Growth & Justice Blog

State economist affirms: Cuts cost more jobs than income tax increase

State Economist Tom Stinson estimates the spending cuts Gov. Tim Pawlenty will start making today will cost Minnesota 3,300 to 4,700 jobs.

By contrast, Stinson told the Legislative Advisory Commission on Tuesday, the $1 billion income tax increase that the Democratic-controlled Legislature passed and Pawlenty vetoed in May would have cost the state an estimated 1,000 jobs over the next two years.

— Pioneer Press

In May, Growth & Justice estimated potential state job losses from a proposed new 4^th tier personal income tax rate of 8.5 percent. Our study [PDF] — of a somewhat different tax proposal than the one ultimately passed by the Legislature — put the potential impact of the revenue-raising tax increase at 1,000 to 5,000 fewer jobs (out of about 2.7 million).

Yesterday, Minnesota's own state economist came up with a job loss number at the low end of the range Growth & Justice estimated.

We're gratified to see our work validated by Tom Stinson's estimate. (And let the record show, we so-called "tax-loving liberals" were even more conservative in our portrayal of the potential downside of raising more revenue.)

Stinson affirmed the other side of our case, too.

We declared that "any harm from higher taxes should be weighed against the potentially greater negative effects of spending reductions" and noted that the governor's proposed spending cuts could cost even more jobs in local governments and government service providers. 

Stinson's analysis of Gov. Pawlenty's unallotments puts some solid numbers behind that conclusion as well. In his estimation, the impact of the specific cuts could be three to five times greater than the impact from tax-increase-related measures.

It could be worse. His estimate reportedly did not include indirect job losses, such as when a private contractor loses state business and is forced to lay off employees.

Our assessment, though based on evidence, was still theoretical. Unfortunately for Minnesota, we about to gather more evidence about job loss — from unallotment, starting today.

— Charlie Quimby

Hollowing out the public sector affects public safety

Our continuing and increasingly dubious experiment with starving the public sector in Minnesota is producing almost daily reports of questionable budget cuts.   A Star Tribune front-page story on disappearing lifeguards at public beaches is the latest manifestation of our increasingly penurious fiscal policy.    Anti-government conservatives like to claim that much or most of government investment is unnecesssary or superfluous, and that all we really need are military forces, courts and police to protect property.   But it turns out that a relentless ratcheting down of public investment affects public safety in myriad ways:  crumbling bridges, less attention to mesothelioma incidence in northern Minnesota miners, Local Government Aid cuts that force police and emergency service layoffs, hospital reimbursement cuts that hamper emergency rooms in the midst of an ongoing swine flu pandemic, and on and on.    Public safety is a primary responsibility of our entirely legitimate and mostly effective state-and-local government systems.    Most of the things those governments do eventually have something to do with public safety and providing for the "General Welfare," an often overlooked primary goal that is spelled out in the United States Constitution.    And these systems can't be funded without fair and ample tax revenues.

Dane Smith

Healthcare reform lessons from small town America

“Any plan that relies on the sheep to negotiate with the wolves is doomed to failure.”

— "The Cost Conundrum: What a Texas town can teach us about health care," The New Yorker

We know health care cost growth must be contained. It's hampering our competitiveness, bankrupting families and hamstringing state and federal budgets. But any hope for a systems solution gets tangled in the political struggle that pits free marketry against creeping socialism in every area of community life.

But what if the free market chose something that looked more like "socialized medicine" — and it worked?

That's one intriguing possibility found in surgeon Atul Gawande's New Yorker article, which looks at high-cost and low-cost health care systems around the country. In light of the evidence, none of the leading theories about why costs grow out of control account for dramatic health care cost and quality differences among otherwise similar communities.

Looking at McAllen, Texas, one of the most costly healthcare markets in the nation, Gawande found that "the primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine." What's more, overutilization was not producing better outcomes there or elsewhere.

Two economists working at Dartmouth, Katherine Baicker and Amitabh Chandra, found that the more money Medicare spent per person in a given state the lower that state’s quality ranking tended to be. In fact, the four states with the highest levels of spending—Louisiana, Texas, California, and Florida—were near the bottom of the national rankings on the quality of patient care.
[...]
In an odd way, this news is reassuring. Universal coverage won’t be feasible unless we can control costs. Policymakers have worried that doing so would require rationing, which the public would never go along with. So the idea that there’s plenty of fat in the system is proving deeply attractive. “Nearly thirty per cent of Medicare’s costs could be saved without negatively affecting health outcomes if spending in high- and medium-cost areas could be reduced to the level in low-cost areas,” Peter Orszag, the President’s budget director, has stated.

