The Fallacy of the Untaxed Pot of Gold

With increasing frequency, offering new taxing mechanisms to fund ever-growing governments is becoming in vogue. Whether it’s tinkering with California’s Prop 13, marijuana taxes, or the newly proposed 5% “service” tax in California, such proposals labor under the false premise that there are untaxed pots of gold and that if only we would tap them our budget problems would go away.  Rather than solve our problems, however, new taxes would weigh down our economy even more and result in less revenue over time –not more.

Keep in mind, as we consider government funding, that there is not one government today that is smaller than it was 10 years ago or 40.  The sphere of governments – federal, state and local – and their corresponding budgets have grown at alarming rates and run up huge unfunded liabilities.  The prospect that any of them will be smaller tomorrow or 10 years from now is literally zero.

Despite that, discussions over funding government growth, however unsustainable, dominate over whether we should be growing government at all.  Those who would accept government growth rather than curtail it, constantly look for new ways to tax. It is a predilection that is sinking our cities, states and country.

Keep in mind that throughout history, in any given economy, there is only so much that a government can extract from the economy overall before the weight of taxes drags the economy down.  Whether that is extracted by 1 tax at 50% or 50 different taxes at 1% – the economic effect is nearly the same. I would argue, however, that 50 small taxes are worse because people don’t realize the aggregate effect as much as they would one, large, blunt tax.  Since we live under many different and hidden taxes, it’s easier to offer new, however small, taxes.

As an economy weakens, there are fewer business transactions and fewer sales.  Recessions brought on by high tax rates, like all recessions, produce less tax revenues not more.  That is why John Maynard Keynes said that “high tax rates defeat their own object,” i.e. to collect tax revenue.

Today we face double-digit, structural unemployment.  Since 2007, the Nation has lost nearly $7 trillion in homeowner equity and California homeowners have lost nearly $2 trillion of that – more than the size of its economy for a year. With those losses, dramatic decreases in net worth and dramatic losses in consumer purchasing power have followed. Simply stated, the great lot of Americans and Californians do not have the money or wealth they once did.

Those weakened homeowners, unemployed and consumers in general are not hiding pots of money going unused and waiting to be taxed.   People are buying fewer things overall because they have less money overall – and less consumer purchasing results in less jobs which means less consumer purchases by the unemployed, and the downward spiral continues.  Those pushing the proposed new service tax in California fail to grasp those basic concepts and Keynes’ warning.

The new tax would tax nearly everyone that provides services including business consultants, most independent contractors, financial advisors, insurance brokers, real estate brokers, travel agents, housekeepers, gardeners, piano teachers, hair dressers, pool servicemen and the accountants and lawyers that service them.

Because the economy and consumer purchasing is so weak, people are already cutting back on the use of those services – which means less tax revenues from a reduced number of transactions whether they be a home sale or a new will.  In response to such weak demand, businesses are forced to lower prices to attract consumers and in periods of weak demand, like today, manufactures and sellers cannot easily pass on price increases.  For instance, despite rising costs for commodities and parts, today’s businesses have not been able to raise prices at the same rate as those rising costs.

All combined, those dynamics are why Keynes wrote in full:
‘Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.
For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”

California and the Nation are already making a loss.

Keynes well understood that business owners of today will not simply be able pass on the 5% service tax increase which, if they tried, would amount to a 5% price increase.  Instead, by in large, the new 5% tax increase will be an added 5% cost of doing business on those providers. Thus, despite the modest tax decreases offered elsewhere in their proposal, an overall tax increase would await a huge portion of California businesses – not mention future increases to that 5% rate which would inevitably be pushed.

We should also know that just because a portion of the transactions that Californians undertake is not being taxed or is taxed lower than in some other states, i.e. property taxes or services, does not mean that a higher or new tax will net more money from people – just as higher prices do not create more sales.

At the end of the day, consumers and businesses have only have so much money – the number and variance of taxes leaves them with only so much in their pockets.  Attempting to pick another of their pockets will not produce long-term, newfound gold.  It will only leave them weaker than before and so to our economy – all of which leads to prolonged budget deficits.

I am literally saddened to hear some think a massive new category of taxation is the answer to California’s economic or budget problems.   At some point, those who want to raise tax rates or create new taxes will come to understand that California is already uncompetitive because it is over taxed and over regulated – while they may not get that during an economy where California homeowners have lost nearly $2 trillion in homeowner equity, the over 10,000 people that leave this state every week and those facing foreclosure and under-water mortgages certainly do.

(Tom Del Beccaro is the Chairman of the California Republican Party.  This article was first posted on Fox & Hounds.)

Are “Automatic” Budget Cuts Really Automatic?

Is anyone else starting to wonder just how automatic California’s planned “automatic” budget cuts are going to be?

Especially when Gov. Jerry Brown, the Legislature and state finance officials, channeling their inner Bill Clinton, seem to be suggesting that a cut-triggering budget shortfall depends on what your definition of what — and when — “shortfall” is.

It seemed so straightforward last June, when Brown and the Legislature finally agreed on an $86 billion budget that was balanced with $4 billion of magic money — a late-arriving guesstimate of the additional funds the state’s purportedly improving economy would pump into California’s coffers over the next year.

But just in case that fortuitous budget estimate turned out to be a bit optimistic, the budget mavens agreed to a trigger mechanism that called for deep, automatic midyear program cuts if the state finance officials found the budget was running more than $1 billion below estimates.

Fast forward to last Thursday, when state Controller John Chiang announced that California’s revenues were $1.5 billion below budget estimates for the first four months of the fiscal year.

Under the budget agreement, a shortfall of that size would trigger $601 million in cuts on Jan. 1, including $100 million each to the University of California and state college systems, $30 million to community colleges, and millions more to social service programs.

If the projected shortfall rose above $2 billion, an additional $1.8 billion in budget reductions would take place Feb. 1, including $1.5 billion in K-12 school funding.

Those are some ugly numbers that are going to slash deeply into all levels of education and threaten the safety net for California’s most vulnerable residents. But if the money’s not there, what other choice is there, which is why the cuts were put on autopilot.

Still, there’s no way a Democratic governor or legislator wants to see those kinds of cuts on their watch, regardless of how necessary — or automatic — they may be.

So now there’s a growing murmur about how it’s not the actual, cash money budget shortfall that exists that will trigger the cuts, but the projected health of the budget in June 2012. And, boy oh boy, are those second half numbers going to be good. Trust us.

Stop me if you’ve heard this before.

