Arts Complexes, Like Sports Stadiums, May Not Make Economic Sense

See Surprise! Arts Center Predictions Flawed by David Boaz of Cato.

"The Washington Post reports that the financial projections for a government-funded arts center, Artisphere, in Arlington, Virginia, don’t seem to have panned out. Do they ever? The Post story sounds like all the previous stories about what happened after influential interest groups persuaded the taxpayers’ representatives to give them money on the basis of reams of economic projections:

The Arlington County-funded arts center, which opened Oct. 10 last year in the Newseum’s former space, projected it would have 300,000 visitors in its first year. As of the end of last month, it had hosted about 90,000. And the venue for art, theater, film, music and more, whose build-out cost $6.7 million, had to request an additional $800,000 to supplement the $3 million appropriated for its first annual operating budget.

“Our original business plan had very aggressive projections,” says Executive Director Jose Ortiz….“In terms of those expectations, no, we didn’t make those.”

“One of the projections was that every performance was going to be at capacity,” he says. “For a brand-new facility, that’s impossible.”

Deja vu for sure. These economic projections for subsidized stadiums are always vastly overstated. And the Cato Institute has published a number of studies over the years looking at the issue, mostly with respect to athletic stadiums. Dennis Coates and Brad Humphreys wrote in a 2004 Cato study criticizing the proposed subsidy for Nationals Park in the District of Columbia, “The wonder is that anyone finds such figures credible.”

In “Sports Pork: The Costly Relationship between Major League Sports and Government,” Raymond Keating finds:

The lone beneficiaries of sports subsidies are team owners and players. The existence of what economists call the “substitution effect” (in terms of the stadium game, leisure dollars will be spent one way or another whether a stadium exists or not), the dubiousness of the Keynesian multiplier, the offsetting impact of a negative multiplier, the inefficiency of government, and the negatives of higher taxes all argue against government sports subsidies. Indeed, the results of studies on changes in the economy resulting from the presence of stadiums, arenas, and sports teams show no positive economic impact from professional sports — or a possible negative effect.

In Regulation magazine, (.pdf) Dennis Coates and Brad Humphreys found that the economic literature on stadium subsidies comes to consistent conclusions:

The evidence suggests that attracting a professional sports franchise to a city and building that franchise a new stadium or arena will have no effect on the growth rate of real per capita income and may reduce the level of real per capita income in that city.

And in that 2004 study, “Caught Stealing: Debunking the Economic Case for D.C. Baseball,” Coates and Humphreys looked specifically at the economics of the new baseball stadium in Washington, D.C., and found similar results:

Our conclusion, and that of nearly all academic economists studying this issue, is that professional sports generally have little, if any, positive effect on a city’s economy. The net economic impact of professional sports in Washington, D.C., and the 36 other cities that hosted professional sports teams over nearly 30 years, was a reduction in real per capita income over the entire metropolitan area.

And yet millionaire owners and mayors with Edifice Complexes keep commissioning these studies, and council members and editorial boards keep falling for them. The Artisphere project was approved by the Arlington County Board in July of 2009. Was the county flush with money at the time? Well, not surprisingly, county officials were wringing their hands about the need to make cuts in late 2008, including “A detailed review of every service to determine what is mandated, what is essential to the community and what is discretionary.” In February 2009 the Post reported budget cuts, including police positions. Maybe the next time Arlington County — or any other state or municipality — needs to cut its budget, it might think about cutting subsidies for money-losing venues before going after police officers, firefighters, and math teachers."

‘What a Piece of Junk’: Responding to the Economic Policy Institute on Public Employee Pay

Great post by Andrew Biggs of AEI

In the original”Star Wars” trilogy (not those crappy prequels), Luke Skywalker uttered these words when he first saw Han Solo’s ship, the Millennium Falcon: “What a piece of junk.” I had the same reaction to a new policy brief from the Economic Policy Institute (EPI), which attacks my work with Jason Richwine on public sector pay, in particular a recent study for the Ohio Business Roundtable. (I should note that these comments are my own and that Jason is far more polite than I am).

