Recent court decisions could have a big impact on big business (and small business)

This has been a big year for business in the courts. A U.S. district court approved the AT&T-Time Warner merger, the Supreme Court upheld Amex’s agreements with merchants, and a circuit court pushed back on the Federal Trade Commission’s vague and heavy handed policing of companies’ consumer data safeguards.

These three decisions mark a new era in the intersection of law and economics.

AT&T-Time Warner

AT&T-Time Warner is a vertical merger, a combination of firms with a buyer-seller relationship. Time Warner creates and broadcasts content via outlets such as HBO, CNN, and TNT. AT&T distributes content via services such as DirecTV.

Economists see little risk to competition from vertical mergers, although there are some idiosyncratic circumstances in which competition could be harmed. Nevertheless, the U.S. Department of Justice went to court to block the merger.

The last time the goverment sued to block a merger was more than 40 years ago, and the government lost. Since then, the government relied on the threat of litigation to extract settlements from the merging parties. For example, in the 1996 merger between Time Warner and Turner, the FTC required limits on how the new company could bundle HBO with less desirable channels and eliminated agreements that allowed TCI (a cable company that partially owned Turner) to carry Turner channels at preferential rates.

With AT&T-Time Warner, the government took a big risk, and lost. It was a big risk because (1) it’s a vertical merger, and (2) the case against the merger was weak. The government’s expert argued consumers would face an extra 45 cents a month on their cable bills if the merger went through, but under cross-examination, conceded it might be as little as 13 cents a month. That’s a big difference and raised big questions about the reliability of the expert’s model.

Judge Richard J. Leon’s 170+ page ruling agreed that the government’s case was weak and its expert was not credible. While it’s easy to cheer a victory of big business over big government, the real victory was the judge’s heavy reliance on facts, data, and analysis rather than speculation over the potential for consumer harm. That’s a big deal and may make the way for more vertical mergers.

Ohio v. American Express

The Supreme Court’s ruling in Amex may seem obscure. The court backed American Express Co.’s policy of preventing retailers from offering customers incentives to pay with cheaper cards.

Amex charges higher fees to merchants than do other cards, such as Visa, MasterCard, and Discover. Amex cardholders also have higher incomes and tend to spend more at stores than those associated with other networks. And, Amex offers its cardholders better benefits, services, and rewards than the other cards. Merchants don’t like Amex because of the higher fees, customers prefer Amex because of the card’s perks.

Amex, and other card companies, operate in what is known as a two-sided market. Put simply, they have two sets of customers: merchants who pay swipe fees, and consumers who pay fees and interest.

Part of Amex’s agreement with merchants is an “anti-steering” provision that bars merchants from offering discounts for using non-Amex cards. The U.S. Justice Department and a group of states sued the company, alleging the Amex rules limited merchants’ ability to reduce their costs from accepting credit cards, which meant higher retail prices. Amex argued that the higher prices charged to merchants were kicked back to its cardholders in the form of more and better perks.

The Supreme Court found that the Justice Department and states focused exclusively on one side (merchant fees) of the two-sided market. The courts says the government can’t meet its burden by showing some effect on some part of the market. Instead, they must demonstrate, “increased cost of credit card transactions … reduced number of credit card transactions, or otherwise stifled competition.” The government could not prove any of those things.

We live in a world two-sided markets. Amazon may be the biggest two-sided market in the history of the world, linking buyers and sellers. Smartphones such as iPhones and Android devices are two-sided markets, linking consumers with app developers. The Supreme Court’s ruling in Amex sets a standard for how antitrust law should treat the economics of two-sided markets.


LabMD is another matter that seems obscure, but could have big impacts on the administrative state.

Since the early 2000s, the FTC has brought charges against more than 150 companies alleging they had bad security or privacy practices. LabMD was one of them, when its computer system was compromised by professional hackers in 2008. The FTC claimed that LabMD’s failure to adequately protect customer data was an “unfair” business practice.

Challenging the FTC can get very expensive and the agency used the threat of litigation to secure settlements from dozens of companies. It then used those settlements to convince everyone else that those settlements constituted binding law and enforceable security standards.

Because no one ever forced the FTC to defend what it was doing in court, the FTC’s assertion of legal authority became a self-fulfilling prophecy. LabMD, however, chose to challege the FTC. The fight drove LabMD out of business, but public interest law firm Cause of Action and lawyers at Ropes & Gray took the case on a pro bono basis.

The 11th Circuit Court of Appeals ruled the FTC’s approach to developing security standards violates basic principles of due process. The court said the FTC’s basic approach—in which the FTC tries to improve general security practices by suing companies that experience security breaches—violates the basic legal principle that the government can’t punish someone for conduct that the government hasn’t previously explained is problematic.

My colleague at ICLE observes the lesson to learn from LabMD isn’t about the illegitimacy of the FTC’s approach to internet privacy and security. Instead, it says legality of the administrative state is premised on courts placing a check on abusive regulators.

The lessons learned from these three recent cases reflect a profound shift in thinkging about the laws governing economic activity:

  • AT&T-Time Warner indicates that facts matter. Mere speculation of potential harms will not satisfy the court.
  • Amex highlights the growing role two-sided markets play in our economy and provides framework for evaluating competition in these markets.
  • LabMD is a small step in reining in the administrative state. Regulations must be scrutinized before they are imposed and enforced.

