Teen Employment Sinking in the Ocean State

Quick links: to download the printable PDF of this study click here.  See Media Release at end.

Related stories: Research Director Justin Katz discusses the issue on the Dan Yorke Show.

Abstract

Gainful employment is disappearing from the experience of the American teenager (ages 16 to 19), and increasing minimum wages are part of the problem. In Rhode Island, teen unemployment was 28.3% in 2011, more than double its 2007 low of 12.9%, and hours worked per week had fallen from 10.0 to 6.1.

Rhode Island’s minimum wage climb from $6.75 in 2004 to $7.75 for 2013 will have cost 597 teenage jobs. As teenagers’ employment has fallen and their average hours worked per week have decreased, the weekly working hours per 100 teens in the population has dropped 62% — and 79% for those without high school diplomas. Because 70% of working teens are in the retail or leisure/hospitality industries, a bold policy change such as eliminating the state sales tax would be especially beneficial to them.

Getting Teenagers Accustomed to Working

Chores and a lemonade stand become a newspaper route and a summer job in retail, then a professional trade following high school graduation. If college is in the picture, retail transitions to on-campus service work followed by some sort of internship, which lands the young adult at the entrance of a career path, degree in hand. Such is the classic progression of young Americans’ easing into the workforce, with the adventurous and innovative breaking off to build their own companies or invent new industries.

The United States’ extended jobs recession appears to have accelerated a disruption of this pattern. The change has been acutely felt in states that have trailed the nation’s meager recovery, such as Rhode Island. From 2003 to 2011, teenagers’ share of employment in all Ocean State industries fell from 5.7% to 4.3%, despite the fact that their overall percentage of the population held steady.

In 2011, states with minimum wages that exceeded the federal rate tended to have higher unemployment. High minimum wages disproportionately harm teenagers’ employment prospects.  So, not only are young adults in such states operating in dampened economies, but the jobs that they would typically seek are even harder to come by.

Policy Recommendation

With Rhode Island in desperate need of an economic turnaround, and because dedicated and well-rounded young adults will be critical toward that end, the state must reverse the working plight of its teenagers. The RI Center for Freedom & Prosperity recommends that the General Assembly and Governor Chafee:

  1. Set Rhode Island’s minimum wage at the federal rate of $7.25.
  2. Consider a bold economic policy, such as eliminating the state sales tax, that would jolt the overall economy forward with especially beneficial effects for the teenage population.

Minimum Wage & Teen Employment

The effect of minimum wages on unemployment rates is a contentious issue among economists. Until the 1990s, they broadly understood increased minimum wages to harm employment. Since then, various studies have muddied the waters.

Given the myriad variables involved in a modern economy, small-scale policy changes can disappear in the data, and incremental minimum wage hikes may not register. Consensus is still strong, however, that low-skill, low-pay groups like teens are adversely affected by such increases.

Of the 24 states with unemployment over 8.0% for 2011, 11 had set their minimum wages above the federal $7.25 per hour. Of the 26 states with 8.0% unemployment or lower, only six had elevated minimums.  The average unemployment rate for former was 9.0%, compared with 7.7% for those in which the federal rate applied.

That gap doubles for teenagers (16-19 years old).  In states where the $7.25 minimum applied, teens’ unemployment rate was 21.7%. In the elevated-rate states, it was 24.3%. Chart 1 illustrates the point, narrowing the focus to the eight states with minimum wages over $8.00 per hour.

United States Unemployment and Teen Unemployment by State Minimum Wage, 2011

Rhode Island

In 2011, the Ocean State’s teen unemployment was 28.3%, the worst in New England, and more than double its 2007 low of 12.9%. Meanwhile, the weekly hours of the average employed RI teen dropped from 10.0 to 6.1.

Putting Rhode Island in context requires an acknowledgment that it simultaneously has the most-sickly economy in New England and the second lowest minimum wage, in 2011. The $7.40 per hour the state mandated for the lowest-paid employees within its borders was higher than only New Hampshire’s rate, regionally. Increasing the rate to $7.75 this past legislative session pushed the Ocean State past Maine, as well.

At first glance, these comparisons would seem to contradict the notion that high minimum wages are associated with higher unemployment. As suggested above, however, minimum wage is a secondary factor and is not sufficient to save a state economy that is already failing.

In an update for the RI Center for Freedom & Prosperity of their 2010 study, “The Teen Unemployment Crisis,” economists David Macpherson (Trinity University) and William Even (Miami University) found that Rhode Island’s increase from $6.75 in 2005 to $7.40 cost the state’s teens 397 jobs in 2011. Of that total, 306 were lost to those without high school diplomas. As the Center reported in June, Macpherson and Even estimate that the additional hike, to $7.75 per hour, will cost Rhode Island’s teenagers another 200 job opportunities.

In total, that $1 raise will have cost about 2.7% of employed teens valuable work experience, increasing to about a 7.1% loss among those without high school diplomas.

Table 1 shows the dramatic drop in teen employment from 2002 to 2011. For perspective, the 2010 Census found 66,423 Rhode Islanders 16-19 years old — about 32,663 without high school diplomas.

 

Table 1
RI Teen Employment Trends by Age and High School Diploma
16-19, no diploma 16-19 18-20, diploma
Employment
2002 (%) 38 49 64.3
2011 (%) 19 32.4 49.2
Change (%) -50 -33.9 -23.5
Ave. hours/week
2002 6.7 10.7 19.3
2011 2.8 6.1 13.1
Change (%) -57.6 -43.1 -32.3
Hours/100 teens
2002 254.4 522.2 1,240.20
2011 54 196.5 642.2
Change (%) -78.8 -62.4 -48.2
Note:“Change” percentages may differ due to rounding.Source: Census Bureau & Bureau of Labor Statistics, Current Population Surve

 

Not only are fewer teens working, but those who have jobs are spending less time on them. The weekly hours worked per 100 teens in the total population captures the combined effects of these trends. Employment is evaporating from teens’ experience in Rhode Island.

Massachusetts shows that a high minimum wage doesn’t always correspond with high teen unemployment (see Chart 2). But if Rhode Island insists on imposing a high rate, it must take even more dramatic steps to improve its economy to counter-balance the downward pressure on employment.

U.S., Rhode Island, and Massachusetts Teen Unemployment, with Minimum Wage Changes, 2002-2011

One Solution: Eliminate Sales Tax

In early June, the RI Center for Freedom & Prosperity proposed its Zero.Zero plan to eliminate the state sales tax in Rhode Island.  Such a policy would be especially beneficial for teens.

The Center found that immediate elimination of Rhode Island’s sales tax would create 23,873 jobs. The data did not differentiate between industries or the demographic qualities of the newly hired workers, but it would be reasonable to predict that teenagers and other low-wage workers would benefit disproportionately and more immediately.

By far, Rhode Island teenagers are more active in the very industries that most feel the effects of the sales tax: retail and leisure and hospitality. Of teens who were working in 2011, 23.5% were in the retail industry, where they accounted for 8.8% of the workforce. Another 46.4% worked in the leisure and hospitality industry, accounting for 17.8% of all employees.

Altogether, 69.9% of working teens were in these two industries. Clearly, the healthier retail and leisure market in a zero percent sales tax environment would benefit the lowest-paid workers first, including Rhode Island’s young adults.

Conclusion

As with all of the challenges that it faces, Rhode Island has a choice between paths: the one we’ve been following and one that shifts decision-making back toward individuals working together in a less-regulated private economy. The first shifts resources under the control of government planners, and the second would allow Rhode Islanders to keep their money and make decisions in accordance with their own interests.

For all of the emphasis that the state has been placing on developing a “knowledge economy,” it has paid precious little attention to the need to foster work ethic and experience in its youth. Meanwhile, lavish public-school funding and special deals toward government-approved economic development have been requiring increasingly high tax burdens — in the form of the incrementally broadening sales tax, of ballooning property taxes, and of expanding licensing requirements and fees.

Instead, Rhode Island’s emphasis should be on getting people, especially young people, back to work, regardless of their field or pay scale.

