax is actually a first-cousin-once-removed of a value-added tax.

Taylor cites scholars of various political persuasions in support of this analysis. Greg Mankiw makes a similar point. If you prefer taxing consumption to taxing saving and labor, then you should get to know the economics of the border-adjustment tax in the context of a shift from taxing corporate profits to taxing corporate net revenue.

But John Cochrane points out

a tax system in which you tax $100 of sales, but offer $99 of deductions (costs, wages, earnings retained for investment), then tax only the last $1, then tax that $1 again as personal income, would seem to offer lots of room for shenanigans on just what gets deducted. Along with interesting financial engineering to “invest” more earnings and pay less dividends and interest.

The more radically you reform taxes, the more you risk creating new distortions, both foreseen and unforeseen.

Tyler Cowen has a point about politics.

I say anything complicated they will just screw up, and the lack of transparency in the plan means eventually it will lead to a tax hike and furthermore a good deal of favoritism and rent-seeking along the way. Best hope is simply that they cut the corporate tax rate and don’t do much else on that front.

It is true that lowering the corporate tax rate would reduce the malincentive effects of loopholes in the tax. Lowering the stakes involved would lower the rent-seeking. Also, simply lowering the rate seems less risky (see John Cochrane’s whole post.

The economic theory of how a border-adjustment tax should work is worth knowing. However, theory tends to apply to concepts in the abstract. In practice, a lot of tax policy turns on what gets defined as taxable and what does not. And those regulatory and legislative decisions are where the rent-seeking and the distortions kick in.

Noah Smith on Higher Education Policy

He writes,

As long as the number of available college spots remains roughly fixed, reducing the price of college will have only a very modest effect in creating broad-based economic opportunity.

My recommended solution is to focus on increasing the number of college spots available. Those could be four-year university slots, or vocational education — a mix of both would probably be best. But the key is that supply should go up.

Pointer from Mark Thoma.

Of course, from an economic point of view, Smith’s point is spot on. However, the Kling Theory of Public Choice is that public policy will always choose to subsidize demand and restrict supply. That is what is most in the interest of incumbent suppliers, who are the drivers of public policy.

Crony Non-profitism

Jeff Bergner writes,

Like the Sierra Club and other environmental groups, the NRDC receives grants from the federal government both directly and indirectly. In addition, it participates in a process referred to as “sue and settle.” It brings lawsuits against the EPA on issues where EPA officials actually have no objection to being sued. EPA and NRDC officials then “settle” these suits, sometimes almost immediately and together, in the form of “consent decrees,” write new regulations ostensibly to settle the lawsuits. On many occasions, the EPA also pays the legal fees of the NRDC and similar groups as part of its settlement.

He gives many other examples.

An Odd Hurdle for Tax Reform

Steve Lohr writes,

Mr. Auerbach’s approach, embraced by the Brady proposal, will also face a hurdle at the World Trade Organization. Among its provisions is to allow American companies to deduct domestic wages from taxation, which makes it less costly to employ workers and helps them offset the higher price of imported goods. A wage deduction is not currently permitted under W.T.O. rules, and is likely to be seen as an unfair subsidy to American companies and a trade barrier.

Pointer from Greg Mankiw. As if domestic special interests were not enough of a hurdle.

A Congressional Regulation Office?

Philip Wallach and Kevin R. Kosar write,

The office would have two core functions. First, it would perform cost-benefit analyses of agencies’ significant rules, which number around a hundred per year, in order to provide a disinterested check on agencies’ self-interested math. These CRO analyses would coincide with the prospective estimates that agencies themselves perform. This would create a legislative counterweight to the rule-review function of the Office of Information and Regulatory Affairs — which is nested within the OMB and thus the Executive Office of the President, and is therefore unable to provide a credibly neutral review process that goes beyond concerns internal to the executive branch.