“The bulk of the $4 billion, to the extent that it’s going to be realized, will be coming in between December and June,” H.D. Palmer, spokesman for the state Department of Finance, said last month. “We are still in the early innings.”

According to a memo obtained by the Sacramento Bee,  the Assembly’s Democratic budget team is convinced that the state and national economy is beginning to roll, which will be good news for the state’s future budget numbers.

“Whether the trigger is pulled,” the memo said, “will have much more to do with thesubjective forecast for the second half of the year than the objective data that we have in hand now.” (Emphasis contained in memo).

So, to paraphrase, while the magic money used to balance the budget last June hasn’t arrived in the state treasury so far, the check is in the mail. We hope.

It’s the no-real-money-needed budget plan. If the state is, say, $2 billion in the hole on Dec. 15, when state finance Director Ana Matosantos is required to release her budget estimate for the rest of the fiscal year, just project that $1 billion and one additional dollars will arrive by June 30 and, voila, no midyear “trigger” cuts needed.

And when the money isn’t there come budget time? As Texas Gov. Rick Perry would say, “Oops.”

But of course by then it’s time to put together the 2012-13 budget, so the deficit can has been kicked down the road for yet another year, once again avoiding the hard choices the governor has repeatedly said must be made.

In September, Brown struck a blow for honesty in budgeting by vetoing a bill that would have let Democratic legislators fiddle with the budget trigger in the name of fairness, not to mention political expediency.

It’s two months later, though, and those automatic cuts no one wants are looming larger every day. It would be easy enough to fudge that December estimate, arguing that any current shortfall is just a technical issue that will disappear in the months to come.

Yet Brown was elected on an “eat your vegetables” platform that promised he would be the bringer of hard truths, doing whatever was needed to get the state back on a firm economic footing.

It won’t get much harder than letting those devastating cuts take place. But if Brown wants to have any credibility when he starts the next round of budget negotiations in January, he can only grimace and let them happen.

(John Wildermuth is a journalist and noted political commentator. This article was first posted in Fox & Hounds.)

Orange County Lincoln Club’s “New Conversation” on Illegal Immigration

Last month, the joint Lincoln Clubs of Orange County, San Diego, and Northern California went on their annual trip to Washington, D.C. to visit with Members of Congress, U.S. Senators and think tank leaders.  We talked mostly about the economy, jobs, and pension reform.  The issue of immigration was addressed in a session with James Carafano, Director of the Douglas & Sarah Allison Center for Foreign Policy Studies at The Heritage Foundation.

Carafano was one of our most engaging speakers.  He said that everyone on all sides of the immigration issue was angry at the current Presidential Administration for the handling of immigration policy and enforcement.  No one “Inside the Beltway” could see a pathway towards meaningful policies to address border security, a guest worker program, or effective enforcement policies aimed at those who come here illegally and those businesses that knowingly break the law by hiring them.

This week, the Lincoln Club of Orange County unveiled “a three-point, common-sense approach” on Immigration Reform.  Their blueprint may be the beginning of a renewed new discussion, focused on economic empowerment rather than welfare-state dependence.

Immigration policy is a political landmine for lawmakers, even though more and more businesses are acknowledging that border security is only one facet of the discussion that must be addressed when talking about employers’ and workers’ responsibilities under the law.

The Orange County plan supports an approach to immigration reform that includes (1) additional border security measures, (2) creation of a guest worker program that allows illegal immigrants to get temporary work permits if they meet certain criteria such as proof of employment, passing a criminal background check, paying fees and taxes and (3) calls for a streamlined high-tech system for employers and government to enforce the program.

Conservatives and liberals in California need to abandon the sharp-tongue, wedge campaign rhetoric and engage in the dialogue from a realistic standpoint of how policy impacts our economy.  They need to work together and engage employers and workers from all sectors of the California economy.  Immigration reform impacts all Californians who care about our economic base.  This is especially true for Central Valley growers and workers in high tech Silicon Valley, major pillars of the California economy.

The dialogue that has taken place thus far has been limited to pricey attorneys, political consultants, special interest groups and individuals who wish to paint immigration as a wedge issue.  What good does that discussion do to restore California and American economy’s economic footing at a time when we must be innovative and create jobs?

When my grandparents came here from Lipari, Sicily and Castel Forte, Italy; they sought the American dream of making a better life for their family than the one they left behind.  They worked hard during the Great Depression and fought so that their children and grandchildren would have a better life.  Economic security and the “shining city on a hill” wasn’t something they thought was unattainable.  Their work ethic and values were passed along to all of their grandchildren.

If we don’t do something soon to effectively address illegal immigration through market based, sensible solutions, we’ll be stuck with an underground economy that will fill the labor force in our agriculture centers and big cities illegally.  That breeds more government-based, government-run solutions rather than economic vitality.

When I worked at the U.S. Labor Department in the previous Presidential Administration, we accomplished a great many things to reform outdated regulations and ease the regulatory environment so small businesses could create jobs.  What we failed to do was rally conservatives and liberals to common ground on immigration.  The current Administration had the same chance to make their mark when the President was elected with super majorities in both the U.S. Senate and U.S. House.  Now with a split Congress, attempts appear futile to enact meaningful, market based reform.

Some will say it’s too hard to enact an immigration policy that favors economic freedom and opportunity since our government seems intent on preserving a welfare state full of taxpayer funded entitlements.  But the key to the discussion is restoring economic freedom rather than stifling it.  Gravitation towards government-funded fixes must be replaced by gravitation towards market-based reforms that favor high growth jobs and a better way of life.  That is the American dream that brought my Grandparents to this country – not the promise of a government handout.

(Judy Lloyd is a senior manager and strategist specializing in government affairs, community outreach, development and public relations. She has served in notable leadership roles in government, the private sector and her community for more than 28 years.)

Supreme Court’s Decision a Victory for the People’s Initiative

Many news reports on the California Supreme Court’s decision to allow Proposition 8 initiative proponents to defend their initiative before the bench called the decision ‘a set back for gay rights.’ More accurately the decision was not for or against gay rights, it was a victory for the people’s right of initiative.

It makes both legal sense and common sense that initiative proponents are allowed to defend their law against legal and constitutional challenges. Leaving a law passed by the voters without a champion would be more than an insult to the proponents; it would be an aberration of justice to the majority of voters who passed the measure.

Simple fairness dictates that an important constitutional question gets a vigorous defense in front of an impartial panel.