In some ways none of these decisions are revolutionary. Instead, they reflect an evolution toward greater transparency in how the law is to be applied and greater scrutiny over how the regulations are imposed.


Unsurprising evidence that hiking the minimum wage hurts low wage workers

On July 1, the minimum wage spiked in several cities and states across the country. Portland, Oregon’s minimum wage will rise by $1.50 to $11.25 an hour. Los Angeles will also hike its minimum wage by $1.50 to $12 an hour. Recent research shows that these hikes will make low wage workers poorer.

A study supported and funded in part by the Seattle city government, was released this week, along with an NBER paper evaluating Seattle’s minimum wage increase to $13 an hour. The papers find that the increase to $13 an hour had significant negative impacts on employment and led to lower incomes for minimum wage workers.

The study is the first study of a very high minimum wage for a city. During the study period, Seattle’s minimum wage increased from what had been the nation’s highest state minimum wage to an even higher level. It is also unique in its use of administrative data that has much more detail than is usually available to economics researchers.

Conclusions from the research focusing on Seattle’s increase to $13 an hour are clear: The policy harms those it was designed to help.

  • A loss of more than 5,000 jobs and a 9 percent reduction in hours worked by those who retained their jobs.
  • Low-wage workers lost an average of $125 per month. The minimum wage has always been a terrible way to reduce poverty. In 2015 and 2016, I presented analysis to the Oregon Legislature indicating that incomes would decline with a steep increase in the minimum wage. The Seattle study provides evidence backing up that forecast.
  • Minimum wage supporters point to research from the 1990s that made headlines with its claims that minimum wage increases had no impact on restaurant employment. The authors of the Seattle study were able to replicate the results of these papers by using their own data and imposing the same limitations that the earlier researchers had faced. The Seattle study shows that those earlier papers’ findings were likely driven by their approach and data limitations. This is a big deal, and a novel research approach that gives strength to the Seattle study’s results.

Some inside baseball.

The Seattle Minimum Wage Study was supported and funded in part by the Seattle city government. It’s rare that policy makers go through any effort to measure the effectiveness of their policies, so Seattle should get some points for transparency.

Or not so transparent: The mayor of Seattle commissioned another study, by an advocacy group at Berkeley whose previous work on the minimum wage is uniformly in favor of hiking the minimum wage (they testified before the Oregon Legislature to cheerlead the state’s minimum wage increase). It should come as no surprise that the Berkeley group released its report several days before the city’s “official” study came out.

You might think to yourself, “OK, that’s Seattle. Seattle is different.”

But, maybe Seattle is not that different. In fact, maybe the negative impacts of high minimum wages are universal, as seen in another study that came out this week, this time from Denmark.

In Denmark the minimum wage jumps up by 40 percent when a worker turns 18. The Danish researchers found that this steep increase was associated with employment dropping by one-third, as seen in the chart below from the paper.


Let’s look at what’s going to happen in Oregon. The state’s employment department estimates that about 301,000 jobs will be affected by the rate increase. With employment of almost 1.8 million, that means one in six workers will be affected by the steep hikes going into effect on July 1. That’s a big piece of the work force. By way of comparison, in the past when the minimum wage would increase by five or ten cents a year, only about six percent of the workforce was affected.

This is going to disproportionately affect youth employment. As noted in my testimony to the legislature, unemployment for Oregonians age 16 to 19 is 8.5 percentage points higher than the national average. This was not always the case. In the early 1990s, Oregon’s youth had roughly the same rate of unemployment as the U.S. as a whole. Then, as Oregon’s minimum wage rose relative to the federal minimum wage, Oregon’s youth unemployment worsened. Just this week, Multnomah County made a desperate plea for businesses to hire more youth as summer interns.

It has been suggested Oregon youth have traded education for work experience—in essence, they have opted to stay in high school or enroll in higher education instead of entering the workforce. The figure below shows, however, that youth unemployment has increased for both those enrolled in school and those who are not enrolled in school. The figure debunks the notion that education and employment are substitutes. In fact, the large number of students seeking work demonstrates many youth want employment while they further their education.


None of these results should be surprising. Minimum wage research is more than a hundred years old. Aside from the “mans bites dog” research from the 1990s, economists were broadly in agreement that higher minimum wages would be associated with reduced employment, especially among youth. The research published this week is groundbreaking in its data and methodology. At the same time, the results are unsurprising to anyone with any understanding of economics or experience running a business.

This post was originally published at Truth on the Market.

$5 million lawsuit alleges Raisinets boxes “recklessly” underfilled

Stuff like this gives lawyers a bad name.

A lawsuit filed Tuesday in a California federal court claims Nestlé packages some of its Raisinets in opaque movie-theater-style containers that lead customers to believe they are buying a full box, when in fact only 60% of the box contains chocolate-coated raisins.

The plaintiff—Sandy Hafer, a California resident who allegedly bought Nestlé’s Dark Chocolate Raisinets—claims that she and other candy consumers had relied on Nestlé’s “deceptive packaging” in deciding to buy the Raisinets. According to the suit, which seeks class-action status, had Ms. Hafer and others known the boxes weren’t full, they wouldn’t have bought the candy or would have paid significantly less.

Stuff like this gives regulators a bad name.

Federal law governing “slack fill”—or the empty space in a container—says a container is filled in a manner that is misleading if it contains slack fill that doesn’t have a functional purpose, like protecting the package’s contents.

