Washington Policy Center Blog

A Common Mistake

One simplistic critique used by those who prefer political solutions to economic solutions is to point out market failures. The existence of these failures proves, to them, that any government solution is justified no matter how costly.

Often, however, critics know little of economics and their arguments are often incorrect. Witness an op-ed published by UW psychology professor David Barash in the Seattle Times last week. He highlights what is known as the "tragedy of the commons." Where everyone shares common access to a resource, fish for example, individuals have no incentive to manage for the long term. Any fish left will simply be caught by your neighbor, so the incentive is to fish until there are no more fish, hence the tragedy.

In the editorial he cites another example: "It may be inconvenient to recycle and, in fact, easier for individuals simply to throw their garbage away, or to use more than their share of scarce commodities. In the process, they derive personal gain or enhanced convenience, while the cost — in overcrowded dumpsites or worldwide resource shortages — is, by contrast, a general one."

The only problem is that what he describes is not an example of the tragedy of the commons. There are clear property rights at landfills and there is a charge to use them. As landfills become full, the price to dump your trash will go up.

The problem with landfills (I should note here that we have a tremendous amount of space in landfills, by some estimates enough to last us into the 22nd century without opening new sites) is that government artificially keeps prices low to prevent people from dumping their trash in forests and fields or wherever they won't get caught. This is not a problem of the "commons" but of enforcement. Government could choose to charge appropriate rates and increase enforcement and the penalties for illegal dumping. That would adequately solve the problem, although the costs of enforcement might be very high.

Further he argues that people might use "more than their share of scarce resources." What is my share and who decides what my share is? If people hold property rights to those resources, like timber, iron, tin or water, the use of resources comes at a price. The more you use the more you pay and as those resources become "scarce" the price goes up. In fact, economics is often described as the science of "allocating scarce resources." Does he think we can make a better decision using politics? Can he show me an example where politics has worked better?

The ultimate point of his editorial is to argue for strong government action to address climate change. How confident can we be that his prescriptions make any sense when he doesn't seem to have a very good grasp of the very argument he attempts to make?

Their generosity is touching

Greenburgh, New York, has some of the nation's highest property taxes.  This is a problem for the area's senior citizens, who live on a fixed income drawn from retirement savings and Social Security.  Understandably, many have deep roots there and don't want to leave.

Their plight has not gone unnoticed by Greenburgh officials, who recently offered a plan to allow senior citizens to work part-time for local government agencies.  Under this "tax workoff" program, wages would go entirely and directly towards paying down the person's property tax obligation.  Let no one accuse Greenburgh officials of being hard-hearted.

Not surprisingly, public employee unions are concerned about the program's impact on member job security, which means city officials will be reluctant to replace unionized full-time workers with part-time senior citizens (solidarity goes only so far, you know).

The program's parallels with indentured servitude aside, one has to wonder about the logic here:  expand the government payroll in order to pay people so they can pay their property taxes.

One local resident says paying property taxes in and around Greenburgh is "a constant struggle."  She likes the idea of the tax workoff plan.  "You have to be creative," she said.  Spot on.  Here's a creative idea for Greenburgh officials to ponder: a property tax cut.  Perhaps that's a bit too creative.

Taxpayers need searchable Web site to track state spending

The Tacoma News Tribune ran my column today discussing our proposal for a free searchable website of state spending and performance information. Details here:

• Taxpayers need searchable Web site to track state spending (Tacoma News Tribune)
• Microsoft willing to help with transparency reforms
• Creating a Free, Searchable Website of State Spending
• Time to Shine Light on Government Spending (FoxNews.com)
• ALEC embraces budget transparency proposals

Spokane's City Wi-Fi Expansion Hits the Skids

The Spokane Journal of Business' Kim Crompton gives an excellent insider's view as to why municipal Wi-Fi networks are failing in Spokane and also nationwide. Several major cities, including Chicago, San Francisco and Houston, have all struggled to deploy free-of-charge Wi-Fi networks throughout downtown areas.

Several problems have surfaced over the past few years as municipal governments and private companies attempted to strike gold with free Wi-Fi services.

First, actual demand for the service has always come in far less than expected. This is a problem because users taking advantage of the free service are exposed to advertising -- this is a large part how private companies recoup operating costs. Eventually, advertisers figure out that purchasing ads on these networks isn't worth the money. This hurts the company providing the free resource. Regarding demand, cities are seeing that people appreciate the internet services they pay for. The free services are often inferior (slower speeds, weaker signals) than the service they pay for.

Second, locking government into the wireless-fidelity platform is a bad idea. Technology changes incredibly rapidly and already Wi-Fi is an outdated (albeit still useful) technology. WiMax signals, a similar but superior technology, carry farther and is a much more affordable technology. Compton points out that you need 40 nodes broadcasting Wi-Fi per square mile at a cost of $3,000 per node, versus a single WiMax tower that can cover several square miles.