In previous work for EPI, Rutgers University’s Jeffrey Keefe concluded that Ohio state and local government workers receive slightly lower total pay and benefits than similar workers in the private sector. We find, by contrast, that the combined value of public sector salaries, benefits, and job security exceeds private sector levels by roughly 43 percent.

Keefe questions practically every part of our Ohio paper and, trust me, we have answers to almost all of his points. If you read EPI’s paper and are tempted to believe its claims, post a comment and I’ll address it.

But pensions are where the real action is. Once you accept our view of pensions, you could buy pretty much everything else EPI says and still conclude that public employees are overpaid. EPI thinks pay studies should focus on what employers contribute toward pensions while we look at the benefits employees actually receive.

Put simply, EPI believes that government pensions can generate a given dollar of future retirement benefits at roughly one-third the cost of a private sector employer. And it’s true that, for each dollar of guaranteed future benefits, governments actually do contribute about one-third as much as private pensions. These lower contributions are based on aggressive accounting rules that let public plans “discount” their future benefit liabilities using high interest rates of around 8 percent, versus about 5.5 percent for private defined benefit (DB) plans and, implicitly, around 4 percent for 401(k)-type pensions. Based on low employer contributions, EPI concludes that public sector pensions aren’t actually all that generous. We counter that if you look at the benefits employees actually receive, most public employees’ total compensation package is well above private sector levels.

In effect, EPI’s argument rests on you believing that “Public employees are overpaid, but we aren’t overpaying them.” That is, government possesses some magic by which it can pay far higher pensions at far lower costs than the private sector. This claim is doubly wrong.

1) The vast, vast majority of professional economists don’t believe that government possesses such magic. As Keefe himself admits, most economists argue that accounting rules that let public plans contribute so much less than private pensions are simply wrong. Don’t take my word for it, though: Nobel Prize-winning economists, the Federal Reserve, and the Congressional Budget Office all say the same thing. If public pensions followed economically-sound accounting rules, their contribution rates would rise and it would be obvious that public employees receive higher total compensation.

2) Moreover, even if government can magically generate pension benefits at one third the cost, that does not imply that employees should be the beneficiaries of that little miracle. According to the theory of “equalizing differences”—which the Handbook of Labor Economics calls “the fundamental (long-run) market equilibrium construct in labor economics”—government just as well could pay lower wages and use the savings to reduce taxes or increase other government programs.

For a public/private pay comparison, what we want to know is whether that offset has taken place. By measuring the pensions people will actually receive, along with their salaries and other benefits, we can accurately compare total compensation packages between the public and private sectors. And, based on these actual benefits, it is unequivocal that public employees in Ohio, and in most other states for that matter, receive higher total pay than private sector workers.

Other public sector pay studies—such as from the (hardly conservative-leaning) Center for State and Local Government Excellence, which EPI cited in its highly-misleading blog post on our paper—note that, “the public sector contribution under-states public sector compensation,” for exactly the reasons we describe. (We have other issues with the CSLGE study, but on this point they’re correct).

So to accept EPI’s arguments regarding pensions and overall public sector compensation, you have to reject the views of both the vast majority of financial economists and the vast majority of labor economists. Nice going, EPI

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Oregon Studies Suggests Casts Doubt On Value Of Government Health Care

See What We Don't Know About Health Insurance: Is the drive for universal health coverage actually making people worse off? by Peter Suderman of Reason. There was an interesting study done if Oregon. Excerpts:

"...a recently released study attempting to gauge the effects of Medicaid—the joint federal/state health insurance program for the poor and disabled—on low-income adults in Oregon. Researchers from Harvard took advantage of the state’s recent Medicaid expansion to run a rare randomized trial experiment that would allow them to determine with a high degree of reliability just what the effects of Medicaid actually are on health, financial security, and utilization of care.

