Washington Policy Blog

Joe Copeland’s criticism (Sunday P-I, 2-8-09) of our recent study of the state-mandated home warranty bill misses the main conclusion of our analysis. The bill’s primary effect would be to create a new way for trial lawyers to file lawsuits against homebuilders, exactly the opposite message state lawmakers should be sending to the depressed housing market. All builders, even the most scrupulous, will have to buy more insurance to guard the increased legal threat, and pass the cost on to homebuyers. Increasing the potential for lawsuits introduces more uncertainty among buyers and sellers, at a time when the real estate market desperately needs greater predictability and confidence. Besides, if the purpose is to protect consumers, passing a bill!
to boost business for trial lawyers won’t help. The consumer complaint rate against building contractors is only 1.5%; the consumer complaint rate against lawyers is 7%.

This week, the Senate will again hear testimony on the state's proposed cap-and-trade legislation, designed to reduce greenhouse gas emissions. In the first round of hearings, there was a great deal made about the potential economic costs and benefits of cap-and-trade. Setting those aside for the moment, there was an assumption that,whatever the cost, cap-and-trade will work to reduce CO2 emissions. In fact, the evidence shows that it is unlikely to do so.

Ecology Director Jay Manning testified twice before the Legislature this year that Europe was likely to meet its CO2 reduction targets using the cap-and-trade system under the Kyoto Protocol. A quick look at the data from Europe shows this is not true. The most recent data, found on the EU Environment Agency’s web page, show that the emissions reductions they have achieved under cap-and-trade are almost nonexistent.

First, while the Kyoto Protocol measures emissions against 1990, the agreement was signed in 1997 and has been in effect since then. Emissions reductions prior to 1997 are due to other factors including the collapse of the communist bloc and the economies of E. Europe in the early 90s and the UK’s switch from coal to natural gas in the early 90s. Thus, cap-and-trade is only responsible for emissions reductions since 1997. From 1998 to 2006 (the most recent year for which data is available), emissions of greenhouse gases have declined only 0.42%. Nearly 90 percent of CO2 emissions in Europe occurred before Kyoto was signed. The note below, which highlights this point, is taken from the EU report.

Second, for Europe to meet the goals it would require a sudden reduction of 5 percent in CO2 emissions during the final five years of the protocol (i.e. from 2007 to 2012). As you can see in the chart below, following existing measures, Europe will fail to meet the targets. Adding “additional” measures gets them close but still fails. Only when Europe aggressively pursues carbon offsets from China and elsewhere do they meet the target. Ironically, the EU recently tightened the rules on offsets, meaning that such offsets are likely to decrease, not increase.

Additionally, as is evident, the 5-year average of emissions, represented by the black line, would leave Europe with emissions only slightly below 1990 levels, missing even the projections for the existing measures. Only a sudden downturn not evident at any time up to this point would leave Europe in compliance. The argument that EU is on track to meet their goals is wishful thinking at best. There is no reason to believe that the WCI cap-and-trade system would be any different.

Finally, as a result of the failure of Kyoto in Europe, countries are facing a large penalty,on the order of $46 billion. This cost will be paid by the economies and taxpayers of Europe.

Put simply, cap-and-trade has not lived up to its promise and alternatives are needed. Whatever you believe about the economic merits or disadvantages of cap-and-trade, if it doesn't work, why would we adopt it?

On Wednesday the House passed out of the Commerce and Labor Committee an increase to Unemployment Insurance benefits (HB1906). If enacted, the bill would provide a temporary increase in unemployment benefits by adding $45 to the weekly benefit amount and make $155 the minimum amount payable weekly. Washington already has the 5th highest UI payments in the nation, and the 2nd highest UI taxes in the nation.

This is a part of the state's "economic stimulus" package some policymakers are pushing as an attempt to get our economy back on track. Having just experienced a very large increase in the unemployment rate (6.3% in November to 7.1% in December) it is natural for policymakers to assume that raising UI benefits to those who have recently been laid off will help keep the economy flowing. The rational is that increased benefits will be passed on through the economy in the!
form of rent, groceries, consumer goods and entertainment. This is referred to as the "multiplier effect" -- a dollar of benefits results in more than $1 in economic good.

Unfortunately, this is misleading. What is not being said is that UI benefits, while perhaps causing a "multiplying" effect on the back end, also reduce economic growth on the front end, thus negating any true economic stimulus strategy. UI benefits are simply redistributed dollars. Employers pay UI premiums, which results in a loss in opportunity cost. This is forgotten because UI premiums have been around for so long that no one remembers what that money could have gone to instead of paying for UI. But UI is here to stay and the sentiment is that employers should help pay for a social safety net the public wants.

But this isn't a discussion about UI. This is a discussion about the potential benefits that increased UI benefits will or won't have on the greater ec!
onomy.

The legislature's plan of drawing down our su!
bstantial UI reserve fund ($4 billion as of December '08) makes sense. Similar action was taken with the Workers' Compensation fund last year, which resulted in a six-month partial rate holiday for workers. But it is also a gamble. The fiscal note attached to one of these bills shows that the state is calculating these higher UI benefits at a cost of about $180 million over the 2009-11 biennium, but they assume a 7.5% unemployment rate. Hopefully, the rate won't break the 7.5% mark, but if it does, and stays above that level for an extended period of time, that's where the danger comes in. That would result in needing to shore up the UI trust fund with higher UI premiums charged to employers -- thus making Washington state an even more expensive place to do business (see above about our rankings).