But what, exactly, accounts for the fat?

Gawande looks at, but finds little evidence to indict, the usual suspects: Government, consumers with little skin in the game, greedy hospitals and insurance companies, unhealthy habits and skewed provider incentives. Instead, he points to a culture shift in the culture of medical practice that mirrors a change in society.

A focus on money, not healthy communities.

The article suggests that physicians are not equipped — with training or data — to focus on the financial considerations of their decisions, while the business orientation of hospitals and insurance companies requires them to focus on

whether they are losing money or making money. They know that if their doctors bring in enough business—surgery, imaging, home-nursing referrals—they make money; and if they get the doctors to bring in more, they make more. But they have only the vaguest notion of whether the doctors are making their communities as healthy as they can, or whether they are more or less efficient than their counterparts elsewhere.

According to Gawande, Stanford sociologist Woody Powell — studying why certain regions became leaders in biotechnology while similar centers did not — has formulated a theory of economic development which holds that "anchor tenants" define the character of an economic community, just as anchor tenants in a mall do. By setting certain collaborative community norms, anchor tenants encouraged successful communities, while those aiming to dominate did not.

Powell suspects that anchor tenants play a similarly powerful community role in other areas of economics, too, and health care may be no exception. About fifteen years ago, it seems, something began to change in McAllen. A few leaders of local institutions took profit growth to be a legitimate ethic in the practice of medicine. Not all the doctors accepted this. But they failed to discourage those who did. So here, along the banks of the Rio Grande, in the Square Dance Capital of the World, a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers.

The difference between McAllen and Grand Junction, Colorado, one of the nation's lowest-cost markets with some of the highest quality-of-care scores, may be the difference between a culture focused on money versus one focused on a healthy community.

[Y]ears ago the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick patients. They also agreed, at the behest of the main health plan in town, an H.M.O., to meet regularly on small peer-review committees to go over their patient charts together. They focussed on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates. Problems went down. Quality went up. Then, in 2004, the doctors’ group and the local H.M.O. jointly created a regional information network—a community-wide electronic-record system that shared office notes, test results, and hospital data for patients across the area. Again, problems went down. Quality went up. And costs ended up lower than just about anywhere else in the United States.

Grand Junction’s medical community was not following anyone else’s recipe. But, like Mayo, it created what Elliott Fisher, of Dartmouth, calls an accountable-care organization. The leading doctors and the hospital system adopted measures to blunt harmful financial incentives, and they took collective responsibility for improving the sum total of patient care.

It almost sounds like socialism, except Grand Junction is politically a very conservative community. Go figure.

— Charlie Quimby

Shauxing what we knaux from Caux, on the value of "Social Capital''

The Caux (pronounced "ko") Round Table is an intriguing non-profit group  — based in St. Paul  but with a strong international presence — that advances the principles of enlightened and ethical capitalism.   It recently released its country rankings for Social Capital Achievement.  Like many such comprehensive measures of overall quality-of-life AND competitiveness, the Caux ranking places the U.S at an unimpressive 15th place, and  below other prosperous democracies with more and smarter public investments in education, health-care and other forms of human capital.  

At Growth & Justice, we often make the same case at the national and state level, arguing for Minnesota's need to invest in human capital and infrastructure, pointing out that it has been the secret to our business success.

Even more useful than the ranking itself is the articulation Caux provides for the idea of a progressive business climate.  Here are excerpts from the 2009 ranking report.  

Economic development does not occur independently from social,  cultural and political institutions. Wealth creation is not an isolated, autonomous, self-referential process within communities; it is a dependent variable, subordinate to the dictates of prior conditions.   Markets are organic phenomena; they grow strong and vibrant only in facilitating environments [...] Countries with high levels of social capital achievement are more economically prosperous and provide a higher quality of life for those who live in them.

The report is co-authored by Stephen B. Young, global executive director of Caux, a former dean of the Hamline University Law School and a significant figure in MInnesota public policy circles for three decades. Young frequently draws on the classics and Cicero for inspiration, and for this report he cited the Second Vatican Council's definition of the "common good'' as "the sum of those conditions of social life which enable groups and (italics mine) individuals to achieve their fulfillment more completely and readily.''

