Robert C. Byrd, 1917 – 2010

 

Robert Carlyle Byrd, the longest-serving member of Congress in United
States history, who spent much of his career as a conservative Democrat
and ended it by fiercely opposing the war in Iraq and questioning the
state’s powerful coal industry, died Monday. He was 92.

He was a true champion for the state and its people. He will be missed and mourned. Let’s hope whoever takes his place will follow in his courage to confront the tough issues of the day, whether war, health care or climate change, that will move this country and state forward.

OPEB Part Deux

On Friday, State Senator McCabe had a nicely written retort to my op-ed last week on OPEB . Senator McCabe is a friend and I value his opinion greatly and I think he takes a well reasoned and balanced approach. I just wish I was as optimistic as McCabe about addressing OPEB and our long-term investment needs. The only statement that misrepresents what I wrote is when McCabe suggests I want to reduce or eliminate the retiree health care subsidy for employees. I do not and would not suggest this, especially since they’ve already eliminated it for all new hires and you’d risk a major lawsuit if you reduced the benefit.

While I agree with many of his points, I think our central disagreement is that I think reining in health care costs is a completely different issue from trying to prefund health care trusts rather than investing in workforce development. McCabe’s argument hinges on the discount rate – will the state get a better return on investment handing the money to Wall Street or will WV get a better return by investing in the education of the workforce, which will lead to higher incomes and more taxes paid in the future. Personally, I think the latter is a better investment, but I do recognize that this is a very debatable point.

I also do not agree – and this was a major point of my op-ed – that the $650 million reflects reality. I think the accrual measure is fundamentally flawed  – and even if it turns out to be true in 15 years that health costs rise to this extent than the whole country will be having far more serious problems – and is based on a worse-case scenario. However, I do recognize that many believe we have to use the numbers the actuaries give us, even if they are faulty.

Regarding health care costs, I agree wholeheartedly that this is the number ONE issue affecting our state and federal government’s long-term fiscal health. And I agree that to address this will require mostly federal action, but there are many things we can do at the state level. Sen. Rockefeller introduced a bill last year to allow people below age 55 to buy into Medicare. This could have put a nice dent in the projected OPEB liability. We should be putting pressure on DC for this proposal. There have also been dozens of other proposals at the federal level to specifically lower Rx drug bills. (It’s also important to keep in mind that if we had the per-capita health care costs of Canada, we wouldn’t even be discussing OPEB or the US debt problem.) At the state level, there are dozens of policy ideas to reduce costs and very few have been implemented.

I think we should be very concerned about our public pension debt (And I commend the Governor and Legislature on addressing this issue), which is real and in comparatively poor shape, and not be so worried about OPEB. If PEIA retiree health care costs rise to $650 million in 15 years, essentially quadrupling in size,  none of us will have health care. I know I would not be able to provide it to our employees if this happens. This is a major crisis! (It’s important to keep in mind that 22 states have appropriated ZERO funds toward their respective OPEB liability.)

My gravest concern is the state will not have the will or ability to make the important investments we need in education and workforce development and put $600 million into the OPEB Trust Fund. This is because state fiscal policy decisions are a zero-sum game – we can’t borrow like the federal government and resources are scarce – based on priority or what’s highest on the agenda. It’s about choices and we can rarely do everything that’s needed. If OPEB is a bigger concern than having an underdeveloped workforce and low-incomes, than it will get the investment. Rarely will both receive equal investment. I hope I’m wrong and McCabe is right.

Being "Smart on Crime" Could Save State $30 Million

According to a new report by the Center for Economic and Policy Research (CEPR), halving the incarceration rates of nonviolent criminals would result in an estimated nationwide savings in corrections spending of $16.9 billion annually, with state and local governments receiving $14.8 billion, or nearly 88 percent of the savings. The national incarceration rate is currently about 240 percent higher than it was in 1980, despite no corresponding increase in crime rates. Currently, the United States has the highest incarceration rate in the world, exceeding those of countries like Russia and Rwanda.