Because here’s the thing: Prior to this study, we didn’t know. We didn’t know despite the fact that Medicaid has existed since 1965, and despite the fact that last year’s health care overhaul expanded Medicaid coverage to all individuals up to 133 percent of the poverty line—with the biggest increase concentrated in childless, low-income adults. Indeed, despite the fact that the program already costs taxpayers roughly $400 billion each year, no one has ever never run an experiment like this before. As the website for the Oregon Health Insurance Experiment happily declares, it is “the first randomized controlled experiment to examine the causal effects of having some type of insurance coverage versus having no insurance at all.”

What Cannon suggests is that the fact that we are only studying this now “shows that the push for universal health insurance is not about improving health and security.” If it were, he says, we’d have seen some of the funding that now pays for coverage used to determine whether that coverage is actually producing the desired effects. And we’d have seen a far more rigorous attempt to spend public money on programs and benefits that have actually been proven to improve health outcomes and save lives. Instead, we’ve sacrificed the possibility of better care for the nebulous, uncertain effects of expanded coverage.

The Oregon study helps us understand what those effects really are. The clearest benefit is improved financial security. This is not a huge surprise; health insurance insulates individuals from large, health-related financial shocks. Even still, that benefit may be counteracted somewhat by downward pressure on savings created by the program. Researchers have found that larger Medicaid benefits correlate with lower personal asset levels; tying benefits to asset tests makes the effect even larger.

Meanwhile, Medicaid’s health benefits are far less certain. On the only objective measure of health the study has yet to report—mortality—there was no significant improvement. (A report on a wider array of objective health measures is due out next year.)

The study did report a substantial increase in self-reported health status. But the correlation of self-reported improvements to objectively better health, or even to increased health care access and utilization, is less clear. Two-thirds of the increase in self-reported health status came almost immediately, after individuals had been provided coverage but before they’d sought significant medical attention.

Meanwhile, despite the study’s randomized design, it was only able to test the effects of Medicaid on a particular population: relatively poor adults—with annual incomes in the range of $13,000—most of whom were quite unhealthy compared to the rest of the population, reporting an average of 10 sick days each month. Last year’s health care law, in contrast, will expand Medicaid to an estimated 16 million individuals below 133 percent of the poverty line, many of whom will not be quite so sick, or even so poor. The population examined in Oregon, says Cannon, is the “most likely to benefit from coverage.” Which he argues probably means that “whatever results you see are likely to be the high water mark” in terms of health improvements when expanding coverage to various populations."

A simple theory of regulations, new and old

Great post by Tyler Cowen of "Marginal Revolution."

"Q = min (#laws, #regulators)

The number of laws grows rapidly, yet the number of regulators grows relatively slowly. There are always more laws than there are regulators to enforce them, and thus the number of regulators is the binding constraint.

The regulators face pressure to enforce the most recently issued directives, if only to avoid being fired or to limit bad publicity. On any given day, it is what they are told to do. Issuing new regulations therefore displaces the enforcement of old ones.

If the best or most fundamental regulations are the ones issued first, over time the average quality of regulation will decline.

Critics from both sides will claim, at the same time, that “regulation is too high,” and “regulation is too low.” They will both be describing aspects of the same proverbial elephant.

The ability of a new regulation to pass a (partial equilibrium) cost-benefit test does not mean said regulation is a good idea, at least not without adjusting for the “crowding out” effect.

Hiring more regulators will address the dilemma only temporarily (assuming that the number of regulators cannot keep up with the number of laws). At first more regulations will be enforced, but as time passes the quality gap between the enforced regulations and the most important regulations will again open up.

If you think you just passed some really, especially important regulations, slow down the pace of future regulations.

If you are pro-deregulation, slowing down the pace of forthcoming regulations won’t much help your cause. It will shift back attention and labor to slightly more important regulations, however. It is possible that the net regulatory impact goes up.