In the case decided yesterday, the California high court was responding to a request from the 9th Circuit Federal Court, which asked if California law permits the proponents to defend initiatives if the state refuses to step up and defend a measure passed by the voters. Proposition 8, which prohibits gay marriage, was passed in the 2008 general election but both Governor Arnold Schwarzenegger and then-Attorney General Jerry Brown refused to argue for the law in court deciding on their own that the measure was unconstitutional.

The California Supreme Court found that when proper authorities refuse to carry out their duties to defend a challenge to a law, “the official proponents of a voter-approved initiative measure are authorized to assert the state’s interest in the initiative’s validity.”
The court’s decision has nothing to do with the issue of the case or ideology.

The will of the people is expressed through a successful ballot measure. Opponents have the right to challenge ballot measures if they believe basic rights have been stripped away by a majority vote. The courts have a right and a duty to make that determination and nullify the law if required by constitutional dictates.

But the people’s voice cannot be stilled by manipulation of the legal process when the measure at hand is refused a champion.

In a 1999 opinion piece titled, “Who Represents Voters at the Mediation Table,” published by the Los Angeles Times, I argued that the Gray Davis administration set up a mock adjudication of Proposition 187, the measure denying benefits to illegal aliens, by submitting portions of the measure for mediation. The problem was that on both sides of the mediation table would be non-supporters of the measure.

As I wrote in the piece, “As to any proposition’s constitutionality, that is for the courts to determine in an open hearing with both sides of the argument–true supporters and real opponents–making the case for and against it.”

The same is true today.

(Joel Fox is President of the Small Business Action Committee and Editor of Fox & Hounds, where this article was first published.)

Restoring Interest Equity on Taxes

Hard as it might be to imagine, California businesses won a small but important victory last year.  Next year, legislators will have an opportunity to reverse a twenty-year trend and give businesses another victory.

In 2010, Governor Schwarzenegger signed Senate Bill 1028, a  bill sponsored by the Board of Equalization (BOE), which gives BOE members the authority to charge only one day of interest for a tax payment that is one day late.

It might not sound like much, but before SB 1028, a taxpayer who was just ten minutes late in filing his taxes for reasons out of his or her control would have owed an entire month’s worth of interest to the BOE.  Today, if taxpayers are just one day late they may be eligible to pay only one day of interest at the current rate of 6 percent.

If, however, taxpayers inadvertently overpay their taxes, they will get zero interest on their refunds.  This unjust policy hurts taxpayers, hurts the economy, and perpetuates California’s image as an enemy to business.

Prior to 1991, the BOE charged the same interest rate on refunds and late payments.  But 1991 was a tough budget year and legislators decided to lower the refund rate to help close a $14 billion deficit.

The BOE was targeted because of a 1990 court decision that entitled federal government contractors to claim refunds on certain sales tax payments.  These refunds would have included a large amount of interest.  By cutting the interest rate on refunds, the state was able to keep a substantial amount of money.

Fourteen bills to correct this injustice have been introduced since 1991. Eleven of those bills have received the unanimous support of BOE members.  However, the Legislature has killed all except for one of them.  Governor Pete Wilson, who signed the budget package that created this disparity, vetoed a 1992 bill that would have corrected it.

This week, for the twelfth time since 1992, BOE members once again voted unanimously to correct this inequity.

This twenty-year experiment in unscrupulous lending has hurt taxpayers trying their best to comply with the state’s complicated tax laws.  And it’s not only businesses that are hurt but also government agencies that are required to pay one or more of the 27 different taxes and fees administered by the BOE.

The BOE estimates that for the 2012-13 fiscal year, approximately $31 million in interest will be paid to taxpayers who inadvertently overpay their taxes and fees. That $31 million will help small business owners, who accidentally paid too much in taxes, keep their doors open and their employees working.

This proposal doesn’t mean taxpayers will be able to intentionally overpay and expect interest in return.  There are already safeguards in the law to prevent businesses from intentionally overpaying their taxes in order to pocket the interest.

The BOEs stated mission is “to serve the public through fair, effective, and efficient tax administration.”  It is time to live up to that standard and correct this unfairness.  But BOE members cannot do it alone.  It was a legislative decision to end interest equity at the BOE, and it is in the Legislature’s power to restore it.

As we face yet another year with a failed budget and large deficits, policymakers must remember that their decisions are not made in a vacuum; they affect the lives of every Californian who has to pay for the costs and live with the consequences of legislation.  Above all, it is the duty of a public servant to serve the public fairly and equitably.

There is simply no justification for interest rate inequity, and this proposal will put an end to it.  We’ve done our job, now it’s the Legislature’s turn to serve the public and end this unfairness.

(Michelle Steel is a California State Board of Equalization Member and former small business owner. This article was first published on Fox & Hounds.)

Phantom $4-Billion Haunts the Budget

The $4-billion dollars that was added to the budget last June, based solely on optimism that economic conditions would improve, and brought the budget into balance on paper (and, by the way, got the legislators paid) never showed up. The Legislative Analyst’s Office issued a report yesterday that says the state is $3.7 billion short of revenues this year.

Whether the trigger that was built into the budget in case the $4-billion did not appear gets pulled, depends on a number of factors. The first is what the governor’s Department of Finance reports the deficit is in about a month.

Even if the Department of Finance figures match the LAO’s numbers there is no certainty that the trigger will be pulled to the full extent of the law — $2-billion.

The largest portion of that $2-billlion would come out of education, with K-12 being reduced $1.1 billion.

Legislators and the governor might peer into the same crystal ball that forecast the $4-billion windfall and see brighter days ahead, concluding that the deepest cuts don’t have to be made.

Then there is the question of taxes. The governor and school interests are already working on plans to put tax increases on the November ballot. But, will the governor go back to the legislature with a proposal for tax increases now, promising to abandon the ballot measure if the legislature passes a tax increase?

The governor was not able to get Republicans to go along with tax increases in the spring. He might be convinced that a drastic hit to schools will generate public outrage and help change the minds of some legislators.

The appetite for tax increases is still not there if you consider the new Public Policy Institute poll released yesterday. While the poll tested only attitudes about higher education in the state, despite more than six in ten saying that higher education is going in the wrong direction, tax increase proposals to better fund higher ed received less than majority support.

Then again, the governor might try to couple concern over school cuts with a sweetener for Republican legislators to reach a deal. Recently, the governor turned down a proposal from Republican legislative leaders to call a special session for pension reform. Would he call a special session that would consider both pension reform, which the Republicans want, and a tax increase, which the Democrats seek?