***

MEDIA RELEASE: July 24, 2012

A 28.3% teen unemployment rate is sinking career building opportunities for Ocean State youth according to a report released today by the Rhode Island Center for Freedom and Prosperity. This unemployment rate has more than doubled in recent years to become the worst in New England, and demonstrating even further weakness in the teen sector, the report also highlights that the number of hours worked has dropped by over 40%.

“If our state is to rebound in the long term, we need our working-age youth to learn to become productive. As part of their transition into a career that fosters self-reliance, teens are looking for valuable workplace experience and resume building, in addition to a little pocket change”, said Mike Stenhouse, CEO for the Center. “Unfortunately our overly burdensome regulatory and tax structure, along with statewide minimum wage increases, are resulting in fewer opportunities for everyone and disproportionately harm our teens. This category would grade-out at yet another F for our state,” continued Stenhouse, referring to the Competitiveness Report Card published earlier this year by the Center.

According to the report, high minimum wage states had a 24.3% teen unemployment rate, compared with 21.7% for states at the federally mandated rate. Further, Rhode Island’s recent minimum wage hikes will cost almost 600 area teenagers a chance at an entry level job. Even for those young adults who were fortunate enough to find work, the average hours worked plummeted to 6.1 per week from 10.7.

As about 70% of working teens are hired in the retail or leisure/hospitality industries, the Center recommends two policy changes: lowering the state minimum wage rate to federal levels; and a phase-out the the state sales tax, which would not only reinvigorate the state’s economy, but would be especially favorable for the retail industry, creating new job opportunities for younger Rhode Islanders.

Today, July 24, is the National Day of Action to Raise the Minimum Wage. “The RI Center for Freedom & Prosperity categorically rejects this ill-informed policy push. A minimum wage hike is yet another regulation that strangles businesses; our report provides clear evidence of the negative, unintended consequences that meddling in complex economic issues can often bring about,” concluded Stenhouse.

The complete teen unemployment report can be downloaded from the Center’s website at www.RIFreedom.org .

Earlier this year, the Center published a policy brief detailing the negative effects of the state’s occupational licensing policies on opportunities for low income and entry level workers. Another report – Zero.Zero – detailed the positive economic effects of eliminating the state sales tax.

The Rhode Island Center for Freedom and Prosperity, a non-partisan public policy think tank, is the state’s leading free-enterprise advocacy organization. With a credo that freedom is indispensable to citizens’ well-being and prosperity, the Center’s mission is to stimulate a rigorous exchange of ideas with the goal of restoring competitiveness to Rhode Island through the advancement of market-based reform solutions.

Center for Freedom Calls for End to Corporate Welfare in RI

38 Studios–Type Cronyism Is Not Capitalism

Introduction

Put simply, crony capitalism is the transfer of public money to businesses and organizations through the peddling of influence. Cronyism gives free markets a bad name, since it can be difficult to determine whether true competition exists or the game has been rigged.

A more appropriate term might be “venture socialism” or the more familiar “corporate welfare.” Whatever its name, the concept involves a less efficient economy — making us all poorer and reducing economic opportunity for our citizens.

Download a PDF of the Policy Brief here.

Unfortunately, cronyism has defenders on both sides of the political aisle because its proponents are on the receiving end of the short-term benefits.  Politicians reward their “friends” with all kinds of publicly provided treasures, from subsidies to exemptions from regulations to loopholes in the tax code. In 2008, we witnessed hundreds of billions of dollars spent on the bailout of major Wall Street firms. A more-recent example of a half-billion dollar investment gone bad has given a name to politically correct green industry schemes: Solyndra.

Given its insulated political culture, Rhode Island is certainly not exempt from cronyist deals and boondoggles. Beginning in the 1990s, corporate giants CVS Caremark and Fidelity Investments have received a bevy of tax breaks and subsidies to build or expand national or regional headquarters.

During the last decade, debates raged about the $300-million-plus ratepayer-funded Deepwater Wind project, a Twin River casino bailout, and the $75 million loan guarantee to Curt Schilling’s 38 Studios. In the past week, Schilling’s video game company has offered a uniquely clear example of the risk that targeted public investments will never produce a positive return on investment for taxpayers.

Taxpayer or ratepayer dollars should not be randomly put at risk to finance politically connected corporate interests. It’s time to replace corporate welfare programs with a broad-based growth program.  It’s time to end the handouts and create a pro-job, pro-business structural environment for economic growth in Rhode Island.

Policy Recommendations

As just one step in reducing the size and scope of government in the Ocean State, the RI Center for Freedom & Prosperity recommends that the State of Rhode Island:

  1. End the practice of corporate welfare in the General Assembly
  2.  Defund the Economic Development Corp. (EDC), preventing it from spending or putting at risk any taxpayer dollars

One of the great mistakes to which policymakers often fall victim is judging public policy programs by their intent rather than their results. Such an approach minimizes the consideration that serious unintended consequences ought to carry in subsequent policy decisions.

Rhode Island should roll back many of its so-called economic development incentive programs, whether in the form of subsidies on the expenditures side of the ledger or loopholes on the tax side.  Any economic development program that cannot be objectively shown to create jobs that generate more in-state revenue than they cost should be repealed.

The savings from the ended programs should be used to enact across-the-board improvements of state competitiveness by reducing the Rhode Island’s stratospheric tax rates to more-competitive figures. For instance, Rhode Island’s corporate income tax rate and sales tax rate are the highest in New England, putting the state at a serious economic disadvantage.

Furthermore, ending the practice of cronyism will reduce the special interest and corporate lobbying that pervades Smith Hill and will send a message that taxpayer dollars can no longer be traded for political support and campaign contributions.

Background/Overview

A key critique of market capitalism often revolves around the undue relationship between powerful corporations and the government, resulting in policies, legislation, and regulations that appear to benefit the well-connected at the expense of the public.  This critique — though often labeled an inherent failure of capitalism — is a function of an outsized government.

The relationship is intuitive: A government with more power over the economy creates more opportunities and greater rewards for lobbying. In turn, influence over an entity with the power to regulate, tax, and police brings access to competitive weapons not available in a free market.

Indeed, the lion’s share of blame for the current economic crisis can be laid at the feet of connected business interests’ feeding on the fruits of the public commons while pushing the risk onto the public.  National examples are most prominent in our minds.

When the housing bubble popped in 2008, Washington-connected Wall Street firms won taxpayer bailouts and bonus checks while the working Americans who paid the bill received pink slips and empty promises. And by most measures, those same firms are now more profitable than ever; industry data shows that President Barack Obama’s first two and a half years in office have been more profitable for Wall Street than George W. Bush’s entire eight years in office.

This is not simply a crisis of bad banks run amok, but an unsettling symptom of cronyism. Cronyism, by its very definition, implies a situation in which the system (i.e., the government and the institutions it establishes), rather than the choices of consumers, picks the winners and losers.

While Rhode Island’s economic climate is demonstrably bad for business (Rhode Island ranks 45th in the Fraser Institute’s Economic Freedom of North America 2011 index), a number of tax credits, incentive packages, and corporate welfare programs benefit a few chosen firms while the rest are forced to languish within a suffocating structural environment.

Targeted incentives are sometimes viewed as legitimate instruments for economic development, but a genuine program for broader growth would allow the state to close many of these loopholes in favor of broader reforms that ease the economic burden across the board.

The Research

Every day, taxpayer money is being funneled to organizations and enterprises that someone in government has decided are worthy of patronage, whether they need it or not.  Worse, this kind of cronyism is not merely limited to a series of one-off deals, but is systematized on every level in the form of grants, tax credits, sweetheart loans, loan guarantees, and other preferential treatment.

According to GoodJobsFirst.org, a left-leaning economic development accountability resource, Rhode Island taxpayers paid out almost $50 million in related costs for fiscal year 2010, including:

  • Corporate income tax rate reduction for job creation
  • Enterprise zone tax credits
  • Job training tax credit
  • Manufacturing and high-performance manufacturing investment tax credit
  • Motion picture production tax credit

Worse, disclosure and reporting on these programs are well below what anyone would expect in return for $50 million.  In a series of transparency benchmarks measuring program outcomes, data availability, and accessibility, the average Rhode Island program produced a woeful score of only 36 out of a possible 100 points.