The lawsuit seeks at least $5 million in damages that would include refunds for potential class members, plus any interest accrued. A 3½-ounce box of Raisinets sells for $1 at Target Corp. stores and has as many calories as a McDonald’s double cheeseburger.

Source: Raisinets Boxes ‘Recklessly’ Underfilled, Lawsuit Alleges – Law Blog – WSJ

Ban the box backfires

“Ban the Box” laws prevent employers from conducting criminal background checks until well into the job application process. (“Ban the Box” comes from the check box on many job applications asking, “Have you every been convicted of a crime?”)

Proponents of “Ban the Box” claim that by ignoring an applicant’s criminal record until late in the application process, ex-cons would have better employment opportunities.

A secondary goal is to reduce racial disparities in employment.

New research suggests that “Ban the Box” has backfired.

We find that [Ban the Box] policies decrease the probability of being employed by 3.4 percentage points (5.1%) for young, low-skilled black men, and by 2.3 percentage points (2.9%) for young, low-skilled Hispanic men. These findings support the hypothesis that when an applicant’s criminal history is unavailable, employers statistically discriminate against demographic groups that are likely to have a criminal record.

Source: NBER

New study concludes: There are few things as expensive as free federal money

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Please download and read the new study: Impact of Federal Transfers on State and Local Own Source Spending.

“Free is a very good price” announced the 1980s pitchman for a local appliance store known for it’s buy-one-get-one offers. But, like most things in life, the BOGO offers had some hitches (Like you had to spend $399[!] on a 19-inch color TV in order to get a 12-inch black-and-white TV for “free”).

Regardless, almost 35 years later, “free is a very good price” is part of the Portland lexicon. But, Portland’s not alone. Throughout the U.S., state and local officials pick up the bullhorn and shout “free is a very good price” when the federal government dangles dollars in front of their faces.

We see this play out across the U.S. States that cannot afford their existing Medicaid programs have expanded coverage under the Affordable Care Act, thanks to the promise that federal funds will pay for a huge portion of the additional costs of coverage. Cities are building slow moving streetcar systems because federal dollars will cover half of the construction costs.

What’s often missed is a simple fact: Federal money isn’t free.

Money “from the feds” is money from those who pay taxes to the feds. Those people and businesses are in every state. If the feds didn’t take those tax dollars, you’d have those dollars in your pocket or your bank account. Sending the dollars to Washington, D.C. only to have D.C. send back a fraction of those dollars doesn’t make you richer, it most likely makes you poorer.

There’s another way in which federal money isn’t free. Nearly every single dollar sent to state and local governments comes with strings attached.

Research I just completed finds that each additional dollar of federal money sent to the states is associated with an average increase of 82 cents in new state and local taxes. Across all states, a hypothetical 10 percent increase in federal grants state and local governments would be associated with with approximately $50 billion in additional increased state and local taxes, charges, or other revenue sources, amounting to an additional government burden of $158 per person.

How does federal funding increase the state and local tax burden? The U.S. Government Accountability Office identifies two ways that strings attached to federal grants can increase state spending: (1) matching fund requirements, and (2) maintenance of effort requirements.

Many federal grants require state and local governments to match federal funding with their own spending in order to receive the federal dollars. This allows bad public policy to masquerade as good policy, simply because it appears to be cheaper than superior alternatives. Much like coupons try to entice consumers to buy something they don’t need, federal matching funds entice state and local governments to pursue projects that they don’t need or can’t afford. By drawing limited state tax dollars toward the priorities of D.C., these matching requirements put pressure on state and local policymakers to raise taxes and fees in order to fund existing priorities.

Of course, these federally-funded policies often fail to deliver on their promises, but that isn’t something D.C. tends to concern itself with. For example, the Feds will supply matching funds to build a project, but often leave the costs of operating the project to the state and local governments. For example, federal funds help build the Portland, Oregon streetcar, but nothing to operate it. Today, Portland’s streetcar operations run at a deficit of $4.5 million a year—and growing. That deficit is filled by diverting the city’s money from much needed road repairs and maintenance. To fill that hole, Portland is proposing a citywide 4-cents-a-gallon gas tax. Without the federal funds, Portland wouldn’t have a streetcar, which means it would have millions more dollars for road repairs and maintenance, which means it wouldn’t need millions in new taxes to fund road repairs and maintenance. Who would have thought that free federal money could be so expensive?

The GAO also points out that, in addition to matching funds, state and local governments are sometimes required to maintain spending in the future as a condition of receiving federal grants. For example, the federal stimulus package passed in the wake of the Great Recession required states to provide a minimum state appropriation to higher education. States failing to maintain higher education spending at pre-recession levels would jeopardize a large chunk of their earmarked stimulus money.

For example, a publication from the American Association of University Professors looked at state higher education spending data and found that the threatened loss of federal funds was a key driver of the higher education budget for many states. Spurred on by the pressure of federal money, states spent more on higher education than they otherwise would have in the face of a recession and shrinking state budgets. Some were forced to increase taxes. AAUP notes that it is no coincidence that Oregon set its higher education funding at almost precisely the cutoff amount necessary to avoid the threatened cuts. It is also no coincidence that the state passed the largest income tax increase in Oregon history during the time the federal stimulus program was in action.

