Where Are We Along The Laffer Curve?

Since the seventies, tax cuts proponents have argued that cutting taxes spurs economic growth that eventually leads to the collection of more tax revenues and that, in essence, makes tax cuts pay for themselves without having to adjust expenditures accordingly.  This has been a bastion position for supply-side economists, especially as it relates to corporate taxes, but it’s an argument that has been extended to individual income tax payers as well, as tax cut proponents have argued that high income earners are predominantly small business owners. 

Because the tax cuts, which were implemented at the beginning of the Bush II administration are about to expire, the debate about the benefits of tax cuts is once again at the forefront of our nation’s fiscal discussion. The often noted inspiration of this reasoning is the work by economist, Arthur Laffer, whose famous model illustration is depicted in a graph that bears his name, The Laffer-Curve. 

Compared to most graphs dismal science has given to the world, this one is simple.  It plots revenue collected against the marginal tax rate the tax payers pay.  At lower rates, which I will call the ‘green zone’ each rate increase results in higher revenue, and at higher rates, which I will call the ‘red zone’ each additional rate increase reduces the revenue collected as tax payers adjust their behavior to avoid the higher taxes. At the extremes, if the tax rate is at 0% no revenue is collected, likewise a tax rate of 100% yields similar results as tax payers stop producing to avoid having the fruits of their labor all go to the tax collector.  Most importantly, in the “red zone”, reducing the tax rate would actually result in higher revenue. 

But where are we on the curve?  Are the tax rates so high that continuing the tax cuts is better for the revenue picture than ending the tax cut? In other words, are we really in the red zone? Tax cut proponents’ arguments appear to assume a red zone environment. Many, including Ronald Reagan in 1981, cited the Kennedy tax cut enacted in 1964, a few months after his death, as an example of a tax cut that spurred economic growth that ultimately led to more revenue. That tax cut reduced marginal tax rates from 91% to 70%. 

Ronald Reagan managed to score a substantial tax cut in 1981 that reduced the individual marginal tax rates gradually from 70% to ultimately 28% by 1986. Revenues decreased substantially as a result of both the Kennedy and Reagan tax cuts according to figures from the 2006 US Treasury paper and from the Tax Policy Center.  By contrast, revenues increased after the Bush I tax increase of 1990 that created a new marginal tax rate of 31%, and during the 1993 Clinton tax hike that created new 36% and 39.6 % tax rates for top earners.  These rates stayed in place until 2001 when, for the first time, the federal budget showed a surplus.  Bush II tax cuts cut rates for all earners and reduced the top rate to 35%.  Deficits returned almost immediately. 

Does that not suggest the red zone may be above 39.6%, and certainly not below? Former Federal Reserve Chairman, Alan Greenspan, appearing on NBC’s Meet the Press on August 1, 2010, said unequivocally that cutting taxes does not raise revenues by paying for themselves.  That would mean he also thinks we are in the green zone, would it not?

Granted, a lot of arguments can be extended about the role of government, and hence disagreements about what should be funded and how.  But it appears to be intellectually dishonest to insist that we are in the red zone when evidence dictates otherwise.  Even Laffer, when asked by a Time reporter in 2007 if the Bush II tax cuts paid for themselves, he said he didn’t know.

Did North Carolina’s Unemployment Really Fall Below 10%? (Brief Study on Labor Force Participation)

NOTE: The following represents the analysis-based opinion of the author and do not reflect those of his employer or any other affiliations

By Kenneth Hunter, Guest Blogger

The Bureau of Labor Statistics released July 2010 unemployment statistics at the State level this morning. Their published findings show North Carolina’s unemployment rate at the seasonally adjusted rate of 9.8% (unadjusted rate 9.9%). This is the first time since March 2009 that the adjusted rate has been reported below 10% for the state.  The report also showed that the State added about 5,500 jobs in July (14,132 net gain over the past 12 months).

This good news aside, statistics also show a continued decline in the size of the overall state labor force (8,100 fewer workers in July, and 47,000 fewer in the last 12 months).  Because the BLS does not provide an estimate of the overall workforce age population, we do not know how their adjustments in labor force represent their view on labor market participation. However, we do know looking at national reports that labor force participation was reduced in a statistical manner throughout the course of the recession, though Federal reports show that the number is being adjusted upward in recent months.