These are only a few of the higher-priced programs.  At present, a startling number of programs are on the books to divert taxpayer money to targeted businesses and industries, accounting for tens of millions in additional handouts with little or no objective standards or accountability. Some of the others include:

  • Distressed Areas Economic Revitalization Act and Enterprise Zone Program
  • Jobs Development Act
  • Rhode Island Public Rail Corporation
  • Child Day Care Facilities in Industrial Parks Grant Program
  • Jobs Training Tax Credit Act
  • Urban Infrastructure Commission
  • Mill Building and Economic Revitalization Program and Tax Credits
  • Jobs Growth Act
  • Petroleum stockpiling program
  • Small Business Advocacy Council
  • and many, many more.

While each carries a plausible justification and positive intended outcome (who could be against child care?), they are all simply variations on the crony-capitalism theme.

Discussion

John Stossel, the libertarian journalist of 20/20 fame and program host on Fox Business News, penned a provocative and compelling piece for Reason magazine in March 2004 titled “Confessions of a Welfare Queen.” Rather than documenting now-familiar stories of individual welfare abuse, as the allusion to Ronald Reagan’s famous “welfare queen” quip suggests, Stossel turned his sights on the multilayered fabric of lavish subsidies for the rich and cronyism.

From bizarre payouts to beachfront homeowners to abuses of eminent domain to unfair subsidies for agro-corporations, Stossel explains how these programs are not examples of market failure, but simply the symptoms of the increasing investiture of power into government, especially over ever-greater swaths of the economy.

Americans who decry cronyism as a betrayal of the social contract are correct: The iron triangle linking lobbyist-rich companies and organizations, campaign contributions, and government policy is a burden on our economy and a drag on our democracy. Too often missed, however, is that regulatory solutions just hand over new car keys and more drinkable money to the hooligans who repeatedly steer the economy into a ditch.

The only solution that can work is to limit the government’s ability to mismanage taxpayer funds; that means cutting back on the size, scope, and domain of government. The most vocal opponents of ending cronyism are, predictably, those who benefit most from the system. They, along with well-meaning but misguided allies, will generally contend that targeted systems of tax breaks and incentive programs are useful for directing policy mechanisms toward specific, concerted ends and that Rhode Island needs these incentive programs to be nationally competitive.

Two fallacious premises support these arguments: first, that public policy instruments are the best available means of achieving common ends and, second, that a labyrinth of programs is a suitable way to attract and develop economic activity. These fallacies, in tandem with the frenetic and sound-bite oriented nature of contemporary media, contribute to the idea that most problems have public sector solutions. This is particularly common in the realm of economics, precisely the area over which a market capitalist system would give the government the least control.

Again and again purported plans for “economic development” have been used to justify programs and incentives that ultimately do little to boost economic growth.  But because spending and special-project support create the illusion of forward movement, beneficiaries can brand the efforts as “doing something.”  What corporate welfare actually does, however, is to tip the scales toward the already rich at the direct expense of the poor and middle class.

Ultimately, government remains wedded to the language and practice of inputs — what it gives and does — because it has very little competence generating or measuring outcomes.  Advocates tend to point to inputs as measures of success — the dollars spent, the teachers hired, the police stations built. Then they trumpet or downplay economic trends, educational accomplishment, and as suits their needs.

Tax breaks and incentives may seem like positives from the input side, but their non-anecdotal outcomes show them to be generally a waste of money.

Conclusion

It’s hard to argue against economic development.  Who doesn’t want the economy to “develop”? But the sad truth is that sending public money to politically-connected organizations, interest groups, and companies on the basis of poorly measured and ill-defined goals is more of a handout than a strategy.  If Rhode Island is serious about promoting economic growth, this kind of piecemeal approach should be seen as expensive and insufficient.

Instead of using targeted tax breaks, incentive grants, and other wizards’ tools to trade away taxpayer funds, Rhode Island should focus on creating a growth-oriented structural environment.  That means replacing isolated pockets of preferential treatment with an across-the-board slate of policies to support growth:

  • Reduced tax rates
  • A more nimble and versatile education system to produce a highly trained workforce
  • Eliminated regulations, streamlined when they are absolutely necessary

Any economic development program that cannot be objectively shown to create jobs and generate more in-state revenue than they cost should be repealed. The savings should be allocated to more general improvements, especially lowering taxes.

Rhode Island’s corporate tax rate remains the highest in New England and is tied for third highest in the country, after Washington, D.C. and Illinois.

Rank in New England

Corporate Tax Rate (%)

Rhode Island

1

9.0

Maine

2

3.5–8.93

New Hampshire

3

8.5

Vermont

4

6.5–8.5

Massachusetts

5

8.25

Connecticut

6

7.5

 

Another area in which Rhode Island is uncompetitive is its state sales tax, which is the highest in the region and tied for second in the country. A study to be released shortly by the RI Center for Freedom & Prosperity will demonstrate that eliminating the sales tax would have the highest “bang for buck” of any reform, creating tens of thousands of jobs and paying for over half of its cost with the increased tax receipts of a larger economy.

Rank in New England

State Sales Tax Rate (%)

Rhode Island

1

7

Connecticut

2

6.35

Massachusetts

3

6.25

Vermont

4

6

Maine

5

5

New Hampshire

6

0

 

These are just a few of the low-threshold starting points for reform. If Rhode Island seeks to distinguish itself as a pro-growth state, it should depart from crony capitalism and unleash the true capitalistic forces in the state.  Fortunately, much of the government cost of the necessary policy changes can be borne by elimination of the special deals and crony-capitalism style programs that infest our state with false promises of a better tomorrow.

To the population more broadly — to the people of Rhode Island — there will be no cost, but rather the benefits of a thriving economy.

Right To Work

Right To Work = Freedom for RI Workers

Freedom of Association for Ocean State Workers

Introduction

Today, in 23 states in America, workers have the freedom under “Right-to-Work” (RTW) laws to decide whether or not to pay union dues. Indiana became the twenty-third state on that list in February of 2012, bringing the workers of the Hoosier State renewed hope in an economy that has seen few glimmers of light.

Rhode Islanders are suffering from a severely weak economy and our state needs to seek every competitive opportunity it can in order to attract and grow jobs. As demonstrated by the Report Card on Rhode Island Competitiveness[1], by many measures, Rhode Island is excessively uncompetitive in both New England and nationally, when it comes to growing and attracting business and high-paying, sustainable jobs.

One of the single most effective ways to provide the Ocean State with a new competitive edge is passing Right-To-Work legislation. Indiana earned itself a major competitive advantage by becoming the only state in the Rust Belt to enact a Right-To-Work law.

Policy Recommendation

Rhode Island should become the 24th Right-To-Work state as part of a larger agenda to re-invigorate the state economy. RTW would give the Ocean State a major advantage over its neighbors by making it the only New England state with RTW protections for its citizens–without costing the state a dime in revenue.

Rhode Island must act now – while there is still an advantage to gain. New Hampshire is actively considering RTW legislation and the debate has begun in other New England states as well.The Ocean State cannot afford to also lag behind in this vital policy area, which can be a catalyst for job growth… nor can Rhode Island workers wait.

Background

Compared to the rest of New England, notwithstanding the rest of the country, the Rhode Island economy is not competitive. According to our Center’s recently released Competitiveness Report Card, Rhode Island scores an F in five out of ten major categories, including “Tax Burden” and “Business Climate.” The Ocean State can rebound from this extended economic slump, and should begin its recovery by undoing one of the greatest impediments to both progress and liberty: compulsory unionism.

Right To Work States as of Feb. 2012

Despite the anti-worker propaganda from the union leadership who depend on mandatory dues to fund their own multi-million dollar enterprises, passing RTW legislation in Rhode Island will not suddenly ban unions or allow unsafe or exploitative business practices. On the contrary, RTW legislation is not an attack on organized labor, but rather provides a framework that restores the rights of workers to choose whether or not they wish to be in a union.