Sunset provisions may induce regulators to treat, enforce, and monitor the old regulations more like the new ones, and vice versa. What other institutions might contribute toward this end?"

How Much Tax Revenue Could Legalizing Marijuana Raise?

This question came up in class this week and a student sent me a link about it. See The Budgetary Implications of Marijuana Prohibition by Harvard economist Jeffrey A. Miron. Here is the Executive Summary:

•Government prohibition of marijuana is the subject of ongoing debate.
•One issue in this debate is the effect of marijuana prohibition on government budgets. Prohibition entails direct enforcement costs and prevents taxation of marijuana production and sale.
•This report examines the budgetary implications of legalizing marijuana – taxing and regulating it like other goods – in all fifty states and at the federal level.
•The report estimates that legalizing marijuana would save $7.7 billion per year in government expenditure on enforcement of prohibition. $5.3 billion of this savings would accrue to state and local governments, while $2.4 billion would accrue to the federal government.
•The report also estimates that marijuana legalization would yield tax revenue of $2.4 billion annually if marijuana were taxed like all other goods and $6.2 billion annually if marijuana were taxed at rates comparable to those on alcohol and tobacco.
•Whether marijuana legalization is a desirable policy depends on many factors other than the budgetary impacts discussed here. But these impacts should be included in a rational debate about marijuana policy.

Infrastructure spendng has been rising for many years

See Don’t Bank on It by Don Boudreaux of "Cafe Hayek."

"Here – in the 575 words alloted to me twice a month by the good folks at the Pittsburgh Tribune-Review – is my take on Pres. Obama’s proposed “infrastructure bank.” A slice:

This failure [of government of late to supply reliable infrastructure in the U.S.] isn’t the consequence of inadequate funding. According to a 2010 Congressional Budget Office report, inflation-adjusted annual spending by all levels of government on transportation and water infrastructure (which includes, among other items, roads, airports and harbors) increased steadily from 1982 through 2003. In 2003, that spending was 88 percent higher than it was 21 years earlier.

Between 2003 and 2007 this spending did decrease, but only by 6 percent.

Are we to conclude that such a puny decrease in annual infrastructure spending — coming after a steady 21-year rise in such spending — is responsible for all the crumbling going on? If so, what does this fact reveal about how well government spends taxpayers’ dollars?"

How did Fannie Mae get such political clout?

See Most of the Devils Are Here by David Henderson of EconLog.

"How did Fannie Mae get such political clout? This is one of the best-told stories in the book. McLean and Nocera tell how a well-connected Democrat named Jim Johnson made Fannie Mae almost invulnerable politically. Johnson, who had been Vice President Walter Mondale's executive assistant during Jimmy Carter's presidency and had run Mondale's failed presidential campaign in 1984, was the chairman and chief executive officer of Fannie Mae from 1991 to 1998. During that time, he turned Fannie Mae into one of the most powerful lobbies in Washington, using that lobbying power to defend its government-granted privileges. The most important privilege was government backing.
While the U.S. government did not explicitly back Fannie Mae -- a government-sponsored enterprise rather than a government enterprise -- everyone assumed, it turns out correctly, that it did.

To get powerful congressmen on board, Johnson set up "partnership offices" in their congressional districts. The first such office was in San Antonio, in the district of Henry Gonzalez (D, Texas), then-chairman of the House Banking Committee. These offices were staffed, the authors write, "by someone close to power -- the son of a senator, a governor's assistant, a former congressional staffer." Expenditures on such offices don't even count as lobbying. But Fannie Mae also lobbied, spending $170 million between 1997 and 2006."

"This is from my book review, "Most of the Devils are Here," in the latest issue of Regulation. It's a review of Bethany McLean and Joseph Nocera, All the Devils are Here.

I think the book is excellent but its main weakness is that the reader has no way of judging, without days of independent research, whether some of the claims are true. There are no footnotes or references."