From the Grasping at Straws Department — if there is any good news in the LAO report, it is that despite the state looking at a $13 billion budget deficit for the next budget year as a consequence of the current year projected deficit and the operational budget shortfall, long term forecast by the LAO shows the deficit dropping to $5 billion by 2016. That is the result of recent budget cuts and the prospect of improved revenue.

(Joel Fox is President of the Small Business Action Committee and Editor of Fox & Hounds, where this article was first published.)

The Green and the Black: CA’s oil industry speaks up

It took some doing, but business just won a round in its seemingly endless battle with the balky regulators who give California such a bad reputation. And it wasn’t just any business: it was the unfashionable, unloved oil and gas industry. Earlier this month, Governor Jerry Brown announced that he would replace two top state regulators responsible for reviewing new oil-drilling permits. Placed on paid administrative leave was Elena Miller, who had direct authority over the permitting process as head of the state’s Division of Oil, Gas and Geothermal Resources (DOGGR). Brown also dismissed Miller’s boss, Derek Chernow, the acting director of the state’s Department of Conservation. Brown had sense enough to see that California was becoming known as a bad place to invest. Now, of course, he will need to follow through by appointing a DOGGR chief similar to those who ran the agency before Miller: not a shill for Big Oil, but someone who would enforce environmental rules without treating oil and gas production as something akin to a criminal enterprise.

Miller was an Arnold Schwarzenegger appointee and had been on the job since September 2009. On her watch, the pace of permitting at DOGGR slowed in proportion to the number of drilling applications that the agency received. In 2009, according to Bloomberg News, the agency approved 37 of 52 applications for new drilling. This year, DOGGR has approved just 14 of 199 applications. Miller insisted that the slowdown couldn’t be helped; regulators have a responsibility to ensure that extraction techniques, such as steam injection, don’t pollute groundwater or have other dire environmental consequences. (Incidentally, steam injection shouldn’t be confused with the more controversial hydraulic fracturing, or “fracking.”) While it may be true that Miller was exercising due diligence zealously, it’s also true that she earned a reputation as a talk-to-the-hand bureaucrat. As Catherine Reheis-Boyd, president of the Western States Petroleum Association, told the Los Angeles Times, Miller had “no interest in talking, no interest in solving [problems] and no interest in granting permits. . . . It’s hard to solve a problem when someone won’t tell you what the problem is.”

Miller and Chernow finally received their walking papers when the industry’s frustrations could no longer be ignored without doing furtherdamage to the battered California business climate. A study earlier this year by the Los Angeles County Economic Development Corporation found that drilling delays were costing the state about $1 billion per year in new capital investment. By September, industry leaders were talking openly of suing the state. Brown heard from a bipartisan band of lawmakers, including Democratic state senator Michael Rubio and Republican congressman Kevin McCarthy, the majority whip in the U.S. House of Representatives.

The last straw might have come in October, when Occidental Petroleum Corporation declared that California permit delays could cause the company’s 2011 oil and gas production to fall for the first time since 2005. Even Wall Street was taking notice now: in the middle of a domestic oil and gas boom pushing America toward its long-sought goal of energy independence, California—wouldn’t you know it?—was bucking the trend.

Petroleum may look like a small player compared with California’s agriculture sector or marquee industries such as entertainment, technology, and tourism, and the oil business gets nothing close to the promotion that the state lavishes on solar and other “green” power. But California is the fourth-largest producer of crude oil in the country—behind Texas, Alaska, and federal leases in the Gulf of Mexico. California also has huge reserves of shale oil. A federal report published in July estimated that some 15 billion barrels of crude are technically recoverable from the Monterey shale formation in and around Kern County. How much of that oil actually gets pulled from the ground depends on the price, but it accounts for nearly two-thirds of America’s entire shale oil reserves and would cover about two years of total U.S. crude-oil consumption.

Such treasure compels Occidental and other drilling companies to stay in California despite the regulatory hurdles. For bureaucrats to block their efforts without good reason is not only bad for the state but also damaging to America’s economy and long-term security. Most of what California does to itself may not be of great consequence to the rest of the country; after all, jobs that leave California will probably go to some other state. But locking up a strategic national resource is a more serious business, as even an environmentalist like Jerry Brown could figure out.

(Tom Gray, formerly the editorial page editor at the Los Angeles Daily News, writes on California’s economy and politics. This article was first posted on City Journal.)

Teachers are Overpaid and Underpaid

A new study claims that public school teachers are overpaid. Are they? Depends.

An ongoing whine from teachers unions and their fellow travelers is that public school teachers don’t earn enough money. But according to Andrew Biggs, a researcher at the American Enterprise Institute scholar and Jason Richwine, a senior policy analyst at the Heritage Foundation, it is just not true. In fact, in a recently released study, they find that teachers are overpaid. Typically teachers have many perks like excellent healthcare and pension packages which aren’t counted as “income.” Armed with facts, charts and a bevy of footnotes, the authors make a very good case for their thesis. For example, they claim,

“Workers who switch from non-teaching jobs to teaching jobs receive a wage increase of roughly 9 percent, while teachers who change to non-teaching jobs see their wages decrease by approximately 3 percent.

“When retiree health coverage for teachers is included, it is worth roughly an additional 10 percent of wages, whereas private sector employees often do not receive this benefit at all.

“Teachers benefit strongly from job security benefits, which are worth about an extra 1 percent of wages, rising to 8.6 percent when considering that extra job security protects a premium paid in terms of salaries and benefits.

“Taking all of this into account, teachers actually receive salary and benefits that are 52 percent greater than fair market levels.”

Needless to say, the usual suspects are none too pleased with the report. A teacher-blogger going by New York City Educator calls his piece, “‘That’s Just Mean’: Bullies at the Heritage Foundation.” Okay, whatever.

Education Secretary Arne Duncan claims that

“…public school teachers are ‘desperately underpaid’ and has called for doubling teacher salaries.”

American Federation of Teachers President Randi Weingarten bashed the report, huffing that it’s full of “ridiculous assertions” says,

“The AEI report concludes that America’s public school teachers are overpaid — something that defies common sense — and uses misleading statistics and questionable research to make its case.

“If teachers are so overpaid, then why aren’t more “1 percenters” banging down the doors to enter the teaching profession? Why do 50 percent of teachers leave the profession within three to five years, an attrition rate that costs our school districts $7 billion annually?”