Simply stated, it allows workers the choice to either affiliate with a union and pay dues, or to opt out of the union system.

RTW legislation typically includes eliminating onerous laws and regulations that pressure workers — overtly or otherwise — to join unions whether or not they feel it is within their best interests. Under a RTW measure, workers would be protected from being fired or harassed if they choose not to pay union dues.

According to Mike Brownfield of the Heritage Foundation:

“It’s understandable that states would want the benefits that Right-to-Work brings, but it’s also understandable why unions oppose it so strongly. When Idaho and Oklahoma passed Right-to-Work laws, union membership fell 15 percent. Likewise, the forced dues payments the unions collected plummeted right along with their membership. Right-to-Work would put money directly into the pockets of private-sector workers.”[2]

RTW is only a danger to unionism as an industry of ‘political’ machinery, not to the idea of unionism itself. And in the process of restoring the basic civil liberties of Rhode Island workers and allowing them to decide for themselves about union membership …

… RTW would make Rhode Island far more economically competitive and will increase economic freedom for its citizens.

Freedom and Prosperity

Most importantly, RTW is about individual freedom. Robert Barro, a professor of economics at Harvard University and a senior fellow at Stanford University’s Hoover Institution, notes that while unions were originally subject to antitrust legislation in the late 19th century, savvy politicking by organized labor was able to obtain exemptions in the early 20th century. And subsequently, unions were able to use this exemption to negotiate “union shop” laws, which essentially forced workers to join unions.

“From the standpoint of civil liberties,” notes Barro in a Wall Street Journal Op-Ed, “the individual right to work—without being forced to join a union or pay dues—has a much better claim than collective bargaining.”[3]

Depriving workers of their right of association is both undemocratic and economically ruinous. The ability of unions to use their unique and virtually unassailable leverage in states where unionism is mandatory has — as the devastation of the automotive and railroad industries well-underline[4] — extracted such concessions from private industries (and, in some cases, the public) to handicap economic growth, raise unemployment, and stultify necessary technological innovation.

In times of massive capital investments in factories and machinery, these negative effects were small compared to the cost of factory relocation, but in this global and post-industrial economy such assets are essentially portable, and a shift to a lower cost labor environment is viewed as a sound business practice rather than an insurmountable hurdle. That means slower growth and lost jobs.

Multiple studies have confirmed the relationship between forced unionism and negative growth and, conversely, the relationship between right to work and positive economic growth:

Manufacturing Growth: One study found that “cumulative growth of employment in manufacturing (the traditional area of union strength prior to the rise of public-employee unions) in the right-to-work states was 26 percentage points greater than that in the non-right-to-work states.”[5]

New Business Growth: Another study, published by the Office of Senator Jim DeMint (R), clearly shows that despite representing only 40.3 percent of the U.S. population, Right-to-Work states can claim almost 60 percent of new business growth between 1993 and 2009.[6]

Gross State Product Growth: Arthur B. Laffer and Stephen Moore noted in the Wall Street Journal last year, “[o]ver the past decade (2000-09) the right-to-work states grew faster in nearly every respect than their union-shop counterparts: 54.6% versus 41.1% in gross state product, 53.3% versus 40.6% in personal income, 11.9% versus 6.1% in population, and 4.1% versus -0.6% in payrolls.”[7]

Job Growth: James Sherk of the Heritage Foundation found RTW is good for jobs: “Right-to-work states are much more attractive for businesses investment. Unionized firms earn lower profits, invest less, and create fewer jobs than comparable nonunion firms . . . of neighboring counties on state borders with and without right-to-work laws . . . manufacturing jobs in counties in right-to-work states is one-third higher than in adjacent counties in non–right-to-work states. Right-to-work laws attract jobs.”[8]

Migration Gains: Richard Vedder, the Edwin and Ruth Kennedy Distinguished Professor of Economics at Ohio University, examines the national movement of people and economic growth toward RTW states and concludes: “The proportion of Americans living in right-to-work states has risen noticeably over the years, and only a small part of that is driven by new states adopting such laws. People move in extraordinary numbers to right-to-work states from states where union pressure has prevented the adoption of such laws. Moreover, the greater flexibility for workers and employers offered where right-to-work exists has contributed to higher rates of economic growth rates in the right-to-work environment.”[9]

Wage Growth: W. Robert Reed have found that RTW leads to both greater employment and higher wage growth.[10] [11]

Finally, RTW creates higher wages. According to Paul Kersey at the Mackinac Institute: “Then there is the cost of living, which tends to be lower in right-to-work states. A study by the Missouri Economic Research and Information Center found that in 2009, after adjusting for the cost of living, annual per-capita disposable income was $35,543 in right-to-work states, compared to $33,389 in non-right-to-work states. That equates to a $2,154 premium each year for those living in right-to-work states.”[12]

There is no question that Rhode Island could certainly use the clear competitive advantage that RTW would bring–a much needed economic shot in the arm.

Reduces Corruption of the Political Process

Disproportionate union power is not only troubling from the standpoint of individual liberty and economic prosperity, but also when considering the integrity of the political system. Union dues, which are often collected via intrusive anti-worker forced unionization laws, are often recycled through a system that has essentially allowed Big Labor to throw its institutional and financial support to the candidates they choose: inevitably, those that endorse or at least comply with their monopolistic tendencies.[13]

For Rhode Island, which continues to suffer from the extended doldrums of the economic crisis, the business-as-usual approach to public policy needs to come to an end. Making the Ocean State a Right-To-Work state is an excellent way to begin and to improve competitiveness immediately while making great strides for civil liberty and political integrity.

A longstanding majority (in fact, a super-majority for many decades now) of Americans support a worker’s right to choose whether to join a union[14], a fact that is perhaps reinforced by the dwindling numbers of private sector unions. It is illustrative of the money and power at stake in this political debate when we consider that less than half of U.S. states are RTW despite the clear preferences of the public.

Conclusion

Rhode Island desperately needs to initiate comprehensive and fundamental public policy reform if it hopes to regain its competitive status. One of the furthest-reaching and simplest reforms that would not cost the state a dime would be to pass Right-To-Work legislation.

With Right-To-Work comes significant and demonstrable economic benefits — a shot in the arm that the Ocean State economy badly needs — but also the restoration of what is a fundamental civil right of workers … freedom of association.

By nearly every measure shown in our Report Card on Rhode Island Competitiveness, the Ocean State is not competitive nationally and within New England. However, passing RTW legislation would allow the state the chance to be immediately competitive and worthy of a strong look by businesses and investors looking at the northeast.

The positive impact of worker choice in other states has been clearly demonstrated, and 23 states now see the benefit of worker freedom to their economies. For Rhode Island, the benefits and the urgency is clear: now is the time to do the ‘right’ thing.

* * *

This Policy Brief was jointly developed and co-edited by Giovanni Cicione (Senior Policy Advisor to the Center) and J. Scott Moody (Adjunct Scholar to the Center), with research by Michael Cecire (Policy Analyst for the Center).

Download a printable version of this Policy Brief here …

End Notes


[1] RI Center for Freedom and Prosperity, “Report Card on Rhode Island Competitiveness, http://www.rifreedom.org/2012/02/rhody-fails-report-card/

[2] Brownfield, Mike, “Morning Bell: Right to Work Head to Indiana,” The Foundry, January 30, 2012. http://blog.heritage.org/2012/01/30/morning-bell-right-to-work-heads-to-indiana/?utm_source=Newsletter&utm_medium=Email&utm_campaign=Morning%2BBell

 [3] Barro, Robert, “Unions vs. the Right to Work,” The Wall Street Journal, February, 28, 2011. http://online.wsj.com/article/SB10001424052748704150604576166011983939364.html .

 [4] Holcombe, Randall G. and Gwartney, James D., “Unions, Economic Freedom, and Growth,” CATO Journal, Vol. 30, No. 1, Winter 2010. http://www.cato.org/pubs/journal/cj30n1/cj30n1-1.pdf

 [5] See: “The Location of Industry: Do States’ Policies Matter? Regulation, Vol. 23, No. 1, 2000,47-50 . http://www.cato.org/pubs/regulation/regv23n1/holmes.pdf

 [6] Report from U.S. Senator Jim DeMint, “Right-to-Work States are Winning the Future,” May 2011. http://demint.senate.gov/public/?a=Files.Serve&File_id=88760fc5-0ac6-4e6c-91b5-6ba8b17fd06e .