Also, several cellular providers have already rolled out 3G signals for cell phones and laptop cards that provide speeds equivalent or higher to DSL and 4G, the next technology, is already on its way.

So why would government want to be locked into an inferior technology that everyone has already moved on from, while losing money hand over fist? Well, I guess that's government for you.

A better option is to let businesses like ClearWire (providing WiMax) and the cellular services (e.g. AT&T and Verizon) use their own capital to role out services, instead of using taxpayer money to provide an inferior alternative. It's one thing for a government to provide free Wi-Fi inside of government buildings such as libraries, it's an entirely different matter when it tries to role out a city-wide service.

Hubris

"2007 is likely to be the warmest year on record globally, beating the current record set in 1998, say climate-change experts at the Met Office."
- UK Met Office, "2007 - forecast to be the warmest year yet," press release, January 4, 2007

"The preliminary annual average temperature for 2007 across the contiguous United States will likely be near 54.3°F, 1.5°F (0.8°C) above the twentieth century mean of 52.8°F. This currently establishes 2007 as the eighth warmest on record. ...The global annual temperature for combined land and ocean surfaces in 2007 is expected to be +0.55°C* (+0.99°F)* above the 20th century average, ranking 5th* warmest in the period of record."
- National Climatic Data Center, "Climate of 2007 Preliminary Annual Report," December 13, 2007

Expect to hear news stories in January about 2007 being one of the hottest on record. It was. Don't expect to hear that was it cooler than climatologists and their models predicted. It was. Don't expect to hear that they missed the projected temperature anomaly by 10 percent in one year. They did. Don't expect people to extrapolate that error to the ability to accurately predict 100 years from now. They won't.

Update (December 21, 2007)

Another blogger took issue with my analysis above and did find something I had missed (this is why competition, of ideas or in the economy, is so great -- it keeps us on our toes). The U.S. National Climatic Data Center calculates temperature anomaly against the 20th century average. The U.K. Met Office compares it to the period 1960-1990. Thus, their numbers are different. The Met Office predicted 2007 temperatures to be 0.54 degrees C above the average. In reality, the temperature was 0.41 degrees C above the average used by the U.K., not the 0.55 degrees C that the U.S. NCDC says.

What is interesting is that the original 95 percent confidence range (i.e. two standard deviations from the mean) was 0.38 to 0.70 degrees C above the average. Note that 0.41 is almost at the lowest end of this range. In fact, it is beyond the single standard deviation from the mean (0.46 - 0.62 degrees C) where the confidence level of a normal distribution is 68 percent. In other words, if I had told them that the temperature would be 0.41 degrees C above average, they would have told me that the likelihood of that being true was 10-20 percent.

What is strange is that the U.K. Met Office claims that 2007 will end up being the 7th warmest on record, while the U.S. NCDC says it will be the 5th hottest. NASA, by the way, says it will be the 2nd hottest. So, I called the National Climatic Data Center and asked what was up. They explained that everyone uses a slightly different data set and compares it against a slightly different average. They are also using different projections for the rest of December, so the numbers are likely to be different for that reason as well.

Thus, I shouldn't have used the UK numbers and compared them to the U.S numbers. Doing so, however, skewed the numbers to make the UK prediction look better than it actually was, making such predictions hubris, which was my point.

It's Economics...Not Rocket (or High School) Science

Today's Seattle Times carries a story about an Oregon high school science teacher who wades into the climate change debate by creating a YouTube video. In the Times article, he reasons that "He realized he had taken enough science to become a high-school science teacher. He used the climate-change debate to teach critical thinking." In the video (you can watch it here) he uses critical thinking to weigh the risks and costs associated with various strategies. He concludes, by creating a four cell table, that the highest cost comes when global warming turns out to be true but we do nothing. Ergo, the best option is to do something.

This type of analysis follows a general narrative about climate change. Popular discussions of climate change often begin with "scientists say..." Judging what policy is best, however, is not a scientific judgment but an economic one using a decision tree that weighs costs and probabilities.

For instance, imagine you lead a squad of ten soldiers and there are two routes to camp. If you take route one, you are guaranteed to lose 40 percent of your troops, but the rest will make it safely. Along route two, there is an 80 percent chance that everyone will make it alive, but a 20 percent chance that everyone will be killed. What do you choose? In this case, math and economics dictate that it is better to take route two since the average lives lost is less (20 percent X 10 soldiers = 2 vs. 100 percent X 4 soldiers = 4).

The above calculation can only be done, however, if we know the percentages and the impacts. The H.S. teacher admits that he knows neither. But we can try our hand to get a sense of the metrics.