Kim Anderson, advocacy director at the National Education Association, who questions the reliability of the report, chimes in,

“Talented individuals turn away from this rewarding profession because they are forced to choose between making a difference in the lives of students and providing for their families.”

After a quick look at the negative responses, an obvious fix emerges: We should pay teachers by how effective they are in the classroom. By doing this, we would attract a more professional class of teachers. In every other profession in America, people are paid by how competent and productive they are. Good doctors earn more money than their less talented colleagues; good lawyers command higher fees than those who regularly lose their court cases, etc. Why do we make a special case for education – where competency is paramount?

It’s because teachers are positioned in our society like industrial workers, not professionals. Government run schools and the powerful teachers unions have coalesced to make teaching the equivalent of working in a glorified auto plant. Due to the one-size-fits-all nature of collective bargaining, we have an appalling system whereby teachers can make more money simply by logging years on the job and by taking useless professional development classes. Teacher quality throughout almost every school district in the country is a non-factor in teacher compensation.

Hence the real answer to the question, “Are teachers overpaid?” is no and yes. The good ones are most definitely underpaid and the mediocre and worse are most definitely overpaid. Andrew Biggs points this out,

“…across-the-board pay increases are hardly warranted. What is needed is pay flexibility, to reward the best teachers and dismiss the worst.”

In his review of the teacher pay study, AEI’s Rick Hess analyzes the rigidity of the current system,

“In a routine day, a 4th grade teacher who is a terrific English language arts instructor might teach reading for just 90 minutes. This is an extravagant waste of talent, especially when one can stroll down the hallway and see a less adept colleague offering 90 minutes of pedestrian reading instruction.”

On Jay Greene’s blog, Heritage’s Lindsey Burke sums it all up quite well,

“Effective teachers should be handsomely rewarded for the impact they are having on a child’s education. By reforming compensation policies in a way that accounts for the abilities of great teachers to improve student outcomes, we will ensure excellent teachers are richly compensated, and mediocre teachers have a strong incentive to improve.”

Teachers need to demand freedom from the government-teacher union monopoly. Until they escape from this highly unprofessional set-up, join other professionals and are paid according to their ability, they will continue to be treated as interchangeable parts. Yes, if they follow this advice, they may lose some of their union guaranteed perks. But in exchange, they will be treated as professionals with all the respect, esteem and compensation accorded to those in that class.

But in the meantime, we will continue to overpay bad and mediocre teachers and underpay the good ones. And the teachers unions and their allies will keep on bellyaching about yet another lousy state of affairs that they are responsible for.

(Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers with reliable and balanced information about professional affiliations and positions on educational issues. This article was first posted on Union Watch.)

LAO: CA Fiscal Outlook Still Dismal

The outlook on the state’s budget is no better today than it was last May. The Legislative Analyst’s Office reported yesterday that state revenues will fall far short of budgeted revenues, guaranteeing that billions of dollars in “trigger” cuts will be enacted, just as the Legislature planned in the budget passed in June.

Of the trigger cuts to be made, K-12 education spending will be impacted again, as will higher education and health and human services.

“The grim news today from the Legislative Analyst that California is facing yet another $13 billion budget shortfall, is sadly the byproduct of the fiscally irresponsible majority vote budget scheme passed by Democrats,” Assembly Republican Leader Connie Conway said in a statement. “Had the Legislature chosen the path of the Assembly Republican roadmap to balance the budget and fully fund our schools without raising taxes, K-12 and higher education would not be on the brink of further devastating cuts today.”

Trigger cuts to K-12 schools could mean shortening the school year in some districts by as many as seven days. However, collective bargaining could hamper the process.

Legislative Analyst Mac Taylor said today in a press conference that many school districts have already shortened the school year one to five days.

But within minutes of the press conference, some legislators were already calling for reopening the budget process in order to avoid the trigger cuts to education. “Today’s numbers make it clear that the state’s first priority must be to get to the ballot in November and raise needed revenues to avoid any more damage to Californians. The notion of cutting deeper into education, public safety and services for those in need is unthinkable,” said Sen. Pres. Pro Tem Darrell Steinberg, D-Sacramento, in a press statement.

Even though it was legislators who put the trigger cuts into the budget, the calls to avoid the cuts demonstrates that they were only kicking the can down road once again. Many say that the budget was smoke and mirrors, a little shuck and jive, accounting tricks and budget gimmicks.

“Rather than pulling the trigger on hundreds of millions in additional painful cuts to our public schools, the Legislature should instead look to repeal spending increases in the Democrat budget,” Conway said.

Trigger Cuts

Taylor was measured in his presentation, but did not mince words when he said that revenues in the state will be $3.7 billion below the amount in the 2011-12 budget. This budget year shortfall creates the need for $2 billion of midyear cuts, known as the “trigger cuts.”

Two levels of trigger cuts are in place: Trigger 1 includes additional large cuts to higher education, health and human services, corrections, child care, libraries, and Medi-Cal. Trigger 2 cuts will be in Proposition 98 reductions. School funding, including higher education, represents more than 85 percent of the proposed trigger cuts.

“In an effort to protect social welfare programs, the Democrats crafted the trigger to focus primarily on schools,” said one Capitol source who asked to remain anonymous.

Had the Democrats not excluded $5.1 billion of state sales tax revenue from the Proposition 98 calculation, schools would be owed nearly $400 million more than the adopted budget, even if the trigger cuts occurred, according to the Capitol source.

Schools Shortchanged

It appears that Democrats crafted a budget that shortchanged schools by $2.1 billion, and allows for them to be reduced up to an additional $1.8 billion. The final adopted budget included spending increases to many health and welfare programs, well above the Gov. Jerry Brown’s proposed January spending level.

Spending increases included the restoration of grants to welfare recipients totaling more than $500 million. There was a restoration of in-home domestic and related services for recipients provided by family members, at a cost of $236 million. And a large scale welfare information technology system for Los Angeles was restored, costing taxpayers $13 million.

“I thought then and feel the same way now, that it was more important to get the budget right than fast,” said Assemblyman Anthony Portantino, D-La Cañada Flintridge, in a statement. “Unfortunately, fast was the order of the day and I voted “no.””

The LAO found that California will receive less sales tax because of the Amazon tax issue delay, and less corporate taxes because of the single sales tax loophole that has not been addressed.

Taylor said that the Legislature made some tough decisions during the last round of budget talks, which staved off a worse deficit.

The report warned that the state may have to reconsider the restoration of prior-year cuts to health and social services. Those cuts are set to expire in the 2012-13 budget year.