 [7] Laffer, Arthur B. and Moore, Stephan, “Boeing and the Union Berlin Wall,” The Wall Street Journal, May 13, 2011. http://online.wsj.com/article/SB10001424052748703730804576317140858893466.html?mod=WSJ_Opinion_LEADTop

 [8] Sherk, James, “Right to Work Increases Jobs and Choices,” WebMemo #3411, November 9, 2011. http://www.heritage.org/research/reports/2011/11/right-to-work-increases-jobs-and-choices#_ftn6

 [9] Vedder, Richard, “Right-To-Work Laws: Liberty, Prosperity, and Quality of Life,” Cato Journal, Vol. 30, No. 1, Winter 2010, pp. 171-180. http://www.cato.org/pubs/journal/cj30n1/cj30n1-9.pdf

 [10] Reed, W. Robert and Wilbanks, James R., “The Impact of Right-To-Work on State Economic Development: Evidence from Ohio,” Presented at the Western Economic Association Meetings, San Francisco, CA, 2001.

 [11] Reed, W. Robert, “How Right-To-Work Laws Affect Wages,” Journal of Labor Research. http://www.econ.canterbury.ac.nz/personal_pages/bob_reed/Papers/RTW_Wages_Paper.pdf

 [12] Kersey, Paul, “What a Right-to-Work Law Will Mean for Indiana,” Mackinac Center for Public Policy, January 19, 2012. http://www.mackinac.org/16333

 [13] “Organized Labor’s Forced Dues-Funded ‘In Kind’ Campaign Contributions Undermine Representative Government,” Fact Sheet, National Right to Work Committee, March 18, 2003. http://www.nrtwc.org/FactSheets/UnionSpendingFactSheet.pdf .

 [14] “74% Favor Right-to-Work Law Eliminating Mandatory Union Dues,” Rasmussen Reports, January 31, 2012. http://www.rasmussenreports.com/public_content/business/jobs_employment/january_2012/74_favor_right_to_work_law_eliminating_mandatory_union_dues

 

Scholarship Program Recommended for Special-Needs RI Students

Senators Ciccone and Walaska are called upon to take action to back up their own “School Choice Week” Resolution. Read the full Policy Brief here … with charts and end notes.

Stephen Hopkins Center supports our Center’s call for the Bright Today Scholarship Program

MEDIA RELEASE:

Bright Today Scholarship Program

Empowering Rhode Island’s Most Vulnerable Children with a Quality Education

Senators Ciccone and Walaska are called upon to take action to back up their own “School Choice Week” Resolution

January 26, 2012, Providence, RI — In recognition of National School Choice Week, the Rhode Island Center for Freedom and Prosperity urges policymakers to adopt a school choice scholarship program for special-needs students. In light of the recent resolution co-sponsored by state Senators Ciccone and Walaska recognizing School Choice Week, the RI Center for Freedom calls upon the senators to follow up their welcome recognition with firm action, and respectfully requests that they provide the leadership necessary to see that legislation is adopted that provides a school choice scholarship program for disabled students in Rhode Island.

As follow up to its recently published education report, Closing The Gap, which demonstrated how recent Florida-style school reforms could aid disadvantaged students in the Ocean State, the Rhode Island Center for Freedom today issued a Policy Brief detailing how adoption of one, particular Florida reform – the McKay Scholarship Program – could empower Rhode Island’s most vulnerable and under-achieving students with new choices to receive a quality education.

As part of its “Bright Today” set of recommended school policy reforms, the RI Center for Freedom recommends that the Ocean State develop a scholarship program of its own, which would allow families with special-needs children to utilize public funding, in the form of a voucher – based cost of education in the school district they are leaving – to attend a private school of their choice. This recommendation is consistent with RI Department of Education’s (RIDE) strategic recommendations and can be implemented into law by the Rhode Island General Assembly.

The Policy Brief entitled the Bright Today Scholarship Program cites details from Closing The Gap that shows how Rhode Island students with disabilities are declining in achievement and have lost approximately (5) grade levels of learning to their peers in Florida since the Sunshine State implemented its school voucher system for such students, the McKay Scholarship Program, over 12 years ago. The Brief provides information about this program, including national perspectives, implementation details, and fiscal and academic impacts, as well as a summary of how other states have followed Florida’s lead in this area.

Earlier this month the Rhode Island Senate passed a resolution (#2064) recognizing National School Choice Week, citing that ” … Citizens across Rhode Island agree that improving the quality of education and expanding access to highly effective schools should be an issue of importance to our state’s leaders …”. The RI Center for Freedom calls upon the sponsors of this resolution, and all those who supported it, to take active and concrete steps to back-up their own resolution by developing and passing a Bright Today Scholarship Program bill for the Ocean State.

“The freedom to choose is a staple of almost every component of life in America except perhaps the most important area – education. With all the talk about providing for our state’s neediest residents, we challenge our public officials to actually do something about it”, said Mike Stenhouse, CEO for the RI Center for Freedom. “How can we not act to provide a ‘bright today’ for these families who have been left behind by our educational system? With public demand and leadership, by next fall, hundreds or thousands of our most disadvantaged students could be attending a better school”, added Stenhouse.

The non-partisan Rhode Island Center for Freedom and Prosperity is the state’s leading free-enterprise public policy think tank. Firm in its belief that freedom is indispensable to citizens’ well-being and prosperity, the Center for Freedom’s mission is to restore competitiveness to Rhode Island through the advancement of market-based reform solutions.

Read the full Policy Brief here … with charts and end notes.

 

Governor’s Sales Tax Hike will Hike Unemployment

Download the complete Policy Brief here; includes comparative table and reference end notes.

View or Download the Media Release here; includes quotes and additional information about Scott Moody and STAMP.

Lesson in Capitalism – “Dynamic Effects of Tax Policies”

Balancing the Budget via Sales Tax Increases would Cost Jobs for Rhode Island

January 23, 2012; by J. Scott Moody – adjunct scholar

Consider which of two tax-policy scenarios may be more beneficial for Rhode Island:

A) a policy that increases state revenues to sustain current spending, but which reduces the state’s economic output and where jobs are lost; where municipal revenues go down and where investment in our state is reduced.

B) a policy that reduces state revenues forcing cuts to current spending, but which increases our state’s economic output and where jobs are gained; where municipal revenues go up and where investments in our state rises.

This is the vital debate that must take place in the Ocean State during the 2012 legislative session.

2012 will predictably bring a vigorous debate about how to balance our state budget and how to pay for most of the current spending items in the budget – by some combination of increasing taxes and making cosmetic cuts to existing programs. This is the wrong debate and the wrong objective for the Ocean State!

Instead, debate should focus on how to make Rhode Island more competitive with our neighbors and how to grow our economy so as to add more good jobs for our citizens. Increased tax revenues will naturally follow from the expansion of economic activity.

Dynamic vs Static Tax Modeling

There is a common and fundamental miscalculation when it comes to projecting the effects of tax policy on state revenues. Too often, the more short-sighted and simplistic static calculation is utilized, when in reality is the more complex dynamic effect should be evaluated. The downstream effects of tax policy on various aspects of the economy are rarely discussed or quantified, either at the state or municipal level.

Take the state “sales tax” as an example. Rhode Island is expected to derive about $989.5 million from this tax, currently at 7%. In 2011, to balance the budget, the Governor proposed over $150 million in tax increases through an expansion of the state sales tax: reducing the sales tax on some items and charging new sales taxes on other items. For modeling purposes, assuming a overall target of $175 million in new revenues, this would have effectively raised the existing state sales tax rate to about 8.2%. While not an exact apples-apples comparison with the Governor’s 2011 plan, an analysis of the higher 8.2% sales tax, utilizing RI-STAMP, a state tax and analysis modeling program customized specifically for Rhode Island, shows the kind of negative consequences that can be expected to occur when any state sales tax hike is considered.