Another recent study , conducted by the Pew Center on the States, found that the state prison population across the country has declined for the first time in nearly 40 years. This is not the case, however, with West Virginia, where 50 of 55 counties experienced growth in inmate population, according to the latest Division of Corrections (WVDOC) Annual Report. In fact, West Virginia’s prison system is growing at the second highest rate in the country – 5.1 percent in the last year – and by far the highest rate among the surrounding states.

Elsewhere, many policymakers are thinking creatively about ways to save on corrections spending. For example:

  • California has sought to reduce the amount of low-risk parolees returning to prison for technical, noncriminal violations (such as missing an appointment with a parole officer) by instituting intermediate sanctions to hold the parolees accountable without placing the additional burden on the taxpayer of sending them back to prison. 
  • Michigan reduced its prison population by over 6,000 inmates in less than three years by reducing the number of inmates who serve more than 100% of their minimum sentence and by improving supervision during the parole/reintegration phase.
  • Similarly, Mississippi rolled back its minimum sentencing for nonviolent, parole-seeking offenders from 85 to 25 percent of the minimum sentence. Over the next year, the state paroled over 3,000 inmates at a median of 13 months sooner than before, with a minuscule 0.2% rate of recidivism, thanks to enhanced assessment tools during parole determination.  
  • Perhaps the greatest success story comes from the state of Texas, which forecasted additional corrections expenditures of $523 million in 2007 to cover a projected influx of new inmates. Instead, legislators initiated a bipartisan overhaul of the correctional system, notably investing in the expansion of drug courts rather than incarcerating all drug offenders. The Pew Center expects the reforms to save the state $210 million over the next two years, plus an additional $233 million if recidivism drops.

These studies are timely not only because the current unstable economic climate has forced policymakers to think creatively about fiscal policy, but because the incarceration rates that have exploded in the last 20 years lack any corresponding increases in crime. The tremendous variation among the rates of prison population change from state to state further suggest the crucial role state policy plays in determining the size of the prison system, as well as the cost to the taxpayer. 

Harsher state regulations often stem from the political desirability of being viewed as “tough on crime.” Thankfully, Governor Joe Manchin wants to be “smart on crime,” issuing a proposal in January to create an accelerated parole program for West Virginia’s least risky inmates. According to the Times West Virginian, the state’s prison system is designed for 5,000 inmates but holds 6,300 (and counting!), dumping the overflow into regional jails – now burdened themselves – that are not designed to be long-term facilities. 

Should Manchin follow through on an accelerated parole program, the taxpayer savings could be considerable – especially if he supplements the program with improved parole supervision, rehabilitation programs, greater investment in and utilization of drug courts, etc. – and without compromising public safety. The average annual cost per inmate in 2009 was $25,651, according to the WVDOC report, so the 2,738 offenders (43.6 percent) incarcerated for nonviolent crimes cost taxpayers over $70 million per year. CEPR estimates that parole costs between $1,300 and $2,800 annually, so even using the most expensive estimate in that range, shifting half of West Virginia’s nonviolent offenders to parole could result in taxpayer savings of well over $30 million.

For more reading on corrections spending reform, try these studies by the Justice Policy Institute and the JFA Institute.

Can work-sharing work for West Virginia?

During a recession, businesses respond to weak demand by laying off workers. Paul estimated that there are 103,000 jobless workers in West Virginia. In this recession job creation has been slow as we struggle to make it from recession to recovery. As a result, many of the jobless face long-term unemployment.  Almost 46 percent of unemployed workers have been jobless for at least six months , which is the highest level of long-term unemployment in over 60 years. Workers who are losing their jobs are not moving on to new jobs in expanding industries. Instead, they are staying unemployed

Long periods of unemployment can cause long term damage. Workers who have been out of a job for too long may see their skills deteriorate, their savings erode and their professional network dry up. When economic conditions improve, they find it hard to get back into the labor market, and as more time passes, the harder it gets. In addition to the fiscal strain caused by long-term unemployment, workers and their families also experience significant psychological and emotional stress. 