Many legislators are already talking about “revenue increases,” and this was addressed in the LAO report. “The Governor has stated his desire to have certain increases in as yet unspecified taxes on the November 2012 ballot. We would recommend the Legislature continue to review tax expenditure programs and reconsider various proposals from last year, such as modifications to enterprise zone programs, and passage of a mandatory single sales factor of corporate profit appointment,” the report states.

Anticipated economic growth, largely due to tax reductions, is not enough to offset the 12 percent growth in state spending. “This underscores the fact that our budget problems are better solved through economic growth, not double-digit spending increases fueled by massive tax hikes,” Conway said.

Taylor said that, while the Legislature faces a much smaller budget problem than they had forecasted one year ago, there are no easy options for balancing the state’s budget.

“It’s unfortunate that our prediction in July that there would be a $13 billion shortfall was right on target,” said Sen. Minority Leader Bob Dutton, R-Rancho Cucamonga. “Anyone could have predicted that it would take Legislative Democrats less than five minutes to say they plan to sidestep the trigger cuts they voted for and raise taxes instead.”

(Katy Grimes is CalWatchdog’s news reporter. Grimes is a longtime political analyst, writer and journalist. This article was first posted on CalWatchdog.)

Unleash the Entrepreneurs: bad policies are holding back the ultimate job creators

Three years have passed since the financial crisis of 2008, and unemployment rates remain painfully high. As of August 2011, America employed 6.6 million fewer workers than it did four years earlier. To try to fix the problem, the Obama administration has pursued a variety of Keynesian measures—above all, the huge stimulus package of 2009, which included not only direct government spending but also such features as tax credits for home buyers and temporary tax cuts for most Americans.

Such policies ignore a simple but vital truth: job growth comes from entrepreneurs—and public spending projects are as likely to crowd out entrepreneurship as to encourage it. By putting a bit more cash in consumers’ pockets, the tax cuts in the stimulus package may have induced a bit more car- and home-buying, but the next Steve Jobs is not being held back by too little domestic consumer spending. Tax credits for home buyers and the infamous program Cash for Clunkers encourage spending on old industries, not the development of the new products that are likelier to bring America jobs and prosperity.

Unemployment represents a crisis of imagination, a failure to figure out how to make potential workers productive in the modern economy. The people who make creative leaps to solve that problem are entrepreneurs. If we want to bring America’s jobs back, our governments—federal, state, and local—need to tear down barriers to entrepreneurship, create a fertile field for start-up businesses, and unleash the risk-taking innovators who have always been at the heart of our economic growth.

The U.S. Census’s Business Dynamics Statistics program shows definitively that entrepreneurs’ fledgling companies are the country’s jobs engine. Consider a good year, 2005, when American firms added 2.15 million new jobs to the economy. Most kinds of companies didn’t contribute to that growth; firms between six and ten years old, for example, added about 1.7 million new jobs but destroyed more than 2 million through contractions or closings, for a net job loss of more than 350,000. In almost every age group, job destruction exceeded job creation. The exceptions were two types of firms: the very old and the very young. Firms over 26 years old added slightly fewer than 100,000 jobs, on net, while brand-new firms added more than 3 million.

Or look at the period from 1996 to 2008. Every year, the new firms added more than 2.9 million jobs, on net; every year except 2000 and 2006, the other firms, considered as a whole, destroyed jobs, on net. Similarly, the boom of the 1980s was led by job creation from new firms. Even in 2009, at the bottom of the recession, new firms managed to add more than 2.3 million new jobs—though those job gains were overwhelmed by the 7 million jobs lost by older firms. The lesson here: older firms generally shrink, while new firms erupt, hire new workers, and make up for the older firms’ job losses.

Further evidence of the economic power of entrepreneurs is the strong connection between entrepreneurial activity and urban success. One way of estimating entrepreneurial activity is average firm size; the idea is that a city with lots of smaller firms must have a lot of entrepreneurs running them. Another commonly used measure is the percentage of a city’s employees who work in new firms. Over the last 30 years, cities that are entrepreneurial, according to either of these measures, have added jobs more vigorously than those that aren’t. Even within cities, researchers have found, more entrepreneurial neighborhoods add jobs more quickly.

These findings support the ideas of the economist Benjamin Chinitz, who argued 50 years ago that New York City was resilient—it could remake itself as economic conditions changed—while Pittsburgh was not, because New York had a remarkable history of entrepreneurship. New York’s garment industry, the largest industrial cluster in postwar America, was a hive of small companies where anyone could get started with a good idea and a few sewing machines. Pittsburgh, by contrast, was the home of U.S. Steel—practically the definition of corporate America—whose company men were exceedingly unlikely to become entrepreneurs when the steel industry faltered.

Even more than Pittsburgh, Detroit emblematizes un-entrepreneurial America. But before it was dominated by three gigantic auto companies, Detroit was filled with clusters of private, interconnected innovators. Indeed, without the economic energy that those innovators generated, Detroit would never have become the Motor City. So Detroit’s history testifies to two important phenomena: first, the link between American entrepreneurship and employment; and second, the ability of a successful, big-firm industry to destroy a local culture of small-firm start-ups.

Long before it made its first car, Detroit was one of the many economic hubs that grew up around water. The Erie Canal connected the Great Lakes to the markets of the East, and cities sprouted at convenient spots—such as the straits that gave Detroit its name—along the great inland waterway. Naturally, shipping companies emerged, like Detroit Dry Dock, where the young Henry Ford learned about engines. Ford soon found himself attracted to one of the great economic challenges of the 1890s: making affordable cars. The basic technology, including the four-stroke internal combustion engine, had been invented in German cities; it clearly had the potential to produce vast profits, but only if someone could use it to create a functional and affordable automobile. America’s tinkerers—bicycle producers, carriage makers, and engine experts like Ford—flocked to the challenge.

Charles B. King made Detroit’s first car in 1896. King had trained as an engineer at Cornell and gained practical experience working at the Michigan Car Company (which made railcars) and the Russel Wheel and Foundry Company. It may be just a legend that Ford followed King’s car down the streets of Detroit on a bicycle, trying to figure out how the machine worked. But it’s certainly true that for his own car, Ford started “borrowing freely from King for the transmission as well as from existing engines,” as the economic geographer Peter Hall writes. Ford also took advantage of Detroit’s stock of mechanics, parts suppliers, and lumber barons for financing.