Labor market participation is adjusted by officials to account for the attitudes of those out of work, as well as reflect changes in citizen behavior and the impact of historic and demographic shifts.  Over time, labor participation has increased significantly to reflect the rise of the baby boomer workforce and the transition toward two-job households. Taking into account temporary adjustments that reflect periods of full and sparse employment over the past 25 years, our available labor force has averaged a 66-67% participation rate over the past 25 years. This average is still above the actual labor participation reported by the BLS for national statistics, indicating that the posted unemployment rate is probably understated.

The same is true, and even more noticeably, for North Carolina. Without the benefit of updated estimates on the size of the available labor force, we are forced to use annual population estimates for the 16 to 70 age group, as updated by the U.S. Census Bureau. In order to “satisfice” with limited time and resources, as well as account for variances in the workforce due to seasonal factors (i.e., school, summer vacation, holidays), a comparative month average of the participation rates from 2000 to 2007 provides a reasonable basis for evaluating current participation rates, and thus the validity of posted unemployment rates.

Based on this model, the July average labor participation rate in North Carolina (2000 to 2007) was 72.5%. For July 2010, the BLS reported participation at 67.9%, the lowest participation rate in more than a decade. This is a significant difference from the applicable average, meaning that the corresponding unemployment rate (15.7%) is significantly higher than published (9.9%).

As the chart shows, it is plausible that unemployment in North Carolina has resumed an increase, a concept more in line with recent reports on growing first-time claims for unemployment. More importantly, the differential between published rates and those utilizing recent averages for labor force participation suggest a more systematic problem with the State economy that needs immediate attention. If the BLS’ participation estimates are correct, the difference represents the substantial growth of a long-term unemployed population that will place greater burden on established entitlements.

Regardless one’s opinion of the validity of the alternate analysis with respect to measuring unemployment, the exercise makes it clear how far we really are from a clear path toward economic recovery, especially in the Tar Heel State.

ASPA Member Kenneth Hunter is an MPA Graduate of The University of Georgia with more than a decade of experience in local government finance. Kenneth is the Budget & Evaluation Manager for the City of Rocky Mount, North Carolina, and serves on the Executive Committee of theAssociation for Budgeting & Financial Managementand is a Board Member and Webmaster for the North Carolina Local Government Budget Association.

Context of e-Government

By Rajesh Kumar Shakya, Ph.D. Student (Capella University)

E-government (electronic government) refers to the use of information and communication technologies (ICT) to provide the government services to citizens with the enhanced efficiency, accountability, and transparency through cross-cutting e-governance across the whole government machinery. Governments around the world have taken up e-government initiations with different goals which may include few of the following:

• Standardizing and streamlining the public administration across the government agencies
• Make available government services to citizens covering wider and diverse geography
• Reduce transaction cost in government transactions
• Enhance efficiency,  transparency and accountability on government transactions

Governments give priority to some goals over others, sometimes in-line with the national programs, most of the times just to follow the trend without any plans and preparations. Are these goals ever achieved? Were these goals rightly chosen for the national development? Is it demand of time and so the demand of the citizens? Are these governments committed to transform the aspirations into the results? How will governments fulfill the changing demands of the citizens and keep up with the ever changing technology? Is the perception of e-government same in developing and developed world?

Translating e-governance vision into reality has always been challenging. Challenges posed by e-government come together with challenges of technical readiness and ICT efficacy, administrative and managerial maturity and cultural and trust factors.  Needs and challenges in developing and developed world are not same. Arrangements for e-government and its adoption level and context may be different. The solution and approach of implementation also widely varied country to country. Thus, e-government takes different shapes adapted to different circumstances.  There is no single prescription for all governments for the successful implementation and adaptation of e-government. But a lot of lessons can be learned from the implementation experiences around the world, technological and management trends for the success of e-government. Instead of just following the trends, if the governments choose to orchestrate the e-government plan and programs based on the country context, the aspirations of the citizens, government and the demand of our time may surely be fulfilled.

[Rajesh  Kumar Shakya is the practitioner e-Government and e-Government Procurement Consultant for different governments in Asia, Europe, and Africa. More issues, aspects, and  practices in e-government around the world will be discussed in his future posts.]

Making Progress

In his essay “The Study of Administration,” Woodrow Wilson states that “In government, as in virtue, the hardest of hard things is to make progress.”  Such a declaration initially may appear so obvious as to be rather pointless.  But as I consider its veracity, I find myself pondering the reasons why making progress is so hard.  Why, when we all want improvement, when we all want to provide the best services and options for our constituents, is making progress so difficult?