The bottom line is this UI move by Olympia is a gamble and may work out for the thousands now on the rolls of the unemployed in the short term. But passing t!
his off as true economic stimulus, something that is supposed to actually grow the economy as opposed to government, is disingenuous.

A stimulus package too often reflects the view that government simply spending more dollars, through public benefits or public works, will cause a bow wave of spending that will lift us out of the doldrums. Growth in the Gross Domestic Product (and therefore State Domestic Product) can only be increased through a rise in productivity and growth in the private sector. Increasing the cost of government does not accomplish this, because government relies on funding itself through the extraction of taxes, which is private capital removed from the market.

Expect to hear more about the state economic stimulus package on the capital budget side of things in the coming days (e.g. Is giving the State Conservation Commission $10 million for a livestock nutrie!
nt program really economic stimulus?).

As both federal and state policymakers debate the merits of various economic stimulus packages, it is refreshing to see the role technology is playing. No, I'm not talking about buttressing our technology infrastructure, as Obama has mentioned. I'm referring to the technology that allows average Americans to keep tabs on the national stimulus packaged.

StimulusWatch.org is a good site that details the long list of projects people are asking the federal government to fund. The site shows just how many people are confusing economic stimulus with earmarked projects. U.S. Budget Watch provides a detailed description of government actions taken to deal with the recent financial and economic turmoil.

Of course, national news outlets are keeping their websites updated with real-time technology as stimulus proposals shift in !
the proverbial political winds. Of course, a billion here, a billion there... (check out the Wall Street Journal, CNBC, Washington Post and almost any other news site).

For Washington state, we're compiling Washington Policy Center's stimulus analysis on StateStimulus.org. This new site will be a one-stop-shopping site for WPC analysis on the state stimulus, principles that both state and federal policymakers should take into account for putting together stimulus packages, and links to external reports that we think will be useful during this protracted debate.

Over the next couple of weeks, as state policymakers flesh ou!
t the details of infrastructure projects and other methods to !
infuse the state economy with liquidity and jobs, we'll do our best to make sure their efforts stay on track towards truly stimulating our economy. We can't afford to waste billions of dollars we don't have on pet projects and gambles. Stay tuned for more on this issue, because our economy sure isn't recovering any time soon.

Governor Gregoire posted an interactive budget calculator on her website today. From her press release (in-part):

Last November WPC encouraged the Governor's office to make available a resource for citizens that would allow them to build their own budget by “purchasing” items from the state's Priorities of Government (POG) list to see the tradeoffs and help focus their budget recommendations to the Governor and legislators.

Although the Governor's calculator does not allow users to make purchases at a detailed level it does provide important information on the types of activities the state is spending money on.

The more budget transparency the better.

Last week Andrew Garber wrote a story for The Seattle Times on the Governor's request for projects that the state stimulus package may eventually fund. I think that the article revealed what is becoming an important debate on the national scale, and should be talked about as policymakers in Olympia start hashing out the details of a stimulus package -- what is economic stimulus?

The story linked to an Office of Financial Management database that listed the projects by type and locale. Quite the good read. But the important point the article and OFM database shows is that most people (policymakers and the general public) are misconstruing economic stimulus with pork barrel projects.

Traditionally, pork barrel projects are the infrastructure projects that a representative lobbies for on behalf of their own district. This is where "bringing home the bacon" comes from. I don't think there's anything inherently wrong with an elected representative trying to get the best deal for his or her district. But as the OFM list clearly shows, most of these projects are just that, projects. These will not stimulate the economy in the long run, and will only help those in the construction industry in the short run. Some projects may have long lasting benefits to the region but others will only serve to temporarily employ some workers while using government sp!
ending to do so and providing little public benefit.

But!
all of this, and more, is being categorized as 'economic stimulus.' You saw this happen on the national leve and the outrage was quite severe as the U.S. House of Representatives considered including millions of dollars of funding in the package for sexually transmitted disease prevention and new computers for government agencies that have little to do with regulating or dealing with the economy. Likewise, there is funding for student-loan programs, affordable housing assistance, $50 million for the National Endowment for the Arts, $75 million for anti-smoking programs, and lots more. Many of these may be good projects and worthy of taxpayer dollars (all the while borrowed) but none of them should honestly be categorized as having anything to do with growing the economy.

Oh, and the critical infrastructure that the stimulus was suppose to target? It received about $43 billion in the package (about 5%). 

Columnist Mark Steyn had a good quote on the matter:

If infrastructure were so important, as Congress claimed, they should have started by quickly passing $50 in infrastructure spending. Instead, they chose to increase that figure by 1,600% and spread it around various industries and pet projects. Granted the Senate will tinker with the package, but it won't look much different, overall, from the House's version.

The lesson here for Washington state policymakers should be that our economic stimulus cannot turn into a pork-ridden piece of legislation that tries to make everyone happy while having little to no effect on growing the economy -- which is what economic stimulus is truly about.