The CRO’s assessment of a proposed regulation, like CBO’s bill scores, should be posted online and delivered to the committee of jurisdiction. Doing these things would increase the political salience of agency rulemaking, thereby fostering congressional oversight and encouraging policy entrepreneurs in the legislature to take up the subject. A CRO cost-benefit analysis should also be automatically submitted as public comment to the rule, which would oblige an agency response and possibly a recalibration of the rule.

Second, but perhaps just as promising, would be to have CRO perform periodic retrospective analyses informed by real data rather than forward-looking estimates. Agencies sometimes perform “look-back” assessments, but they are modest in number (certainly compared to the massive corpus of standing regulation) and produce only nominal changes. This is unsurprising, since each agency is passing judgment on its own work. CRO reports would regularly goad Congress to examine how the rules produced by existing laws are performing, such that they could work to revise those statutes that have yielded problematic results.

My thoughts.

1. Take the analogy with the Congressional Budget Office. People love the CBO, but its practical impact has been questionable. Since 1975, the Congressional budget process has become worse, not better. Congress has become more evasive of accountability, not less so.

2. The proposed CRO is a solution if the problem is that Congress lacks information about bad regulatory policy. But is that really the problem? The problem is that, as with the budget, there is not much collective will in Congress to set policy.

I think that we have the state of affairs that we do because politicians like it. That means either that the regulators are getting away with something without the public realizing it or the public is basically complacent about regulators running amok. I am afraid that it is the latter.

Would a CRO make the public less complacent? Well, CBO has not made the public any less complacent about the unfunded liabilities of Social Security and Medicare. Instead, the CBO’s main impact has been to increase policy makers’ hubris about the ability of deficit spending to create jobs.

In a better world, what are called “regulations” would be called “laws,” and every single last one of them would require Congressional votes. In an even better world, politicians in Washington would look at all the things that agencies are attempting to regulate and say, “Gee, we have no business doing that. We are not properly informed. We should only regulate in areas where we have a good set of information on which to base regulation.”

I don’t know how to get to a better world. Look, I love checks and balances in theory. And I don’t mean to discourage creative ideas for addressing what I agree is a serious problem. But I am afraid that I must assign a low probability to a CRO moving us in the right direction.

Child Care and Subsidized Demand

Luke P. Rodgers writes,

Child care tax credits are intended to relieve the financial burden of child care expenses for working families, yet the benefit incidence may fall on child care providers if they increase prices in response to credit generosity. Using policy-induced variation in the Child and Dependent Care Credit and multiple datasets in both difference-in-difference and instrumental variable frameworks, I find evidence of substantial pass-through: between $0.73 – $0.90 of every dollar is passed through to providers in the form of higher prices and wages. Robustness checks confirm the pattern that the bulk of credits are crowded out by increased prices. Furthermore, the relative inelasticity of child care suppliers implies that increased non-refundable credit generosity may have the unintended effect of making child care less affordable for low-income families, though the magnitude of this conclusion is tempered by heterogeneous pass-through rates.

Pointer from James Pethokoukis.

I am surprised by the claim that supply is relatively inelastic. I wonder if that is true in the long run and, if so, why. Again, I do not think of the child care industry as politically powerful, so even though this perfectly illustrates my view that the public-choice outcome is subsidized demand and restricted supply, I want to be cautious about this one.

Once Again, Subsidize Demand and Restrict Supply

John Cochrane writes,

Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?

I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care.

In Specialization and Trade, I claim that public policy ends up subsidizing demand and restricting supply, which is almost always incoherent from the standpoint of traditional public goods. Usually, it is the suppliers of the good or service who push for such policies. However, the child care industry does not, as far as I know, have a formidable lobbying presence. Thus, I am inclined to bet that child care subsidies will not get very far in Congress.

Larry Summers Should Read This

Edward L. Glaeser writes,

While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars.

Alex Tabarrok calls the entire article excellent.

UPDATE: Although John Cochrane agrees with Glaeser, but he is more charitable to Summers than I would be.