Easy answers flow quickly: budget restrictions, shifting political priorities, insufficient staff, competing interests.  These are indeed components that must be considered when addressing progress, but I believe the heart of progress lies in the desire for and – perhaps more importantly — the willingness to not just accept but actively seek change.

Change, as we all know, is a difficult pill to swallow as it implies that the status quo is not good enough.  Acknowledging that fact, however, does not equate to judging previous efforts as inadequate.  And therein, I believe, lies the real resistance to change, and thus progress.

We change clothes because the focus of our activities changes: the office attire appropriate for public meetings is not conducive to weeding the corn.  We change vehicles because the sporty sedan we enjoyed as newlyweds no longer fits our growing family.  We change careers because growth of our interests, skills, and knowledge challenge us to seek new opportunities.  We all change because such change meets our needs.  We do so willingly and regularly, without considering our previous choices to be wrong or poorly made; they simply reflect the needs of a different moment in time.  Today’s minivan recognizes adaptation to growth.  A promotion celebrates our increased understanding and abilities.

So, too, must we learn to consider change in the workplace if we are to ever achieve progress.  The hardest of hard things becomes much easier when we recognize that changes demanded for progress highlight growth and improvement rather than correction of error.

Paula Scott Dehetre, Virginia Community Colleges, Workforce Development

Summer is about to end and school will be back in session. As a parent of two rising 6th graders, I am busy buying supplies, new sneakers, backpacks and making sure my children can adjust back to the regimen of early rising to catch the bus.

Others are preparing to attend Fall semester of post-secondary institutions, whether it be to earn a degree or a credential. The crisis of joblessness that we face in America calls for a more focused development of a career pathway for young students as well as dislocated workers, whose livelihood may not exist any longer. Community colleges are a high quality, affordable choice for many in this situation. The VCCS is the administrator of the federal Workforce Investment Act (WIA) in the Commonwealth of Virginia. We forge a partnership between the local workforce investment areas, their One Stop Career Centers, employers and the training providers throughout the community to assist in preparing the supply to meet the demand of economic development.

WIA has not been reauthorized since 1998. It has come a long way since it’s predecessor programs of JTPA and CETA. These programs are very practical areas that public administrators can make a difference in and create great value. I commend students and professionals alike to become educated about your own local workforce investment board in your community and perhaps seek appointment to that Board or the Youth Council in your area. Now is the time and they system could use your help.

Perfect Storm

During the past two months, I’ve read several articles foretelling a second wave of the 2008-2009 recession. Remember the recession? The one we were reluctant to call when it began and enthusiastic to announce as “over” the moment the vaguest of signs were observed? That one.  

According to some economists, a second wave of devastation—or “double dip”, as it is being hailed is likely to occur.  As you might imagine, if the economy takes another dive the scenario is likely to be an exacerbated version of Dip #1 (worsening unemployment, decreased housing prices and sales, increased federal deficit, etc.) For the nonprofit sector, the effects were widespread:

• State and Federal funding delays and reductions: Around the country, nonprofits report delays in payments to nonprofits for services, despite contractual obligations to pay, forcing nonprofit organizations to float programs from often meager reserves, unpredictable (and dwindling) cash flow, and credit lines. A recent survey by CT Association for Nonprofits indicted that a third of Connecticut’s nonprofits experienced reductions in government funding, donations, and investment income. Not surprisingly, 55% also reported reductions in workforce.
• Decreased private fundraising. The Nonprofit Times notes that there has been an overall drop in charitable donations. Donors are worried about their own finances, and are not as easily parted from their cash. Moreover, foundation assets decreased by 22% in 2008, eliminating approximately $150 billion in potential funding in one fell swoop, according to the Foundation Center.
• Increased demand for services:  Across the country, the demand for services has increased due to the financial climate, and outpaces available resources. CT Nonprofit’s survey reports that 82 percent of Connecticut’s nonprofits experienced a rise in demand for services DESPITE needing to reduce their workforce. (See “decreased funding” above.) In my own organization, we are also seeing people presenting with layers of needs. How engaged can a parent of a challenging preschooler be when there isn’t enough food on the table? Can a victim of rape afford to focus on her recovery when she is worried about having fuel to keep her family warm this winter?