So, let's add some costs and likelihoods. He argues that, in the extreme, the potential cost of aggressive CO2 reduction policies is "global economic depression." This will be true whether climate change is true or not (he claims it will only be true if climate change doesn't occur, but that's incorrect -- the impacts of the policy on the economy and the climate are the same since the economic costs to stop climate change are the same whether climate change is true or not). On the other hand, if we do nothing, the cost will be zero if climate change is untrue, but massive if we do nothing and climate change is real (AlGoreostraphie).

Here's the math. Under these extreme assumptions, if we do something, there is a 100 percent chance it will cause a global economic depression costing us Y impact. If we do nothing there is a chance the cost will be zero (if climate change doesn't occur) and a chance that the cost will be catastrophic amounting to Z impact. So the question is which is greater, Y or Z times the probability of Z occurring. If the probability of Z occurring is 1 percent, then Z would need to be 100 times larger than Y for it to make sense for us to do something about climate change (i.e. 100% x Y < 1% x Z).

Admittedly blogs are not conducive to math, but I think you get the point. Put simply, he has framed the choice in a simplistic but reasonable way, but since he doesn't know the probability of Z, the analysis is incomplete and worthless. He simply treats all four boxes as being equally likely. In the sequel he actually indicates that the likelihood of AlGoreostraphie is higher than not. The sources he cites for this however don't say that the likelihood of catastrophe is large, merely that some impact is likely, which is very different.

Finally, we are not making a binary decision -- to do something or not. We are making a multi-factored decision. Should we do something about climate change, AIDS, malaria, nutrition, economic growth or other priorities? (In the sequel the teacher addresses this in about 15 seconds by saying global warming is more costly than everything else combined.) This is a much more complicated economic analysis that involves the most efficient use of resources. That is the heart of economics -- the allocation of scarce resources.

Fortunately, people have looked at this. And when I say "people," what I mean is the world's top economists including three Nobel laureates. The Copenhagen Consensus 2004 compared the potential impacts and risks from climate change to other global challenges. They found that of the 17 potential priorities, strategies to reduce climate change ranked 15th, 16th and 17th. They are scheduled to update this assessment next year, but it is unlikely that the calculus will change dramatically.

In the end, this is not a science question, but one of economics and values. It's why Nobel winning economists have come to different conclusions than the teacher in the YouTube video.

Microsoft willing to help with transparency reforms

Based on conversations yesterday with a representative from Microsoft, it sounds like the home-grown software leader is ready to challenge Google for the mantle of "government transparency crusader."

Over the past year Google has been assisting states with the creation of free searchable budget websites to help improve government transparency. Since enacting such a website is a top priority for WPC, I reached out to Microsoft to see if they'd be willing to help the state move forward with this reform.

The answer is an enthusiastic Yes!

Microsoft also expressed interest in helping to make all government records online searchable via the web as is occurring in Florida.

Hopefully state officials will act on Microsoft's willingness to help and enact these reforms as other states are doing.

Audit sinks Port of Seattle management practices

The State Auditor's Office released a performance audit of the Port of Seattle today. It isn't pretty.

• Port construction management lacks cost controls and accountability.
• The Port circumvents competition requirements in violation of its own policies and sometimes in violation of state law.
• Port policies and Port management’s interpretations of its policies result in a lack of transparency and thwart Commission oversight of construction management activities.
• Port construction management records are incomplete and disorganized.
• The Port fails to enforce basic contract requirements, resulting in delays, extra costs, and an inability to defend against claims.
• Port construction management is vulnerable to fraud, waste and abuse.

According to the report "auditors identified $97.2 million in unnecessary costs. The Port has the potential to avoid similar costs in the future if it institutes every audit recommendation."

Among the other conclusions of the audit:

• The Port lacks sufficient policies and procedures to safeguard public assets from misuse, abuse and fraud. In cases in which controls are in place, they are not always followed.
• The Port Commission has largely delegated decision making responsibilities for construction projects to Port management and employees. In some cases, vendors control projects and make decisions that should be made by the Port.
• Port executive management has withheld information from and sometimes has misinformed the Commission about the terms and progress of construction projects.

Auditors found these conditions are caused by:

"The Port Commission’s adoption of Resolution 3181, delegating some of its decision-making authority to Port administration, including some oversight of construction management. The former Chief Executive Officer’s broad interpretation of the resolution effectively distanced the Commission from information and oversight authority of capital projects. The audit found no record of the Commission reassessing or questioning whether it was meeting its responsibilities to oversee construction projects.

• Port management does not segregate the duties of procurement and contractor oversight. Port employees routinely award contracts and then oversee the contractors they selected. This creates a conflict of interest because those who work with the contractors may develop working relationships that prevent them from awarding and overseeing contracts with a higher degree of objectivity and diligence.