Milton Friedman once said “Nothing is so permanent as a temporary government program.” The first annual cash grant to states was made under the Hatch Act of 1887. More than 125 years later, the Hatch Act is still in effect—distributing tens of millions of dollars to states every year (and requiring a dollar-for-dollar match from states receiving federal money).

Perhaps knowing that federal funding translates into pressure to raise state and local taxes, those in elected office will take the long view and reject the empty promises of “free” federal dollars. One can only hope for such leadership and vision from our elected officials.

Next time your local politician/policy wonk/whatever dangles federal dollars in front of you and says “free is a very good price.” Remind him or her of some other wisdom from the ages:

  • “If it sounds too good to be true, it probably is,” or
  • “There’s no such thing as a free lunch,” or
  • “You can’t get something for nothing.”

Or how about a new phrase: “There are few things as expensive as free federal money.”

For more information, please download and read the new study: Impact of Federal Transfers on State and Local Own Source Spending.


Growing population, shrinking streets: A very Portland formula for traffic congestion

It’s not an illusion. Portland traffic is getting worse: Longer drive times, more congestion, angrier drivers, and “active transportation” that should be renamed “aggressive transportation.”

And, it’s no accident. It’s all part of the City’s Vision Zero plan for transportation. One consequence of Vision Zero is that while Portland’s population is growing, its street network is shrinking.

Miles go missing on Portland streets

In a Friday afternoon bad news dump, the Portland Bureau of Transportation revealed (PDF) that the city’s streets have deteriorated over the past year (more on that in another post). The miles of unpaved streets and streets in “poor” or “very poor” condition have increased by 3 percent since last year.

But that’s not the big story.

The big story is that since 2010, 77 miles of Portland streets have disappeared.

In 2010, PBOT reported (PDF) the City had 4,907 lane miles of improved streets and 60 miles of unimproved streets, for a total of 4,967 miles of streets.

The most recent PBOT report (PDF), for 2014, shows 4,834 of paved streets and 56 miles of non-paved streets, for a total of 4,890 miles of streets.

Between 2010 and 2014, 77 miles of streets have gone missing. That’s a drop of 1.6 percent.

And it gets worse …

Over that same time period, Portland’s population has grown by 3 percent (that’s about 18,000 more people in the city).

Put those two things together: Portland has gained 18,000 more people and lost 77 miles of streets. That means that for every 230 people Portland gains in population, the city’s street network loses 1 mile.

One would think that the city would increase the capacity of it’s street network in response to a growing population, rather than shrink it. But that’s not the point of Vision Zero.

On the upside, we have made some progress toward explaining why Portland’s traffic congestion worsens by the year: More people, fewer streets.

Oregon’s low carbon fuel standard: Messy policy, bad economics

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The extension of Oregon’s low carbon fuel standard (LCFS) was crammed through in the early days of the 2015 legislative session.

Supporters of the low carbon fuel standard hope that Oregon can free ride off infrastructure already in place in California and British Columbia to reduce the impact at the pump.

Reality is less hopeful: Every aspect of Oregon life will be affected by higher fuel prices that will do nothing to slow, stop, or reverse global warming or climate change.

Even worse, even experts who have spent years studying the low carbon fuel standard have no idea how suppliers and consumers will respond to the LCFS, leading to years of uncertainty.

This is presentation to the Oregon Fuels Association annual meeting in Sunriver, Oregon on July 20, 2015.

How bad are Oregon’s public schools? Digging into the Oregonian’s data

Just how bad are Oregon’s public schools? And, if they really are that bad, is more spending the only solution?

The Oregonian has dug deep into data on state spending on schools and student performance. The Oregonian researchers conclude that the state’s schools produce results that rank in the bottom third nationally, partly because Oregon lags far behind the national average in classroom spending.

In an act of total classiness, the Oregonian researchers have made their data easily available as an Excel file for anyone to use.

We at Econ Minute took way more than a minute to dig into the Oregonian’s analysis. We found some things that may radically change what you thought you knew about school spending and performance in Oregon. (And we don’t even talk about PERS.) All the graphs are available for download as PDF.

  • Oregon’s spending on education is dampened by the state’s relatively low income;
  • Oregon’s performance on reading and math are close to what would be expected for the state’s level of spending;
  • Oregon’s failure to graduate students out of high school is a big mystery to just about everyone; and
  • More spending provides little bang for the buck—huge increases in spending are associated with relatively modest improvements in performance.

First things first … State rankings can be misleading for two reasons:

  1. State rankings do not account for size differences among states. With state rankings, a small state like Delaware is given the same weight as a huge state like California. Oregon may be ranked toward the bottom of states in spending per student, but with respect to the number of students enrolled, Oregon is right in the middle.
  2. Rankings tend to distort small differences between states. For example, Washington spends $345 more per student than Georgia—a difference of only 3.5 percent—but Washington is ranked 7 places higher than Georgia in state spending per student. The difference in spending between Oregon and Washington is tiny, but Washington is ranked four places higher than Oregon.