Recession Round #1 had a devastating effect on nonprofit organizations, and more of the same is expected :  Less state and federal funding. Fewer charitable contributions. Larger numbers of people needing services. Recession Round #2 may be the Perfect Storm for the nonprofit sector.

Robyn-Jay Bage, M.P.A.
Nonprofit CEO and Assistant Professor of Management

More Federal Money… More State Budget Problems

By Kenneth Hunter, Guest Blogger

In a matter of hours this past Tuesday, the US House of Representatives passed and President Obama signed a $26 Billion bailout plan that will provide additional Federal funding assistance to states dealing with significant structural budget deficits related to declining and stagnate revenues, along with growing Medicare and education spending.

Despite the fact that Congressional leadership and the White House both state that this legislation is “paid for” thru tax increases and cuts in other spending programs, the reality is that the bailout is a clear indicator that the current structure of “universal-style” public services and entitlements is fiscally unsustainable. Perhaps the most disturbing fact involving this action is that 30 states, including here in North Carolina, prepared and adopted their Fiscal Year 2011 budgets to incorporate these “anticipated” revenues to fill in gaping deficits.

In North Carolina’s case, the General Assembly and Governor Bev Perdue cobbled together a budget that allocated an additional $1.6 Billion in stabilization funding made possible by last year’s Recovery Act, then balanced out with an assumption that an additional Federal bailout would provide them with nearly $519 million.

The budget did include a “replacement plant” to cover the gap if Washington did nothing. Along with raiding numerous reserve funds, the plan included a $139 million reduction in contributions made by the State to their employee retirement system, a balancing gimmick that would be considered criminal by many, and irresponsible to anyone.

Local governments participating in North Carolina’s State-administered retirement (pension) program were forced to increase employer-paid premiums by approximately 35% this year. This will be the first of many employer and employee-side increases we anticipate over the next several years. While cities, town, and counties in the Tar Heel State are doing their best to balance budgets and control spending in real terms, often the product of effective work between elected officials and professional analysts, our elected leaders in Raleigh (like many other state capitals across the country) have simply pulled out the legal pads and started balancing for the sake of numbers, not reality.

Regardless of one’s opinion of the original stimulus and recovery efforts, everyone with any financial understanding realizes that such initiatives relying on significant infusions of cash must end, almost as quickly as they begin. Not only do the resources not exist to keep repeating this trend, but continued “bailouts” will only encourage irresponsible behavior at the state level, perhaps reaching down into localities.

If this level of institutionalized irresponsibility reaches all levels of government, without effective restoration of fiscal discipline by principled administrators and politicians, respecting the interests and inherent liberty and rights of the individual citizen, the integrity of American government will be destroyed at a fundamental level.  Forcing states to take their financial crises seriously, turning to restructuring from the inside rather than holding their hands out for another Federal bailout, is critical to the survival of our Federal system.

ASPA Member Kenneth Hunter is an MPA Graduate of The University of Georgia with more than a decade of experience in local government finance. Kenneth is the Budget & Evaluation Manager for the City of Rocky Mount, North Carolina, and serves on the Executive Committee of theAssociation for Budgeting & Financial Managementand is a Board Member and Webmaster for the North Carolina Local Government Budget Association.

Substance Abuse and Public Administration

Good afternoon ASPA Members:

I am honored to be one of ASPA’s bloggers for this upcoming semester.  I look forward to discussing issues that impact our profession and our lives throughout the course of the year.

One of my areas of interest in substance abuse and the administration of policies that attempt to control the social problem.  I have worked at all levels of American government, in nonprofit treatment and detoxification centers, and encountered the occassional drunken or stoned student in class. While we hear about the problem on the news, we rarely think the problem impacts our profession.  I am working with publishers on three books on that very subject.  Often times, I had to rely upon my primary research, interviews, etc. rather than articles published about this issue in public administration journals. 

Our policies dealing with this issue vary from community-to-community, state-to-state, and even nation-to-nation.  Often times, we ignore the problems that an employee experiences when he or she is addicted to a substance like alcohol, prescription drugs, or illicit ones.  We ignore it until it becomes a problem.  At which point, the person is given a choice to go to treatment or be fired.  The public sector protects the rights of individual in need but do we often ignore those problems?  I say, we do.