Good stuff.

— Dane Smith

Choosing remedies without knowing the side effects

As we head into the final gymnastics of a budget resolution, the talk tilts toward political strategy instead of fiscal analysis. Did the DFL err in putting forward too many, too-complex proposals that emphasized more revenue? Is the governor, in holding to his no new taxes position, positioning for another term or simply creating a little room to get out of Dodge before the fiscal consequences hit home?

We hear speculation about the consequences of budget decisions — for schools, nursing homes, rural communities, the working poor, job loss or job creation.

If you're a political junkie, this phase is all good fun. But if you're hopeful of steering public decision making toward more rational and empirical processes, you may sigh and start planning for next year.

At Growth & Justice, we've tried to make contributions to the discussion that add facts and analysis, most recently with our study on the potential economic impact of a new fourth-tier income tax proposal. 

Economist Marsha Blumenthal conducted the study [Download PDF], which I helped frame, to better understand how a tax increase on high earners might affect Minnesota small businesses in particular and the state economy in general. In an op-ed for the Pioneer Press summarizing our findings, Marsha and I concluded that there would be some negative impact from the tax increase, but that "no resolution — whether it relies more on revenue increases or spending cuts — will be without some net negative economic impact" and that the downside of budget cuts may be even greater.

But how can policy makers have an informed discussion about these outcomes unless they have real evidence and and use available analytical tools to weigh the economic costs?

What struck me, as a non-academic business person, was how little reliable, current data we — and legislators — had available to help us reach our conclusions. We received great cooperation from House Research and the Department of Revenue; we drew from research literature, Census data and IRS reports. But still, we had to rely on pre-recession revenue and jobs numbers, simulations and extrapolations, studies of studies and experiments that didn't precisely apply to our question. And then other factors, such as changing economic conditions, new federal policies and legislation in other states, could come along tomorrow and nudge our analysis off balance.

We ask a lot from the policy makers expected to balance the budget by choosing the right mix of taxes, spending cuts, budgetary shifts and borrowing, while analyzing competing program needs across a vast range of policy areas. They can't know exactly the economic side effects of these various remedies — let alone how they interact.

No wonder, then, in these final hours the budget battles come down to ideology and political — not economic — calculations.

— Charlie Quimby

Recognizing business leaders and public leadership

Accepting a Hubert H. Humphrey Public Leadership Award earlier this month, Jim Campbell spoke about his upbringing in Byron, Minnesota, where his father the banker chaired the school board, the manager of the co-op was the volunteer fire chief, and other business owners ran community institutions.

In fact, the business community was indistinguishable from the community itself. The business people well recognized how their prosperity was intertwined with the prosperity of the place where they did business.

It was a picture of America that's familiar to anyone who grew up in a small town. Yes, there was no doubt some Gopher Prairie boosterism and self-dealing in those relationships, but in general, Campbell's nostalgic recollection is probably reasonably accurate. It made me reflect how local community interest can become blurred in the cause marketing/Big Box/high finance economy. And how public leadership is in danger of becoming a political specialty rather than a normal expectation of business leadership.

The Itasca Project founder and former Norwest Bank executive Campbell is one stellar example of how that old-fashioned business/public relationship can still work on a larger scale in the big city. Progressives, who may reflexively demean business for greed and contributing to social ills, need occasional reminders that Minnesota has more people like Campbell than Gordon Gekko.

— Charlie Quimby

Wisconsin, where the venture grass looks greener — so far

The Star Tribune today reports a start-up medical company, which grew out of University of Minnesota research, is considering moving to Wisconsin because of taxes.

No, the decision will not be based on the usual complaint about taxes on the business or its owners. The concern is taxes on high-tech investors in an economic environment where money for research is very difficult to obtain. The company believes investment dollars are greener on the other side of the border because of a Wisconsin law that gives investors in start ups

tax incentives that encourage them to fund risky, early stage companies based in the Badger State. Angel investors there can claim a 25 percent tax credit over two years up to $500,000 per investment; venture capital funds can earn a 25 percent credit over one year up to $2 million per investment.

Research-based medical start ups have ongoing needs for capital as they develop products and get them through the regulatory process. They also may be more mobile than other types of businesses that have already established facilities, suppliers and customers. 