Let’s adjust this …

The first thing that pops out of the Oregonian’s analysis is that per-student spending is “adjusted” for differences in cost of living across states. The concept of a state level cost of living is a bit odd. Even areas within the Portland metropolitan area have widely different cost of living indexes. The adjustment for state cost of living seems a bit bogus, but that’s a fight for another day. So let’s see what the data say …

The figure below shows the relationship between the state cost of living index and spending per student. There’s a pretty clear trend: A higher cost of living is associated with greater spending per student. Three observations:

  1. The trend line has a pretty good fit with the data. The R-squared of 0.63 says that variations in cost of living index explain 63 percent of the variation in spending per student. Enjoy that 0.63, you won’t see it again …
  2. The trend line suggests an elasticity of a little more than 2. In other words, a 10 percent higher cost of living is associated with 20 percent more spending per student, if cost of living was the sole determinant of spending per student. (Note to self: Put this on the econometrics exam on potential specification error.)
  3. Oregon (the red square) is below the trend line. In other words, Oregon spends less than expected if cost of living was the sole determinant of spending per student. That’s what the Oregonian researchers concluded also.




Oregon is a funny state. Oregon has a higher cost of living: 6.4 percent higher than the U.S. as a whole. But, we also have lower per capita personal income: 11.2 percent lower than the U.S. average.

The figure below shows that Oregon’s cost of living is substantially greater than other states with similar incomes. If per capita personal income was the sole determinant of cost of living, Oregon’s cost of living would be 10 percent lower. More generally, Oregonians earn less and pay more.




On the one hand, Oregon’s higher cost of living would point to more spending per student. But, Oregon’s lower income would point to less spending per student, because the money simply isn’t there. For people who like big words, countervailing factors is the word.

The figure below shows the relationship between  state per capita personal income and spending per student. There’s a pretty clear trend: Lower income are associated with less spending per student and higher incomes are associated with more spending. Three observations:

  1. As with cost of living, the trend line has a pretty good fit with the data. The R-squared of 0.54 says that variations in per capita personal income explain 54 percent of the variation in spending per student.
  2. The trendline suggests an elasticity of a 1.5 to 1.7. In other words, a 10 percent more in per capita personal income is associated with 15-17 percent more spending per student.
  3. Oregon (the red square) is right on the trendline. In other words, Oregon spends exactly what would be expected if per capita personal income was the sole determinant of spending per student.

Bottom line: Oregon’s ability to spend on education is limited by its relatively weak incomes.




We said that that fight over cost of living adjustments is a fight for another day. Today’s not that day, so let’s dig into the data using the cost of living adjusted spending that the Oregonian researchers used.

Graduation rates

The figure below shows that there is virtually no relationship between current expenditures per student and graduation rates.

Remember when we said to enjoy that R-squared of 0.63. Yeah. Those days are gone. The R-squared on the trend line for the spending-graduation relationship is 0.03. You’d do better trying to throw a dart at the chart.

Even so, Oregon is distinctively bad. That big red box sticks out like a big sore thumb.

Here’s some trivia: The Oregonian data reports that Oregon’s current graduation rate is 72 percent (along with Georgia), or 9 points lower than the U.S. graduation rate of 81 percent. In 1986, Oregon’s graduation rate was 74.1 percent, slightly higher than the U.S. rate of 71.5 percent. Over time, while the national graduation rate improved, Oregon’s rate got worse. Go figure.





The figures below show that there is a slight positive relationship between current expenditures per student and math performance, measured by percent of students who are “proficient” and  eighth grade math test scores.

Check out Oregon’s big red box. For both fourth grade and eighth grade, Oregon is right on the trendline. In other words, Oregon is performing almost exactly as expected in math for the state’s level of spending per student.

Also, check out how flat those trendlines are. That means that even huge increases in spending are associated with relatively modest increases in math performance. There’s just not that much bang for the buck on math.








The figures below shows that there’s virtually no relationship between current expenditures per student and fourth grade reading “proficiency,” but a small positive relationship with respect to eighth grade reading test scores.

Check out Oregon’s big red box. In fourth grade, Oregon is performing as expected (or ever-so-slightly better) given the state’s level of spending per student. Eighth grade test scores are noticeably higher than expected.

The scaling in the charts distort how flat the trendlines are. As with math, even huge increases in spending are associated with relatively modest increases in reading performance. Again, there’s just not that much bang for the buck.








The Oregonian researchers have a measure that combines graduation rates, math, and reading into a single number. Then, they calculate that score in to a percent over or under the U.S. average. It’s very clunky and mostly bogus, but that won’t stop us from using it.

The figure below plots relationship between this measure and spending per student as a share of the U.S. average spending per student.

In a perfect would, one would expect a 1-to-1 relationship: Bigger spending, better performance. That is, one could argue a state that spends 20 percent more than the U.S. average should perform 20 percent better than the U.S. average on the combined performance measure.

Not so. The figure shows that the there really is no significant variation. Part of this because of the the way the measure is calculated.

One note on Oregon: The state seems to be dragged down on this measure by its abysmal graduate rate.




We have also run these graphs using spending as a share of state personal income. The qualitative results are roughly the same. All the graphs are available for download as PDF.

Podcast – The worst solution to homelessness, Millennials and their parents, and a taste of Chinese wines



This week’s Econ Minute Podcast spans the globe and crosses generations.

First we have what may be the one of the worst solutions to urban homelessness. Cities across the globe go to great lengths to get their homeless population out from under bridges and away from railroad tracks. Progressive Portland turns that goal on it’s head. The city’s mayor is finalizing a deal to purchase some land under a under a bridge and only few feet away from an active railway line. His goal: Move some of downtown Portland’s homeless population to a place where they are out of sight and out of mind.