For example, how many professors of public administration are trained to deal with the student who attends class intoxicated?  How do we know the student is even intoxicated if he or she is not belligerent?  What about our colleagues who seemed to be “buzzed” all of the time?  I remember having a couple of professors who were obviously alcoholic or drug-addicted.  Instead of dealing straight away with the problem, the person’s colleagues ignored the problem and passively complained.

What about in the public sector workplace?  Colleges and universities have a zero-tolerance policy but it may be ignored until an avoidable situation becomes unavoidable.  In some situations, the intoxicated person is fired immedidately, particularly in areas where one’s health and safety are at stake.  But what about the secretary who takes pain medication and is a bit “flighty” for an hour or two on the job?  What about the caseworker who justifies their actions while under the influence?

Our national policy toward substance abuse is coordinated through the White House Office on National Drug Control Policy.  Several federal agencies control certain aspects of the multifaced issue:  Health and Human Services conducts addiction research; the Justice Department works with domestic and foreign governments to control drugs flowing into the country while tracking down moonshiners (their numbers are growing around the country); Housing and Urban Development attempt to clean up neighborhoods; the Department of Education writes curricula on prevention programs, etc.  State and local agencies attempt to write their own policies that mirror their concerns but match federal policies.  I contend these bureaucracies, those of us who work in public administration, are the policy makers here.

We work with citizens groups.  We talk with industry leaders.  We work with and educate elected officials about the problem and what needs to be done to help us.  But the problem eventually returns to us – the bureaucrat – and we make decisions based upon what we see when that person enters our public treatment facility, is pulled over by the local police, or comes to class intoxicated.

This is a topic that warrants more discussion within and among our field.  I look forward to hearing and reading your comments.

All the best,

Dwight Vick

What’s a Pracademic?

It’s been years since I first heard the term “pracademic” and I’m still no closer to understanding the term.  Is it someone who works, or has worked, in academia and government?  Is it someone who works in government and occasionally teaches as an adjunct?  Is it a professor who also consults for, or serves on, the board of a nonprofit organization?  None of the above?

Multiple members and leaders of ASPA have suggested that ASPA consider specific programming for this segment of our membership. But before we do, it’s important to identify who we are talking about. For that matter, is it a demographic classification or an area of interest?

If you are a self-styled pracademic, please take a moment and let us know what type of programming and services appeal to you.  Is it something we are already doing, not doing at all, or need to be doing better? 

Please respond to this post, or if you prefer, contact me directly at mrankin@aspanet.org.

Best,

Matt Rankin
ASPA Deputy Director

“Interventions” Improve Customer Service for North Carolina City

Some material excerpted from a story first appearing on the website of the North Carolina Local Government Budget Association, written by this same author.

ASPA members Evans Ballard (City of Salisbury, NC) and Dr. William Rivenbark (UNC School of Government) co-wrote the cover article for this month’s edition of Public Management, the magazine of the International City/County Managers Association (ICMA). Their work summarized a multi-year project that Ballard, along with his employer, Salisbury (NC) City Manager David Treme, undertook to transform their City’s organizational culture toward a preeminent focus on providing residents with the highest possible quality of customer service.

Salisbury’s emphasis on customer service came about when performance surveying results indicated citizen disappointment and apathy toward the public attitude of City staff. Treme responded by developing a focus of customer service excellence as the City’s “hedgehog concept”, an idea he gained by reading Jim Collins‘ management text, Good to Great. Focusing on customer service excellence, Treme and Ballard utilized citizen surveying and a facilitator-led “intervention” strategy to transform the City’s staff culture in order to achieve their goal.

ICMA has posted the article online, along with this video interview with Treme and Ballard.

Here are some additional resources related to the article and Salisbury’s success:

Salisbury’s Community Performance Reports

Salisbury Mission, Vision & Core Values

Salisbury Budget & Performance Office

Videos on Collins’ “Hedgehog Concept”

Case Study on Customer Service Intervention

The Customer Service Intervention (book)

Good to Great and the Social Sectors (monograph)

ASPA Member Kenneth Hunter is an MPA Graduate of The University of Georgia with more than a decade of experience in local government finance. Kenneth is the Budget & Evaluation Manager for the City of Rocky Mount, North Carolina, and serves on the Executive Committee of the Association for Budgeting & Financial Managementand is a Board Member and Webmaster for the North Carolina Local Government Budget Association.