The Governor's Tax Reform Commission proposed similar measures [Download summary PDF] to encourage early-stage investment in Minnesota entrepreneurial and high-tech ventures. There's broad, bipartisan support for change, but this reform is just one of many that must grind through a contentious budget-balancing process.

If the reforms fall through and the company departs to find success next door, Minnesota taxpayers can take cold comfort that they helped fund it. 

— Charlie Quimby

Let the free market do it, not decide it

Tony Wikrent of Nation Builder Books spoke at Drinking Liberally in Minneapolis last week, and The Cucking Stool produced this video from the conversation that ensued.

His comments — on the respective roles of the free market, financial and industrial sectors and the political system — provide a critique of what happens when national goals are determined by theoretical economics and the free market, without enlightened guidance from the political system.

For example, he says, allowing the free market to set industrial policy — say, reducing national petroleum consumption — doesn't necessarily result in the best asset allocation to benefit society. The question, he says, is how do you re-regulate a financial system so that doing the important, productive work that needs to be done is what's profitable?

— Charlie Quimby

High-stakes tests don’t raise achievement

April marks the start of the state-wide education testing season. While 4th-8th graders complete the Minnesota Comprehensive Assessments (MCA-II’s), the class of 2010 faces the strictest high school tests yet — the Graduation Required Assessment for Graduation (GRAD), a series of reading, writing and math tests. 

The GRAD 11th grade math test, however, has created a problem. Roughly half of Minnesota’s students are predicted to fail the exam, potentially denying them a diploma if they cannot successfully pass the test by the end of their senior year. Such a widespread consequence has been deemed unacceptable, at least politically, sending politicians and policymakers back to the testing drawing board.  

The good news, from the students’ perspective, is that the GRAD math test will likely never be a graduation requirement in its current form. The GRAD also has sparked more debate over how testing could affect student learning for better and for worse, but without really illuminating a fundamental issue related to the state’s low test scores. 

Different types of tests are designed to accomplish very different ends. In the nomenclature of the testing industry, a test, regardless of its content, has either a summative or formative purpose. A formative test is any assessment — quiz, test, assignment, etc. — that can inform a teacher’s future instruction. It’s an evaluation designed for improving student achievement.     

The GRAD, however, is a summative test — designed not to inform teachers, but to quantify what a large groups of students has learned over the course of the entire school year. An individual’s score becomes one of thousands of data points used to rank and compare schools, districts or even states as a whole for accountability purposes. 

Here is the crux of the issue: we assume that a summative test like the GRAD — when paired with severe consequences, like denying a diploma to a student — can fix a formative problem.

Recent research is proving the futility of this approach. A review of 30 years worth of state testing data [Download PDF], conducted by the University of Minnesota, found no instance of high-stakes tests raising student achievement. Worse, not only do students face harsh consequences if they fail, passing the test leads to no added benefits: no scholarships, no wage increases, nothing beyond what a regular pre-test diploma would have afforded.      

Unfortunately, there is an inverse relationship between the utility of high-stakes summative testing and its political appeal. The tests seek to replace the complex contradictions and paradoxes of educating students with a black-and-white definition of success and failure, while shifting the onus of success solely onto the students themselves.

The easy refrain becomes: if lazy, underperforming teenagers can’t perform in school, how can we expect them to perform later in life? The tough medicine of the GRAD —  and withholding diplomas from underperforming students, even in the face of high failure rates —  is justified as a necessary mass vaccination that must be done for the common good.         

This line of thinking is logically sound but metaphysically dishonest, because the data gathered by summative tests measures the quality of institutions, not individuals. Dismal performance on the GRAD is not the actual problem — it is a symptom of a systemic disease. And while summative tests are powerful diagnostic tools, they can only measure — not fix — the shortcomings of Minnesota’s educational system.

Solutions need to be instead based around the classroom instruction a child receives from the first day of school until graduation, with particular emphasis on the elementary grades.  Researchers from the Public Policy Institute of California [Download PDF] found they could predict — with a high degree of accuracy — which 4th grade students would eventually pass or fail the California high school exit-exam using a range of emotional, social and academic indicators. If a student’s ultimate success is more a product of early-childhood trajectory than adolescent motivation, effective education policies need to become preventative rather than punitive.

Making that turn, however, will not be possible until we acknowledge the causal relationship between individuals and the institutions they inhabit. Every student in Minnesota should be subject to high standards, consequences, and, yes, frequent testing. But not without access to quality teachers, equitable school funding, and saner testing policies that are designed improve student achievement, rather than just measure it. 