Next we follow up on our look at millennials and see how their parents are changing TV programming.

We end with a story of a bold prediction that came true regarding China’s burgeoning wine business.

The podcast is now available on iTunes. Please subscribe to make the most of your weekly Econ Minute.

A very Portland solution to homelessness: Give up

Sometimes you wish some of the things coming out of Portland City Hall were really just a bad Portlandia skit.

Like now, when the mayor’s solution to a downtown homeless camp is buy some land under a bridge where the city will relocate the homeless population. And get this:

  • The bridge is a very Portland bridge. Cars and trucks are not allowed, only mass transit, bikes, and pedestrians.
  • The bridge is called Tilikum Crossing: Bridge of the People. Yes—really—Bridge of the People. The mayor wants to put a homeless camp under the Bridge of the People.

But, it’s not a bad skit, it’s a bad idea. The following is an editorial, co-authored with Ann Sanderson and co-published on the Tuesday Memo blog.

Industrial Zones are No Place to Live

Late last month the Mayor’s office and Commissioner Amanda Fritz proudly announced that they were finalizing a deal with the Oregon Department of Transportation to purchase a half-acre lot near the landing of the new Tilikum Crossing Bridge of the People.  Once the deal is completed, the mayor intends to relocate the Right 2 Dream Too (R2DToo) homeless population, which has been camping illegally on property at the entrance of downtown Portland’s Chinatown.

Fifteen years ago, when Charlie Hales was a city commissioner, a group of homeless men and women set up camp under the west end of the Fremont Bridge. They claimed the space was their “Dignity Village.” The were eventually moved to city owned space seven miles away from downtown. Fifteen years later the temporary camp is now a permanent settlement whose population is now out of sight and out of mind of Portland’s polite society.

Once relocated, Right 2 Dream Too would be deep in the heart of the Central Eastside Industrial District. Walk a quarter mile in most directions and you’ll be walking through industrial zoned land. Except west. If you walk west for a quarter mile, you’ll end up in the Willamette River.

While the Central Eastside Industrial District has changed a lot in the past few years, it has been and remains primarily an active hub for distribution and manufacturing, consistent with its industrial zoning.

The main purpose of zoning laws is to separate incompatible uses. The goal is to limit the impact of negative externalities and spillovers. When we think of incompatible uses and industrial land, we tend to focus on the noise, vibrations, and traffic associated with industrial uses. These noise, vibrations, and traffic disrupt homeowners and renters, so zoning keeps industrial and residential uses separate.

But, the spillovers go the other way, too. For example, increased pedestrian traffic creates a hazard in an active industrial area with heavy trucks and freight trains in action day and night. If people believe that they have a right to unimpeded access to an industrial area 24/7, accidents, including fatal accidents, can be expected to increase.

Last year in Multnomah County alone, 10 people were killed or injured while trespassing on railroad property. The site selected by Mayor Hales and Commissioner Fritz is only a few feet away from an active railway line. Even worse, residents of Right 2 Dream Too would have to cross the railroad tracks order to access the Eastbank Esplanade, Springwater Corridor, or to access a bridge crossing the Willamette River.

After years of industrial use, the land may be contaminated with toxins rendering the space unsuitable for a camping. Residents may have only a sleeping bag between themselves and the potentially contaminated land. Emissions from diesel electric trains and diesel trucks could cause or exacerbate respiratory illnesses in a population that is already subject to opportunistic diseases. What is the city’s long term liability for moving a homeless population to a potentially contaminated site? Will Portland taxpayers foot the bill when someone from Right 2 Dream Too claims that his or her lung cancer or emphysema came from years of living on city property next to the railroad tracks.

However, the real question is not where to put Right 2 Dream Too. The question is why? What went wrong with our city’s approach to it’s at-risk population that homeless camps like Right 2 Dream Too or Dignity Village became the preferred solution?

The city claims Right 2 Dream Too’s move is a temporary solution to a long term problem.  So was Dignity Village. As we’ve already seen after 15 years of Dignity Village, the structures may be temporary, but the camp has lived on for years. A tent city under a bridge is not housing and in no way does it represent an acceptable permanent solution to homelessness.

While immediate services and housing options need to be made available for Portland’s most vulnerable citizens, institutionalizing homeless by shifting residents to city-owned land is an admission of failure: It says “this is the best we can do.”

Portland calls itself The City that Works. We can do better. We must do better.

This post was co-authored with Ann Sanderson and co-published on the Tuesday Memo blog.

Confessions of an Uber economist: Politicians and their crazy contradictions on crime and safety

Portland, Oregon is a contradiction wrapped in a mystery inside an enigma.

We are transportation innovators. We began the streetcar revival that has infected cities throughout the US. But, we still can’t pump our own gas—too dangerous, you know.

We have mandatory minimum sentences for certain crimes. But, if certain legislators and city commissioners have their way, it will be illegal for employers to ask job applicants if they’ve been convicted of a crime.

We are a high tech hub—the self-proclaimed home of the Silicon Forest. We bent over backward to get Google Fiber in our city. We even made our own Google Fiber beer. But, until a week or so ago, we couldn’t use the Uber or Lyft ridesharing services, because several city commissioners admitted that they didn’t understand the technology. (And, it’s well known that one commissioner still doesn’t have a smartphone.)

All these contradictions played out in the small space of one week. Last week, in fact.