A policy called work-sharing can help mitigate the threat of long-term unemployment. Under work-sharing, instead of laying off workers, employers reduce their workers’ weekly hours. The states then make up some of the lost wages resulting from the reduction in hours from their unemployment funds. 

For example, during an economic downturn, an employer with 100 employees may find it necessary to lay off 20 employees. The laid off employees will then collect unemployment insurance while facing an unsure future in a struggling economy. Under a work-sharing program the employer keeps all 100 employees on payroll, but reduces the work week from five days to four days, achieving the same 20 percent reduction. The employees would then be eligible for work-sharing benefits for the fifth nonworking day.

In most cases, the work-sharing benefit is equal to the proportional unemployment benefit. Unemployment benefits vary by state, level of income, and length of employment, but generally, a worker being paid $800 a week, if laid off, could receive $400 in unemployment benefits. With work-sharing, if that worker works a 4 day work week, his wages would fall to $640, and work-sharing would make up $80, or one day of unemployment benefits, for a total of $720. 

In this example the state incurs no extra unemployment costs, as there are 100 workers collecting 1/5 of their weekly benefit, which is equal to 20 workers collecting a full week of benefits. The employer is charged in the same manner for 100 workers on work-sharing as it is for 20 workers on unemployment.

Instead of becoming unemployed, workers stay on the job and avoid the deterioration of their job skills and the loss of morale unemployment can cause. When the economy improves and demand increases, the employers avoid the costs of retraining and rehiring labor, as the workers who are needed to do the work are already there, which can accelerate the recovery. Employees also have more take home more pay with work-sharing than from unemployment benefits alone, reducing their financial strain.        

Currently 17 states have some form of a work-sharing policy, though few take advantage or are even aware of its existence. Work-sharing has been aggressively used in Germany, where, despite a sharper decline in GDP than the United States during the current recession, their unemployment rate has been stable. And when the recovery in Germany began, German employers had the workers on hand to meet demand.

For employers who are waiting on the economy to recover so they can hire back their workers – not to mention unemployed workers who are watching their skills deteriorate and their finances crumble –  work-sharing represents a simple and worthwhile policy tool to use to get us on our way to economic recovery.

Replacing the Coal Severance Tax?

Sorry for not posting over the last two weeks, but I’ve been out of the country.  I am just now catching up on the news.

Howard Swint had a thought provoking op-ed in the Gazette this past Friday advocating for a 40% profits tax on coal to replace the coal severance tax. As many may know, the severance tax on coal is a gross receipts tax of 5% (with reduced rates for underground thin-seam coal and waste coal).  Not to pick on Swint – and I agree with him in spirit – but this is not a good idea unless it’s in addition to the coal severance tax. Let me explain why.

Higher Volatility.  In 2009, the severance tax on coal generated $371 million compared to $416.5m in 2008, $341m in 2007 and $328m in 2006. While these revenue fluctuations are volatile, a revenue from a profits tax would be even worse.  For example, Massey Energy reported $137m in pre-tax profits in 2009, $49m in 2008 and $129m in 2007. As you can see, the profit variations are more volatile than coal severance tax collections.

Less Revenue. In 2009, Massey Energy mined 22% or 31 million tons of coal in West Virginia (Consol 21.5%, Patriot 12.4%). As shown above, Massey had $137million per-tax profits and would pay $54.8 million under a 40% profits tax in 2009. If we applied Massey’s profits per ton to all coal companies (which is very generous given Massey’s economy of scale), the total yield would be about $250 million, or about $121 million less. If we applied this in 2008, it would be only $89 million or almost 80% less than what the state received in coal severance tax collection in 2008.

Profit’s Over People. This proposal would also set a bad moral precedent by making children (K-12 education, Medicaid, etc.) and disabled and low-income residents (Medicaid, TANF, etc.) subject to the profits of the coal industry. This means that these groups will be forced to rooting for high profits in the coal industry, especially when it appears the industry may be declining. In some ways, this means many residents will be asking coal companies to maximize profits instead of dealing with their externalities.