Ford was only one of Detroit’s many automotive innovators. The Dodge brothers, the Fisher brothers, David Dunbar Buick, Ransom Olds, and Billy Durant, the founder of General Motors in nearby Flint—all were part of the creative cluster around Detroit that solved the problem of producing an inexpensive, effective car. The collective genius of this cluster helps explain why New York City, which had dominated the market at first, quickly ceded its primacy to Detroit, which boasted more than 40 car companies by 1905. Through the early 1920s, Detroit remained a model of innovation through competition, with more than 50 auto manufacturers supplying one another with parts, ideas, and financing even as they fought for market dominance.

One of those ideas was Ford’s method, quickly imitated by his competitors, of building big factories with mechanized assembly lines, which created massive economies of scale and enabled him to cut prices repeatedly. The Ford approach created tens of thousands of jobs, and initially, at least, they were pretty much all in the Detroit area. One of Ford’s Detroit factories, the River Rouge plant, was the world’s largest factory during the 1930s, employing more than 100,000 workers. The great majority of them had little formal education, but starting in 1914, they were earning $5 a day—far more than they could bring home doing almost anything else. Ford’s innovation had made them productive and well paid.

So far, so good. But when change happened, Detroit was unprepared for it. Seeking to reduce costs and fleeing the powerful Michigan unions, auto companies started building factories in lower-cost areas soon after World War II. (Comparing the industrial growth of adjacent counties in states with differing union rules, economist Thomas Holmes has found that between 1947 and 1992, manufacturing grew 23 percent faster on the antiunion side of the state line.) By the late 1970s, the car companies were also struggling to compete with a new set of foreign firms offering attractive prices, quality, and fuel efficiency.

So Ford’s legacy to Detroit has been mixed. On the one hand, he surely brought many jobs there. But the scale of his success transformed a city of small, smart entrepreneurs into a city of vast factories filled with less educated workers. Decades of dominance by big companies in a single industry left Detroit with an ample supply of company men but a dire shortage of the kind of entrepreneurs who can reinvent a city when the economic climate changes. Even today, only 12 percent of Detroit adults have college degrees, and firms remain big. Meanwhile, urban success over the past 40 years has been tightly tied to having an abundance of educated workers and lots of little firms. The scale of Detroit’s decline is breathtaking: a city of 1.85 million residents in 1950 has fewer than 720,000 today.

Detroit also has much to teach us about how wrongheaded public policy can discourage entrepreneurship. The federal government, to begin with, has repeatedly acted to save the auto industry. In 1979, President Jimmy Carter signed the Chrysler Corporation Loan Guarantee Act, which guaranteed $1.2 billion of Chrysler debt. In 1981, the U.S. government pressured the Japanese into accepting “voluntary export restraints” that limited the number of Japanese cars imported into America to 1.7 million per year. (A side effect of the restraints was pushing Japanese manufacturers to open production plants within the United States; needless to say, they typically chose spots far from union-dominated Detroit.) Most recently and spectacularly, the feds bailed out General Motors with $50 billion and Chrysler with $10 billion.

It’s easy to understand why the government wanted to keep two large companies from collapsing in the middle of a recession. But the Big Three were synonymous with industrial stagnation; for all we know, a dissolution of General Motors would have led to a cluster of smaller, more nimble companies. Some might have failed, but others might have been innovative enough to start adding employment. What we do know is that we haven’t produced a world-beating car industry that will be a future jobs machine. These companies will probably keep sputtering along, making money in good years and requiring more bailouts in bad.

On the local level, Detroit is an object lesson in the failure of policies that emphasize physical capital rather than human capital and entrepreneurship. In the 1950s, Mayor Louis Miriani guided a sizable urban-renewal program, spending tens of millions of federal dollars on subsidized housing and overseeing the completion of the $70 million Cobo Convention Center. Miriani’s successor, Jerome Cavanagh, similarly used the federal largesse that showered Detroit in the 1960s to build new housing. And four years after Cavanagh left office, Detroit elected its first African-American mayor, Coleman Young, who spent millions supporting projects like the Joe Louis Arena and General Motors’ Poletown plant. He also invested in a monorail system, using the federal funding for urban transit made available by the National Transportation Act of 1973.

Detroit’s People Mover now glides over underused, often empty, streets, a reminder of the mistaken notion held by all three mayors and by the urban-renewal movement generally: that shiny new buildings can make a shiny new city (see “Urban-Development Legends”). Subsidizing new housing never makes sense in a declining city, since the hallmark of declining cities is that they have an abundance of structures relative to the level of population and demand. At the moment, more than 90 percent of Detroit’s houses are priced below construction cost, so it hardly makes sense to bribe people to build more of them. As for infrastructure, it can be valuable, especially when it radically reduces the costs of doing business, as the Erie Canal did. But today, America and its cities are already well connected, and new infrastructure investments are likely to have fairly modest effects. They are especially unlikely to bring back declining cities.

What would help is knocking down the barriers that block entrepreneurs from thriving. Here, alas, Detroit is a leader in erecting barriers. Take Pink FlaminGO!, a food truck operated by entrepreneur Kristyn Koth, who sold “Latino-influenced locally-sourced fresh food,” as the blog Eat It Detroit put it, out of a Gulf Airstream. Rather than cheering her on, the city gave her so many tickets that she had to close. What Crain’s Detroit Businesscalls “Detroit’s archaic ordinances governing all types of vending in the city” block food trucks from locating near existing restaurants or “in the most populated areas of Detroit”; they also tightly limit which foods street vendors may sell, partly to limit competition with restaurants.

Just as it isn’t the federal government’s job to prop up failing companies, it isn’t a city’s job to defend the status quo against innovative entrepreneurs. Detroit’s heavy regulations are a big reason why there aren’t enough new firms rising to offer alternatives to the Big Three.

Declining industrial cities don’t have to follow Detroit’s path—thanks to entrepreneurs. Forty years ago, as Boeing chopped down its local workforce, two jokers put up a billboard on a Seattle highway that read:WILL THE LAST PERSON LEAVING SEATTLE TURN OUT THE LIGHTS? Today, of course, Seattle looks nothing like Detroit. A stream of innovative companies—Microsoft, Amazon, Starbucks, Costco—has completely transformed the city. Between May 2010 and May 2011, it added more jobs than any metropolitan area except Dallas and Houston.