Simply put: the rhetoric in favor of the GRAD is obscuring the inconvenient fact that we have yet to consistently provide the institutional elements necessary for state-wide student success. To do better, we need policy based on evidence rather than assertion, designed for sustained results over the long term. 

Adolescents make decisions based on emotion and impulse; it would be both ironic and unfortunate if our testing policies continue to follow their example.

– Kevin McNellis is an intern at Growth & Justice

Minnesota compared: Colorado and the allure of limits

As the Minnesota Legislature struggles to close a gaping revenue shortfall, I'm in Colorado watching how another set of lawmakers attacks the same problem.

The two states are similar in size, ethnic makeup and per capita personal income. They are weathering the recession better than many others, but are dealing with the harsh fact that a contracting economy shrinks revenue at the same time it increases demand for government services.

So it’s not surprising some of their budget-balancing efforts look similar, too.

They’ve both searched out one-time infusions beyond federal stimulus dollars. (Colorado is testing whether it can draw upon reserves in the state-founded workers comp insurance company, and Minnesota has proposed borrowing backed by tobacco settlement revenues.) Lawmakers in both places consider rescinding hundreds of millions of dollars in tax credits and exemptions — called tax expenditures — that divert money that would otherwise flow into the tax system.

And, Democratic Gov. Bill Ritter, like Minnesota Gov. Pawlenty, has been raising fees, which may look like taxes but — like all these other measures — don’t constitutionally quack like them.

In fact, the greatest similarity may be this urgent pantomime of raising enough revenue without appearing to raise taxes. The main difference? Colorado is constrained by constitutional amendment; Minnesota, by a tax-averse governor.

Strict revenue limits and no-tax pledges were enabled by a growing economy that supplied sufficient public dollars without the states having to face severe consequences… until later.

Colorado went furthest in imposing what the state’s Bell Policy Center calls “the most restrictive tax and spending limitation in the country” — TABOR, the Taxpayer's Bill of Rights. Designed to hold down taxes and shrink government, TABOR requires voters to approve tax increases that exceed a certain formula of growth. About 90 percent of revenues are dedicated, leaving little room to deal with changing conditions. Fed up with how the state was shortchanging education and transportation, Coloradoans have twice voted to loosen TABOR’s revenue straightjacket.

An inflexible, rule-based approach appeals to those who want the pre-emptive accountability of a bathtub-sized limited government. But it has little to offer the majority who have a broader definition of accountable government. They want the overall tax burden to be distributed fairly and expect spending programs and tax breaks to deliver their promised benefits.

On paper, Minnesota’s more flexible accountability framework looks pretty good.

The Legislature enacted a law in 2008 to revive the Minnesota Milestones established by Gov. Arne Carlson in the 1990s that mark progress against long-term goals for the state, and now there’s an Accountability Minnesota website that reports on the milestones by category and agency. Many legislators from both parties also have initiated goal-setting and accountability initiatives in the Legislature.

But reporting on progress against long-term goals and high-level priorities is only part of holding government accountable for results. The real test of these principles comes at budget time when dollars are scarce and choices must be made.

The scrutiny forced by scarcity can be healthy. For example, both states are finally taking a serious look at whether tax expenditures actually achieve their intent, and how they tend to benefit businesses and higher-income taxpayers over those whose benefits must go through the appropriations process.

According to a recent Public Strategies Group report, “Minnesota’s Bottom Line,” [Download pdf] regular legislative review is already required to evaluate the cost, effectiveness and fairness of this $11 billion in “hidden spending.” Yet cost is the only aspect publicly reported by the Department of Revenue.

And that’s a general shortcoming. Measuring cost is relatively easy, since expenses are routinely captured in the system. Determining effectiveness is more difficult and costly, particularly when the greatest payoffs come from education, health care and transportation systems that deliver value over the long term.

Minnesota needs to know what works as well as what things cost. It’s the most fiscally responsible way to govern and the only way to ensure government can deliver what we expect. 

The apparent simplicity of rules that limit revenue and formulas that disperse money has some appeal in a complicated and changing world. But it’s not the way to manage for results. Maddening as it may be to muddle through this year and push some problems into the next, Minnesota is on a better path  — provided we continue to emphasize fairness and effectiveness, guided by facts and a long-term vision for Minnesota.

— Charlie Quimby