Faulty Foundation. The argument given to swap these two taxes rests on the time honored argument that it’s a tax on capital formation. Every business tax is a tax on capital formation, so this doesn’t hold any water. Taxes are a small part of doing business – 2-3% – and pale in comparison to labor, rent, energy costs. Never mind that the coal is in WV and the mineral economics is primary based on demand and scarcity, not marginal tax rates.

This all being said, I do think there is room for such a tax if it’s on top of the coal severance tax. Although many see these taxes as punitive, usually implemented because of price gouging, or a because of large external costs, or because a certain industry played a big role in wrecking the world economy.

Not to say we told you so, but…

Back in December, the Governor issued an executive order to cut $120 million from the FY10 budget . He did this, according to our report,   based on an overly pessimistic review of the November 2009 tax revenue collections. When collections rose in December, the Governor said “we must stay the course.” We said then that it was highly unlikely that the state needed to make these cuts this deep and that there would be a slim chance that revenues would fall by $120 million. Now it appears we were correct, but we won’t know for sure until the first of July.

Side note: Budget 101: Governors often like to make cuts in the budget mid-year to reduce the base, that way it doesn’t appear that they are cutting programs when the debate heats up in March. And this Governor has been adamant about not increasing the base. One could ponder whether his actions are just a ideological tilt toward reducing the size of Government. Remember, they give out awards for this type of behavior.  

Jobs Deficit Bigger Problem than Budget Deficit

With the national unemployment rate kissing 10% , it was disheartening to see Howard Swint join the job killing deficit hawks. In Saturday’s Gazette-Mail, Swint argues that the solution to our economic woes is a federal  “Balanced Budget Amendment”  that “provides that annual expenditures do not exceed revenue for any fiscal year.”  Swint worries that “special interests” are going to saddle our “children and grandchildren’s money literally before they have even earned it.”  Apparently, there’s even a small movement to enact a balanced budget amendment. The push to enact such an amendment reflects a deep misunderstanding of how the economy works in a recession and a hidden desire to cut benefits and entitlements like Social Security.

Let me first say that the #1 REASON why the U.S. has a long-term budget deficit problem is out of control health care spending (per person health care costs exceeding per person GDP growth). Secondly, our current deficit is largely a result not of current spending but of the bursting of the housing bubble and Bush’s tax cuts for the wealthy. (I will concede, however, that the wars in Iraq and Afghanistan do constitute a good portion of the projected deficits and that a balanced budget amendment might make it more difficult to go to war.) 

Back to the long-term problem. If we had the same health care costs as Canada, there would be no long-term “deficit problem” , plain and simple. Therefore, if we have any concern about our deficit, it would be to control health care spending, and deal with other deficit problems like reversing bush’s tax cuts on the wealthy, increasing tax progressivity once the economy recovers (take the top rate to 40%, move capital gains back to 25% or higher, create a stock transaction tax, etc.), create larger short-term deficits to “outgrow” the debt (aggregate demand), and decrease military spending (Iraq, Afghanistan, other).

The ability of governments to run deficits is essential. As Paul Krugman acutely observed on Monday, “Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea —not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts.” In other words, the best way to pay down the deficit it to out grow it.

Also, what matters is the debt to GDP ratio, not “paying down the debt.” As we grow, the debt gets smaller (This is what happened in the post-war years. We never repaid the debt, it just got smaller with growth). For example, in 2008 the federal government took in $2.1 trillion in revenues. Using this number as a bench mark, in ten years – at 2.5% growth and 2% inflation – it should rise to close to $4 trillion. This means the debt would be a shrinking percentage over next decades deficits under current law.

Debt is mostly a distributional problem, not a generational problem. It’s important to point out that the generation that came of age during WWII were handed the largest debt in the nation’s history, yet they enjoyed the greatest period of shared prosperity the country ever enjoyed. We also have to remember: the investments we make today, whether it’s research and development, education, or infrastructure, is what will determine the well-being of future generations.

If we are worried about debt, the REAL solution is to attack the root problems listed above and get the economy moving again by deficit spending. Putting the budget deficit ahead of the job deficit is like worrying about cutting the lawn when the house is on fire.