Tragically, this sales tax increase would not raise nearly the amount of revenues statically calculated because it would cause serious harm to our already deteriorating state and municipal economies. In summary, a sales tax hike of $175 million is projected to produce severe unintended consequences for theOceanState:

  • Only a $55 million gain in net state revenues (vs the $175 million gain anticipated)
  • A loss in Gross State Product o $932 million
  • A loss of $22 million in municipal revenues
  • A loss of $64 million in investment in our state
  • A loss of 2,224 jobs

 Because a sales tax increase would make Rhode Island even less competitive with its regional neighbors and nationally overall, consumer and entrepreneurial behavior would be significantly altered, resulting in lower economic activity and actually worsening the state’s economic plight. Municipalities, all too often overlooked, will also suffer from this unintended consequence.

Balancing the budget is the wrong goal; and tax increases are precisely the wrong solution!

Conversely, if the Ocean State was to cut its sales tax to 5%, a very different scenario is projected to occur, because our state would suddenly become a more attractive place to purchase goods and services, meaning economic activity would increase.

The static projection of a 2% sales tax cut would put the loss in state revenues, at 2/7 of the current revenue, or about $282.75 million in lower revenues to the state. But again, this static calculation ignores the true dynamic economic impact of tax reductions. RI-STAMP projects the following positive consequences from this tax decrease:

  • Only a $74 million loss in net state revenues (vs the $283 million loss anticipated)
  • A gain in Gross State Product o $1.9 Billion
  • A gain of $44 million in municipal revenues
  • A gain of $121 million in investment in our state
  • A gain of 4,327 jobs

Just from this single tax reform, economic forces, which have been restrained by a burdensome tax structure, will be unleashed in the Ocean State. If the state can find $56 million in cuts, the Rhode Island economy will be vastly enhanced, resulting in more jobs and more local revenues … and we will balance a lower budget!

The Governor’s office recently stated that it plans to address the upcoming budget deficit by cutting spending and raising taxes. As demonstrated above, this path produces negative consequences.

If instead, we look to address the larger economic picture and look to produce more jobs and a brighter economic future for our citizens …

… cutting taxes and cutting spending will produce a more vigorous economy!

Additionally, from a regional and psychological perspective, instead of suffering the ignominy of charging highest sales tax in New England, Rhode Island would benefit by boasting the second lowest sales tax.

Reality Supports Theory

Some may argue that an economic modeling program is just theory and that the actual world may present a very different reality. However, right here in our own New England back-yard, there is specific empirical evidence that fully supports the core premise of the RI-STAMP projections regarding the effects of sales tax policy.

It is well-known that cross-border shopping exists to the great benefit of the zero sales tax state of New Hampshire, with many Rhode Islanders frequently putting in ‘orders’ with family members and friends crossing through the Granite State to pick up liquor and other items for them … duty free!

In Vermont, a recent study showed that its border counties are losing up to $540 Million in retail sales per year to New Hampshire . In Maine, a similar study showed that its border counties are likewise losing $2.2 Billion, in addition to thousands of retail jobs .

With the close proximity of Rhode Island to many Massachusetts and Connecticut residents, it is clear that Rhode Island can win the southern New England sales tax competition; that our economy can benefit from cross-border shopping and see a pronounced increase in economic activity and jobs for our state and our cities & towns.

WHAT IS RI-STAMP?

Developed by the Beacon Hill Institute at Suffolk University, RI-STAMP is a customized, comprehensive model of the RI state economy, designed to capture the principal effects of city tax changes on that economy. In general STAMP is a five-year dynamic computable general equilibrium (CGE) tax model. As such, it provides a mathematical description of the economic relationships among producers, households, government and the rest of the world. It is general in the sense that it takes all the important markets and flows into account. It is an equilibrium model because it assumes that demand equals supply in every market (goods and services, labor and capital); this is achieved by allowing prices to adjust within the model (i.e., prices are endogenous). The model is computable because it can be used to generate numeric solutions to concrete policy and tax changes, with the help of a computer. And it is a tax model because it pays particular attention to identifying the role played by different taxes.

Download the complete Policy Brief here; includes comparative table and reference end notes.

Media Coverage:

1/30/2012: Americans For Tax Reform , ATR: Opposed to Rhode Island Sales Tax Increase

1/23/2012: GoLocalProv.org, NEW: Conservative Think Tank Rips Chafee on Taxes

CLOSING THE GAP Education Study Released

Go to: CLOSING THE GAP Home Page

Testimony of Giovanni D. Cicione, Esq., Senor Policy Advisor, to The Board of Regents of Elementary and Secondary Education. Preview of CLOSING THE GAP education study released on January 9. The RI Center for Freedom & Prosperity submitted written testimony to the Board of Regents at their January 5 meeting regarding elementary and secondary eduacation. Giovanni Cicione, senior policy advisor to the Center, expects to be able to testify verbally at the next meeting of the Regents on Janauary 19.

The full testimony (below), also served as a preview of a major study the Center for Freedom, entitled, Closing The Gap. Visit the Closing The Gap home page here.

***

Testimony of Giovanni D. Cicione, Esq., Senor Policy Advisor, Rhode Island Center for Freedom & Prosperity

To The Board of Regents of Elementary and Secondary Education (submitted January 5, 2012)

Good Afternoon. My name is Giovanni Cicione and I am the Senior Policy Advisor for the Rhode Island Center for Freedom & Prosperity. The Center is a nonprofit, nonpartisan organization, dedicated to providing concerned citizens, the media, and public officials with policy research and data, and advancing free-market solutions to public policy issues in the state.

Or intent in coming before you today was not specifically to weigh in on the debate regarding Achievement First. Rather, we intended to preview and share a study we will be releasing next week entitled “Closing the Gap.” This study, which I will reference n more detail in a moment, looks at reforms made in the state of Florida over 10 years ago that led to dramatic gains in educational achievement for some of the most challenged student populations in that state.

What is interesting from the perspective of today’s debate, is that much of the success in Florida over the last decade can be directly tied to the type of approaches advocated by Achievement First and similar organizations. And while I’m sure you will hear many criticisms of the mayoral academy model from the special interests who oppose these reforms, what our study demonstrates is that when these and other related reforms are put in place not only do you see overall gains, but that those gains are strongest amongst those students who are the most disadvantaged.

Non-English speakers, students who rely on free or reduced lunch support, and students with disabilities saw the most dramatic gains under the Florida reform model.

Our study will provide more detail and specific data when it’s released next week, but I’d like to highlight the key findings and recommendations.

Closing the Gap shows, for example, that Florida’s fourth-grade Hispanic students have improved so dramatically that they now perform at the same achievement as the average for all Rhode Island fourth-graders. Both states started out equally far behind, but Rhode Island students’ average score has improved by only (5) points since 1998, while Florida’s Hispanic students have improved by (25) points; equivalent to two-and-a-half grade levels’ of progress.

Imagine the impact if we had taken the same route ten years ago, when our own Hispanic children now preparing to graduate were just starting their grade school careers. Hispanics are the largest minority group in Rhode Island and represent 11 percent of the total population and 19 percent of the public school population. Unfortunately, Rhode Island Hispanic students have among the lowest (NAEP) scores in the nation in both math and reading. Closing the Gap shows the way to improve this ranking.

Closing the Gap cites reforms in evaluations and accountability for teachers and schools in the areas of transparency and parental choice. The study documents how the latest NAEP results strengthen the argument that Florida-style reforms should be considered for Rhode Island.

Closing the Gap explains in some detail why Florida’s reforms, while benefiting all students, have been especially beneficial to disadvantaged students. The study details the key components of Florida’s K-12 education reform strategy and makes specific policy recommendations that will provide more young Rhode Islanders with an opportunity to succeed in school and enhance their chance of pursuing and achieving their dreams.

Florida’s reform model includes:

• Public-school choice for students in low-performing public schools.

• Private-school choice for students with special-needs.

• An open door for new charter schools.