• Port commissioners have largely ceded the authority to award and manage contracts to low- and mid-level project managers.

• According to an e-mail to the contracted auditors, the Port maintains it “is not subject to any specific legislative framework governing its procurement practices other than those which govern public works design and construction contracts.”

• The Port does not enforce standard construction contract provisions, leading to significant cost and schedule overruns.

These conditions leave the Port’s construction management vulnerable to fraud, waste and abuse. For example, Port management authorized a Third Runway contract that cost $32.7 million more than the Port engineer’s original estimate. The contract violated state law, and details of the arrangement were concealed from the Commission.

In addition, a consulting agreement awarded in 1998 increased without competition from $10 million to more than $120 million and is being used to augment Port staffing, unnecessarily costing taxpayers $60.5 million."

I wonder if anyone at the Port will be getting a golden parachute as a result of this audit?

The Epitome of Wishful Thinking

A new report from the Northwest Federation of Community Organizations is out and highlighting their findings that most people in Washington state (especially people of color) do not make a "living wage" to support their family and expenses. Living wage is defined by the NFCO as a wage that "allows families to meet their basic needs, without public assistance, and that provides them some ability to deal with emergencies and plan ahead."

That people do go hungry in this nation is no small problem. Nor is it something to be ignored. But how do we best go about bringing families, especially those with members who have constant employment, out from underneath poverty?

That, is not so simple.

I have my own thoughts and ideas based on some pretty extensive research I conducted for the report, "A National Movement Hits Close to Home."

But let's take a look at the NFCO's recommendations (their data is a subject for a later post).

In order to alleviate the financial burden of families that either do not earn a living wage or subsist barely above a living wage there were three major recommendations:

1) increase the number of jobs that pay a living wage and bring current jobs up to living wage standards;

2) Supplement wages that fall short of living wage standards and reduce the cost of living without reducing living wage standards;

3) Improve equitable access to sectors and jobs that provide a living wage.

As good and easy as "increasing the jobs that pay a living wage" sounds, the reality is that this is virtually impossible using government regulations. Simply making everyone's wages higher will not mean that their living standards will improve. Also, how can you increase everyone's wages while keeping the cost of living down? What mechanism will ensure this effectively?

In the study there are subset recommendations under each one numbered above and I especially liked how they slipped in "lift barriers to unionization" under the first recommendation. I'm not aware of any barriers to unionization emanating from the government. So, they're asking the government to make it illegal for any company to ban unionization efforts or take steps against workers who unionize. I'd have less of a problem accepting this if most unionization efforts didn't include compulsory membership.

Lastly, using public financing to supplement wage levels (in this case they want to provide food, housing, health care, transportation, and child care) involves a shifting of resources -- mainly from those that have to those that do not. We already have programs that do this but now if you are a single parent with 2 children in King county and do not make $58,000 a year, those that make above $58,000 a year are now paying for the other person's transportation, housing, etc.?

The bottom line is that money does not grow on trees, and you can't just force private industry to pay more wages while at the same time regulate the cost of living and not see some insane economic ramifications. Regulating a burger-flipper to $60,000 a year while mandating the cost of the burger to remain at $1.99 is going to create a massive shortage of burgers because no company can afford $60,000+ per person labor costs and stay in business selling burgers for $1.99.

Gregoire offers $144 million supplemental budget

Updated  (4:20 p.m.)

Today Governor Gregoire proposed an increase in state spending of $144 million, bringing general fund spending to $29.8 billion for 2007-09.

Here is the breakdown of supplemental budgets since 1994:

• 2006 - $1.346 billion increase
• 2004 - $164.7 million increase
• 2002 - $332 million decrease
• 2000 - $277.4 million increase
• 1998 - $6.8 million increase
• 1996 - $14.1 million increase
• 1994 - $192.5 million increase

Although the governor's proposal leaves a reserve balance of $1.2 billion, only $429 million of that is allocated to the protected rainy day account. This mean $774 million is available for legislators to spend in the future. If anything, those numbers should be reversed securing more money in the restricted reserves to help avoid the temptation of state officials to spend more.

Why does this matter?

Due to the large spending increases over the past few years, the Office of Financial Management is projecting a $621 million DEFICIT in the coming years. Here is the updated forecast.

This is why having a REAL spending limit is important. If state officials hadn't circumvented I-601 in 2006 by SPENDING $825 million into "savings" when adopting the $1.3 billion supplemental increase, the budget wouldn't have been able to grow to the size it is today. This reduced spending coupled with the additional reserves that would be available would have prevented the current deficit projection all together and allowed enough money to be left over for tax relief.