Monday of last week I applied to be an Uber driver. The first step was to submit my background check. I also had to submit a copy of my driver’s license, my vehicle registration, my insurance information, and my City of Portland business license.

Oh, and I had to get my vehicle inspected to make sure it was safe and that there was no visible damage.

Now the background check is important, or so it seems. In fact, one of Portland’s city commissioners explained her fear of ridesharing by remarking that her mother always told her not to take a ride from a stranger. Yes, she really said that.

The car inspection was a snap. In fact, it took about 30 minutes and Uber paid for it.

The background check happened to be the biggest bottleneck. Turns out that the third party vendor Uber uses has a bit of a backlog from all the people who want to drive.

Nevertheless, just after noon on Friday of that week, I received text message from Uber saying that I was approved. Yes … a text message.

Fifteen minutes later, I picked up my first fare, which I detailed earlier on the Econ Minute blog.

That same day, a community activist and one of my former students was thrown off the Portland Streetcar for complaining that a vent in the streetcar was leaking water and smelled of smoke.

After complaining a few more times, the rider was thrown off the streetcar for making a disturbance and issued a citation.

Streetcar management dismissed the rider’s complaint as a disturbance to the driver and other riders. They explained that the leak was due to the aging car, which gets smoky and leaks when it’s hot outside. But streetcar management said even their smoky leaky cars are safe to ride in.

Keep in mind that the oldest car in the fleet is about 15 years old. (By the way, the average age of the planes used by Southwest Airlines is 19 years.) Also keep in mind that it wasn’t that hot outside. The high that day was 73 degrees. If that’s “hot,” then Portland’s streetcar would be expected to smoke and leak about five months out of the year.

Now let’s get to the contradictions.

We have a city commissioner who is afraid that Uber drivers might commit some sort of violence against their passengers.

At the same time, the city commission and the state legislature are pushing “ban the box” laws that would make it illegal for a business like Uber to ask whether their drivers have ever been convicted of a crime.

We have rules that require all rideshare car to pass a safety inspection. Yet the city runs streetcars that would fail the same sort of inspection to which Uber cars are subjected.

And we have a city in which African Americans complain that they can’t get a cab or get thrown off the streetcar, yet my first two Uber customers were young African American men—both Five Star riders.

And that is this week’s visit to the contradiction wrapped in a mystery inside an enigma that is Portland, Oregon.

Housing affordability: A problem self-inflicted by policy

Take a stroll through the housing markets along the East Coast and West Coast (and many places in-between), and you’ll hear talk of “affordable housing.”

During the housing boom, incomes were growing fast, but home prices and rents were growing faster. Because housing prices were growing faster than income, conversations turn to the lack of affordable housing.

Throughout the housing bust and the associated recession, rental rates continued to rise while home prices dropped. But, because incomes dropped and credit froze up, the affordable housing conversation continued.

Now, the economy is in recovery. Home prices are rising and so are incomes. But, home prices are rising faster than incomes, so even the recovery won’t make the affordable housing problem go away.

The Portland area is a curious case where land use policies have thrown gasoline on the affordable housing fire.

Oregon Public Broadcasting reports that Portland has a shortage of about 20,000 affordable housing units. About 30,450 very low income households in Portland should be spending in the ballpark of $500 a month or less on housing, only 10,420 units are available in the city within that price range.

But, it looks like things will get worse.

Oregon’s land use laws severely limit the expansion of residential development to outlying areas. The result is a region where development is limited to a virtual island surrounded by agricultural and natural resources uses. Because development cannot spread out, it must spread up. And, when consumers don’t want to buy in to high rise density, single family and low-density residential housing prices have only one way to go, and that way is up.

Gerry Mildner, the director of the Center for Real Estate at Portland State University notes (PDF, followup PDF) that the local government’s application of the state’s land use laws “pay only lip service to housing affordability.”

His analysis finds that under current policies, by 2035, Portland area rents will rise “roughly equal to levels in Los Angeles, San Diego, or San Francisco, eroding an important comparative advantage for the region.”

That’s why it’s been noted the declining housing affordability is often a self-inflicted wound caused by misguided policies.

Taxes matter: The migration of star scientists

Drop in on an Econ 101 class and at some point in the term, you’re bound to hear the economics professor say, “If you want less of something, tax it.”

That’s one reason for “sin” taxes. The hope is that high enough tax on liquor, tobacco, or—more recently—marijuana, will reduce consumption of these sinful products.

Taking it a step further, one way to have fewer rich people would be tax higher incomes at a higher rate.

But there is a rip roaring debate in economics and policy circles about whether this basic rule of economics actually applies to income taxes.

On the one hand, there is a large body of evidence that differences income taxes are associated with the migration of individuals—especially high income individuals—from high tax areas to lower tax areas:

  • Research using data from the Panel Study of Income Dynamics, find that both higher tax rates and increased tax rate progressivity decrease the probability that a head of household will move to a better job during the coming year, slowing the potential for household income growth.
  • The existence of a state income tax influences migration patterns and that higher state income tax levels have resulted in reduced per capita income growth over time.
  • Income taxes have an effect on migration for most races and age groups, and that individuals move from states with high income taxes to states with low income taxes.
  • The Public Policy Institute of California (PDF) finds that Californians of all incomes leave California for states without income taxes. Among highest income households, 36 percent more leave than arrive in California.
  • Approximately 1.5 million New Yorkers left the state between 2000 and 2008 due to “high costs and taxes,” and that those that left were selectively higher income households.
  • Studies from other countries with variable, internal regional tax rates support the hypothesis that US state-to-state migration would also be affected by tax policy. For example, research finds that newly-educated individuals, in particular, migrate in response to tax differences. A one percentage point increase in the tax rate change effects a 2.8 percentage point increase in the net out migration rate.