• Selective and effective se of virtual education.

• Performance pay to reward teachers who achieve student gains.

• Alternative teacher certification.

• A through F grading of all public schools; and

• A ban on social promotion.

These reforms were passed by a bi-partisan group of political leaders who faced many of the same criticisms you will hear today. They did it without empirical evidence that it would work, but they also new that to do nothing would be to condemn students to failure.

Your choice is a much easier one. I’d like to ask you to consider something – think for a moment about what you will say to a first grade student today who comes back here in a dozen years if you don’t adopt these types of reforms? What will you tell that student who asks why she is graduating with a 9th grade education after twelve years of instruction? Today you could perhaps claim that you didn’t’ know if the reforms would work, but Florida has shown us that they do – we cannot plead ignorance or even uncertainty when that child stands before you.

Why does Rhode Island suffer from the largest achievement gap among Hispanic students and other with unique challenges? Is it failing schools, a lack of funding, or is it something much worse … the soft bigotry of low expectations?

The Rhode Island Center for Freedom & Prosperity believes that every student can succeed, and that the only true disadvantage or disability is a rigid and moribund system that stacks the deck against them.

Thank you for the opportunity to be here today.

***

Income Inequality should not “Occupy” our Public Policy Planning

Republished as an OpEd in Providence Business News (January 2, 2012 edition) under the title “Public policy shouldn’t worry about ‘solving’ inequality.”

***

As we observe the “Occupy” phenomenon, and as our local chapter prepares to hibernate for the winter, the issue of income inequality has become a national debate. Even as our President talks about fairness we need only look to the very recent past to understand what government should not do in reaction.

Other than alienating some progressive notion of fairness, I have not heard a cogent argument as to how the condition of income inequality negatively affects our economy. Yet many believe that, by addressing the symptom, we will solve the underlying economic malady. This thinking is naively upside down. Free-market theory would instead suggest that income inequality is the result of economic bust periods and not the cause of downturns, which are an expected part of the normal boom-bust cycle.

During difficult economic times the rich will disproportionately be able to protect their wealth because they have the means and because they steer the wheels of industry. To keep profits high they can down-size, reduce wages, and eliminate capital purchases or investments in new technologies. As uncomfortable as this might be to some, this is just “business” … a natural reaction; not evil. Profits are why they risked their wealth in the first place.

Conversely, during boom times, as competition for labor intensifies, the wealthy, via their companies, will offer higher wages and equity positions to more people and will also invest in growth via myriad other purchases. During these periods the lower and middle classes will gain more proportionately from the fruits of industry.

If not income inequality, what then was the cause of the recent recession? While the Occupiers claim that it was the failure of capitalism, I would contend that the real problem was the monkey-wrench of big-government within the gears of capitalism, motivated by the false notion that the government should legislate fair outcomes.

Think about it … what were the three major industries that failed? Housing, Banking/Finance, and Auto: three of the most heavily regulated industries in America. These industries have become anything but true examples of capitalism or free markets.

As for the “1%”, or millionaires, a recent CATO survey found that 80% of them are first-generation rich, meaning they earned their wealth on their own and didn’t have it handed down from their families. Today, that same 1% pays about 37% of all federal income taxes, while earning just 16% of all income. Isn’t this inequality?

Interestingly, it may not even be true that there are more rich people. The non-partisan Tax Foundation found that since 2007, there has been a 39 percent decline in the number of millionaires, and that the top 1% earned 20% of all income just a few years ago.

But, either way, so what? If we are to prosper as a nation, there necessarily must be prosperous people … get over it! Who else is going to invest capital in new growth ventures, in expanding businesses, in hiring people, and in spurring innovation?

Our nation was originally formed with the principle that citizens are equal in the eyes of the law; later we justly added equality with regard to freedom and voting; inalienable rights. Absolutely nothing in our constitution about equal outcomes.

In the 1990s, concerns were raised about inequalities in the housing market. So, for politically created ‘fairness’ reasons, the government intervened, requiring mortgages be granted to individuals who had not yet earned the privilege of being able to pay for a house. The resulting housing bubble and the current wreckage in the housing market is a predictable outcome of government interference in the free-market system.

This self-induced housing wound bled into the financial markets in the form of mortgage derivatives, a futile and destructive attempt to make profits from the non-profitable mortgage practices the government mandated upon the market. Making matters even worse, because of their connections to government, the banks and financial institutions knew that they would be bailed out by the taxpayers; so they took even more reckless risks. This is a point the Occupiers also make, if not for different reasons.

Taxpayer funded bailouts are yet another form of government interference and are not part of the capitalist system. The ‘risk-reward’ and the ‘never too big to fail’ principles were violated … and we are paying for it today.

This unintended chain-reaction of harmful events in the housing market was caused by well-intended, yet imprudent, government intervention in the name of fairness.

The Occupiers now seem to suggest that public policy should be crafted to mete out incomes. If interference in the housing market was bad for America, imagine what the unintended consequences will be to the business sector if government intervenes with the basic incentives of our nation’s entire economic system!

Capitalism is not a dirty word. In fact, we need more of it … via less government intervention. This is what will naturally reduce income inequalities and lead to growth in our economy. Attempting to solve income inequality through government intervention should not occupy any measure of our public policy planning.

Mike Stenhouse is CEO of the Rhode Island Center for Freedom and Prosperity, a public policy think tank, and earned an Economics Degree from Harvard University.

 

Legal Authority to Adjust State Pension Plans

To read the full version, with citations, click here for PDF …

Exorbitant retirement benefits are threatening the ability of Rhode Island and its municipalities to deliver essential government services and, in one of the most extreme cases in the nation, one of Rhode Island’s municipalities has been driven into bankruptcy because of an inability to resolve pension debt issues through negotiation.

A recent decision by Rhode Island Superior Court Justice Taft-Carter has called into question whether the state and its municipalities have the flexibility to unilaterally adjust pension benefits. Our Center believes that Rhode Island does have broad legal flexibility to adjust existing pension benefits in order to stave off bankruptcy or avoid dramatic reductions in essential services. This policy brief considers the legal background of that question and suggests proactive steps which the legislature can take in order to guide future courts as they consider the constitutionality of proposed reforms.

Most estimates place Rhode Island’s state level unfunded liability at approximately $6,800,000,000 ; a figure on scale with the state annual budget and roughly twice what the state collects in revenues in a year. Of great concern is that such estimates assume investment returns in the pension funds of 7.5 percent while many states are considering using estimates pegged to the money they pay for bond issues – potentially closer to 5 percent. If Rhode Island was to follow that more prudent approach, the unfunded liability would likely exceed twice the current estimates.

More importantly, a practical discount rate would more accurately reflect the expectations of beneficiaries as to the risk of their retirement plans. State and municipal retirees have long been led to believe that pensions were guaranteed by the government. In fact, pensions have always been some combination of promise and ‘gratuity,’ with payouts left to the discretion of politicians and future taxpayers.

And while a lower discount rate would expand the unfunded liability on paper, perhaps it is better to recognize that, for retirees, a conservative estimate of returns is more properly in line with their tolerance for risk.

Unfortunately, for current pensioners, those less conservative estimates of 7.5% returns or higher have been used for decades in Rhode Island and, while we can take the more prudent approach going forward, we must accept that for current participants in our retirement system, the money they were promised is simply not there.

Like the state, municipalities suffer under the burdens of their own liabilities and, with well over one-hundred separate plans, Rhode Island fails to realize savings related to economies of scale and more experienced oversight: Already some of our pensioners are suffering the consequences.

With the City of Central Falls in bankruptcy, its retirees are facing potential cuts to their pension checks of more than half what they had been receiving; a dramatic reduction to a fixed income that many cannot reasonably expect to afford. Poor planning, non-existent oversight, and bad political choices will, in a very real sense, be driving some of these pensioners into poverty.

As the Wall Street Journal’s David Wessel says, “Bankruptcy is a last resort. To avoid it, state and local governments need an alternative that is less unappealing. They don’t have one yet.” With 38 other cities and towns in Rhode Island facing the impacts of the same crisis, Governor Chafee recently called for alternate suggestions to the futility of trying to tax our way out of this deep hole.