Like so many examples of American entrepreneurship, Costco has its origins in New York City’s garment industry, which employed the parents of one Sol Price. Price left the Bronx, moved to Southern California, and worked as a business lawyer for years. When he turned 38, some entrepreneurial gene awoke in him and he began to open discount warehouse retail chains—first FedMart, which catered to government employees, and then Price Club. In 1983, one of Price’s top managers at both companies, James Sinegal, borrowed Price’s idea—Sam Walton did, too—and took it to Seattle, where he founded Costco. Today, Costco has more than 400 stores and is the third-largest retailer in the United States, with $60 billion in domestic sales and nearly $20 billion abroad. Costco employs almost 150,000 people; many of them lack significant formal education, but smart management has made them far more productive.

Starbucks employs only 10,000 fewer people than Costco does, and its origins were far more modest. Two teachers and a writer decided to get into the coffee-roasting business. One of them learned the trade by working in the Berkeley store of legendary Swiss émigré Alfred Peet. When Starbucks opened in 1971—mere days before the jokers’ highway sign went up, as it happened—the company just roasted and sold beans, initially avoiding the sale of brewed coffee.

The transformation of Starbucks was led by Howard Schultz, a kid from Brooklyn who also once worked in the Garment District. Schultz was working for a housewares company when Starbucks piqued his interest by buying so many plastic cone filters, unusual in the coffee industry at the time. He quickly saw the potential in specialty coffee—how an increasingly affluent world would want to brew better joe. Schultz joined the company as head of operations and marketing in 1982. But on a trip to Milan, Schultz became convinced that Starbucks should sell lattes as well as beans. Breaking with the company’s founders, he left and started his own coffee shop, Il Giornale, which was inspired by the cafés that he had seen in Italy. It specialized not only in higher-end coffee but also in trained baristas who were supposed to provide a better retail experience. The success of Il Giornale enabled Schultz to buy Starbucks and create the chain as it is known today.

The company is another brilliant example of how entrepreneurs can create employment for the less skilled. Both Schultz and the original founders saw the demand for better coffee. Schultz’s vision, though, required thousands of workers who didn’t need much formal education but did need the right kind of training. His model became an employment machine. Remember, unemployment represents a crisis of entrepreneurial imagination—and people like Schultz and Sinegal had the imagination to see how they could make thousands of lightly skilled workers amazingly productive.

Seattle also owes its success to its formidable skills base, a major boon to high-tech giants Amazon and Microsoft, which both employ large, highly skilled local workforces. More than half of the city’s adults have a college degree, which makes it one of the more educated places in America. We know that the share of a city’s population with a college degree in 1970 is a strong predictor of its subsequent employment growth. Another predictor is the presence of a land-grant college in an area prior to 1940, which supports Senator Daniel Patrick Moynihan’s old claim that the best way to create a successful city is to found two world-class universities and wait 50 years. One reason an educated population leads to jobs is that it helps entrepreneurs find—and create—opportunity in today’s complicated, technologically intense world. After all, the occupation and skills of prospective workers shape the choices of entrepreneurs; no one would start an engineering company in a city without engineers.

Brainy Minneapolis’s success—per-capita incomes are higher there than in nearly any other metropolitan area between the East Coast and Colorado—shows that having a skilled population can enable a city and its entrepreneurs to overcome even freezing temperatures, which often chill urban vitality. Take Earl Bakken, who studied engineering at the University of Minnesota and later connected with C. Walton Lillehei, a pioneer of open-heart surgery who worked at the university’s hospital. The flow of knowledge between the two led to the invention of the first battery-powered artificial pacemaker, a device that would make Bakken’s company, Medtronic, a major firm. Medtronic remains on the cutting edge of medical technology and now employs 38,000 people, many of them in the Minneapolis area.

Unfortunately, today’s America seems to have too many Detroits and not enough Seattles and Minneapolises. How can more cities become centers of skilled invention and entrepreneurship?

Entrepreneurship doesn’t happen overnight, and it’s rarely the direct creation of government. Bureaucrats aren’t experts in finding unexpected market niches, so politicians are prone to throwing money at the fad of the moment, like “green jobs.” Also unhelpful are policies that privilege older, big-firm industries. My research with William Kerr has found that places blessed—or cursed—with natural resources, such as coal or iron mines, 100 years ago still have larger firms today, across all their industries, and that the employment picture there is correspondingly bleaker than in cities with fewer natural resources. So we should worry about policies like auto bailouts, which are the artificial equivalent of coal mines, encouraging big, stagnant companies at the expense of job-creating start-ups.

Still, certain policies can help entrepreneurs and boost American employment. Since an educated workforce is so important to urban success, America needs better schools, especially in its dense urban areas. Perhaps the most hopeful development on this front is the emergence of charter schools. Since entry to the most successful of these schools is typically by lottery, social scientists can compare the test scores of those who won and got in with the test scores of those who didn’t. A significant number of papers now show the remarkable long-run effects that getting in can have on children’s academic outcomes.

That’s particularly satisfying because charter schools themselves channel American entrepreneurship, replacing poorly performing public monopolies with something closer to the free market. Not every charter school is a success, obviously—not every big-box store is, either—but the good ones attract students and the bad ones eventually fail. That’s how entrepreneurship works.

Another badly needed reform that would help unleash entrepreneurs: every level of government needs to rethink and reduce its regulations, which have grown excessive and stifle innovation (see “The Regulatory Thicket”). The federal government could lead the way by establishing a federally funded independent body, perhaps attached to the Congressional Budget Office, to analyze state and local regulations. Localities that instituted entrepreneurship-killing regulations would lose their power to issue federal-tax-exempt bonds.

Cities play an outsize role in supporting entrepreneurship, especially the kinds of entrepreneurship that employ the less skilled. Our three largest metropolitan areas—New York, Los Angeles, and Chicago—produce 18 percent of America’s output while housing only 13 percent of America’s population. Yet many of our policies, like subsidized highways in low-density areas, pull Americans away from the urban centers that are the country’s true economic heartland. We need to eliminate those policies.

In general, we should never use public dollars to bribe people to remain in dead-end jobs. We should place far less emphasis on the industries of the past and more on those of the future. Federal policies that bail out auto companies and subsidize agriculture aren’t merely expensive; they also encourage people to stay in declining industries rather than strike out on their own.

And we should work diligently to support free markets, whose most important function may be to allow human genius to create new ideas that give jobs to thousands. As America looks to the future, it must renew its commitment to economic freedom, a climate in which entrepreneurs—and America’s workers—can thrive.

Edward L. Glaeser is a professor of economics at Harvard University, a City Journal contributing editor, and a Manhattan Institute senior fellow. This piece was first published at City Journal.