There is growing bi-partisan recognition that exorbitant retirement benefits granted to civil service unions are threatening the ability of states and cities to provide essential services without implementing job-destroying tax increases. Indeed, even former San Francisco Mayor and California State Assembly Speaker Willie Brown (D), a staunch public union supporter, recognizes that lucrative defined benefit pension plans are unsustainable. John Fund of the Wall Street Journal writes about a column Willie Brown authored for the San Francisco Chronicle in which Brown lamented that civil service was out of control.

“The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians – pushed by our friends in labor – gradually expanded pay and benefits … while keeping the job protections and layering on incredibly generous retirement packages.”

Brown later told Fund, “When I was Speaker I was in charge of passing spending. When I became mayor I was in charge of paying for that spending. It was a wake-up call.”

Fortunately, despite the concerns raised by a recent Rhode Island Superior Court decision in the matter of Council 94 v. Carcieri , a more appealing remedy than bankruptcy exists. It is contained in two U.S. Supreme Court cases, Energy Reserves Group v. Kansas Power & Light and United States Trust Company of New York v. New Jersey .

States and (with state authority) municipalities, can unilaterally reduce excess retirement benefits under circumstances now widely prevailing. There is a widespread misunderstanding in many states that the U.S. Constitution prohibits these adjustments but there is no such prohibition. The Council 94 v. Carcieri decision has been misinterpreted as suggesting that Rhode Island has some unique version of that prohibition but that is not what the decision says.

In short, the Council 94 v. Carcieri decision simply states that some Rhode Island pensioners have certain contract rights. That is far from saying that those contract rights cannot be revoked when the state faces a pressing need.

A report published earlier this year by The Pew Center on the States confirmed that legislators’ belief that retirement benefits cannot be modified is only an assumption. “It is uncertain in many states what the constitutional protections are because they haven’t been tested or at least thoroughly tested in the courts,” says Ron Snell, director of state services at the National Conference of State Legislatures. “But state legislators have assumed the protections to be quite strong.”

This assumption that there is constitutional prohibition against benefit modification is a misunderstanding. Case precedent is clear that, under circumstances currently prevailing in many places, retirement benefits may be reduced. The U.S. Supreme Court’s interpretation of the U.S. Constitution lays out the rules by which states may modify their contractual obligations.

The facts required by the clear language of the governing cases are directly applicable to the situation in RI. These cases give us clear guidance.

There are scores of state and lower federal court cases holding against attempts to modify vested pension benefits. Upon examination, few, if any, of these cases were brought on the grounds set forth as applicable by the U.S. Supreme Court. Accordingly, these state and lower court cases are irrelevant to the current circumstances. They were special, very narrow cases that did not spring from legislative action to remedy a broad and general social or economic problem. The governing law may be summarized as follows:

• A state may impair a contractual right if it has a significant and legitimate public purpose such as remedying a broad and general social or economic problem, such as elimination of unforeseen windfall profits.

• A state may do so as an exercise of its police power.

• A contractual impairment may be constitutional if it is reasonable and necessary to serve an important public purpose.

When a state reduces an obligation, the courts will inquire as to whether the adjustment of “the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation’s adoption. Courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.”

When a state impairs its own contractual obligations (as is the case with retirement benefits promises) the courts and certain other material factors come into play. The courts will hold the state to a somewhat higher standard of scrutiny as to the policy’s necessity and reasonableness. Therefore, a prospering state with a well-funded retirement plan could not arbitrarily cut promised benefits. But a state struggling to the point of eliminating essential services or a municipality facing insolvency certainly may, under the law, modify existing retirement benefits. Furthermore, it is entirely settled law that one legislature may not abridge the powers of a succeeding legislature and cannot bargain away the police power of a state.

So, in addition to the realistic reading of the contracts clause itself, and as recognized by the Supreme Court, an independent doctrine holds that the Constitution’s contract clause does not require a state to adhere to a contract that surrenders an essential attribute of sovereignty. The classic doctrine that one legislature can neither abridge the powers of a succeeding legislature nor bargain away its police power permits states to reduce their public employee pension obligations under the circumstances now besetting many states.

The law does not permit a state to impair its contractual obligations arbitrarily or with impunity. The courts will look into whether a proposed impairment is reasonable and necessary to “serve an important public purpose”. Modifying existing pension benefits because the cost of providing them threatens a state or municipality’s ability to provide essential services or precipitating insolvency certainly rises to the standard of “remedying a broad and general social or economic problem.”

According to several well accepted doctrines and the clear holdings of the United States Supreme Court, if a state or, with a state’s authority, a municipality finds itself confronting a severe fiscal challenge based on exorbitant retirement pension obligations it is well within its inherent police powers to reduce its obligations to a reasonable level.

The courts will not rubber-stamp an arbitrary decision. Yet it is difficult to imagine a court finding that a reduction of such benefits to private sector levels for retirees of comparable circumstances to be ‘unreasonable,’ especially when the cost of providing those benefits threatens the ability to provide essential services.

Current evidence of reasonableness and necessity of such reductions includes:

1. extensive studies by respected nonpartisan institutes;

2. reports from respected media sources from across the political spectrum;

3. critiques by elected officials nationwide, both liberal and conservative, Democrat and Republican, of unjustifiably extravagant retirement benefits;

4. the documented growing inability of states and municipalities burdened by the cost of these retirement benefits to provide essential government services or maintain solvency.

Taken together, these factors are highly persuasive that it is reasonable and necessary to adjust certain states’ and municipalities’ pension obligations to the median level of private sector comparable positions. The power to unilaterally, though reasonably, reduce benefits provides a great deal more latitude for officials than many knew they had.

By taking this power into account, the Governor, the Treasurer, and the Rhode Island legislators who are considering solutions for addressing our pension crisis will find themselves positioned with many new options that they may not have realized were available.

Recognizing that, public officials simply may choose to reduce benefits of public workers to demonstrably reasonable levels. A good faith demonstration is all a state needs to reduce retirement benefits. This is simply done by showing they are implementing a remedy to a general economic problem and that such reductions are necessary and reasonable.

One approach, and one that has the added benefit of giving future courts a well-defined outline of legislative intent, would be to introduce and pass legislation laying out clearly and without hesitation the dramatic economic crisis now faced by the state. Such an Act would describe the need to assess the liabilities of the state and municipal pension funds with reference to rates of return reasonably in line with pensioners’ expectations of risk, would describe the limitation on additional sources of revenue to find the massive deficit, and would reference the dramatic reductions in essential services that are unavoidable if we fail to address the unfunded pension liability.

Therefore, the Rhode Island Center for Freedom and Prosperity recommends that the Rhode Island legislature acknowledge, through amendments to the laws governing Rhode Island’s state and local pension systems, that:

a. Pension benefits are promises limited by the ability of the system to pay, and are not binding contracts with pensioners;

b. A reasonable rate of return for pension investments should be equivalent to that of high-quality corporate bonds, as this is more in line with pensioner’s expectations as to the security of their retirement funds;

c. The unfunded liability of the state should be calculated using these more conservative rates and should be reduced to zero over a clearly defined period of time by modifications to existing pension plans that fairly reflect the economic circumstances we face as a state today and the detrimental impact on essential state services that this liability creates.

We further recommend that an extensive public record of such findings be established and preserved in order to leave no questions as to legislative intent and the factual basis for any proposed reforms. By taking this added step the executive branch and the general assembly will have made the job of the courts in ratifying such reforms all the easier, hopefully avoiding further costly legal battles, and providing pensioners with the clarity and predictability that they deserve.

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About The Author

Giovanni D. Cicione Esq. is the Senor Policy Advisor to the Rhode Island Center for Freedom and Prosperity, a non-partisan and non-profit public policy group that advocates for free enterprise solutions to societal problems and for the protection of personal freedom. He received his Juris Doctor from Boston University Law School, a bachelors degree in Philosophy from George Mason University, and is a member of the Bar of the State of Rhode Island and of the Commonwealth of Massachusetts.

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