On the other hand, Warren Buffett once claimed that he’s never worked with anyone who mentioned taxes as a reason to forgo an investment opportunity that he offered.

A working paper recently distributed by the National Bureau of Economic Research seems to support the traditional view.

The authors look at what they call “star scientists,” whom they define as scientists with a large number patents—in the top 5 percent of those with patents. Based on the patent applications, they identify the scientists’ state of residence in each year over a number of years. With that information, the researchers can see whether a scientist has moved, which state they moved from, and which state they moved to. Then they link that information with data on each states top tax rates for individuals and business and and statistically analyze if taxes played a role in the move from state to state.

The results are interesting and indicate that tax rates are factor in attracting and keeping top scientific talent:

  • Star scientists’ moves from state to state are sensitive to changes in the top marginal tax rate on individuals.
  • Corporate income taxes affect state-to-state moves among private sector “star scientists” with no statistically significant effect for moves by academic and government researchers.

Count this as another piece of evidence that, “If you want less of something, tax it.” And it even applies to top scientists.

Podcast – Gridlock, Painkiller Abuse, Jobs, and Free Speech

This week’s podcast looks at how gridlock could be good for state budgets and economic growth.

Then we’ll check out new research suggesting that Medicare’s expansion in to prescription drug benefits has caused a boom in painkiller abuse.

On the job front, we’ll examine new evidence that referral based hiring is better for business and better for workers than the traditional methods of sifting through stacks of resumes and applications.

We’ll wrap thing up with commentary on two very different views of how free speech works in a world of free markets.

Part D pill popping: Did Medicare expansion cause a painkiller epidemic?

Opioids are painkillers like Vicodin and Oxycontin and opioid abuse has increased hugely since 1999. In this case, abuse is measured by substance abuse treatment admissions and deaths involving such painkillers.

As shown in the figure at the top of this post, these drug-related deaths spiked by 20 percent between 2005 and 2006. That happens to be the time that Medicare Part D added a prescription drug benefit making such painkillers much cheaper for seniors.

Recent research published by the National Bureau of Economic Research examines whether the introduction of the Medicare Prescription Drug Benefit Program in 2006 may have contributed to the increase in prescription drug abuse by expanding access to prescription drug benefits among the elderly.

Using data from the Drug Enforcement Agency, and shown in the figure below, they find painkiller distribution increased faster in states with a larger fraction of its population impacted by Part D.


They also find that this relative increase in opioid distribution resulted in increases in painkiller-related substance abuse treatment admissions.

Interestingly, these states experienced significant growth in opioid abuse among both the 65+ population and the under 65 population, even though those under 65 were not directly impacted by the implementation of Medicare Part D.

The authors do not provide an explanation for this observation.

But, maybe, just maybe, the older folks are engaging in a bit of prescription pill arbitrage: Getting painkillers at a low price subsidized by Uncle Sam, then selling them at a higher price to the youngsters.

In fact, last year, the Office of the Inspector General at the Department of Health and Human Services noted “questionable” usage of HIV drugs—including painkillers and concluded:

While some of this utilization may be legitimate, all of these patterns warrant further scrutiny. These patterns may indicate that a beneficiary is receiving inappropriate drugs and diverting them for sale on the black market.

A spokesman from the Centers for Medicare and Medicaid Services has said that the agency “takes this problem seriously and is taking steps to protect Medicare beneficiaries and the Medicare Trust fund from the harm and damaging effects associated with prescription drug fraud and abuse.”

The minimum wage debate in 20 short minutes

Legislatures in many states are considering bills that would raise the minimum wage as high as $15 an hour.

Proponents have argued that raising the minimum wage would reduce poverty and pull workers off of public assistance.

Opponents point out that a steep increase would reduce employment opportunities and that much of the wage increase would get eaten up by taxes and higher prices. Plus there’s the basic principle that if someone wants to offer their labor services for $5 an hour, why should the government say they can’t do that.

The 20 minute (or so) video above hits most of the pros and cons, just click “Play” to watch the show.

Click here to listen to the show as a podcast (right-click to download)

Single party rule and state spending: Discipline through disagreement

Ask a politician what the goal of their party is and they will tell you: To dominate the government.

Democrats and Republicans alike would like nothing more that to totally eliminate the other party from the legislature.

That may be good for the party, but new research says its bad for the budget.

A paper published in the Quarterly Journal of Economics finds that political competition reduces overspending by state legislatures (paywall version; free working paper).

The authors develop a model of legislators, some whom have a bias for overspending. In other words, these legislators want to boost current spending and put off any spending cuts.

Their model predicts that when unanimity is anticipated—for example, under one-party rule—legislators give in to the temptation to overspend.

  • On the one hand, if unanimous support for high spending is expected in future legislatures, legislators know that low spending today cannot stop policymakers from raising spending in the future.
  • On the other hand, if unanimous support for low spending in the future legislatures is expected, legislators can spend today and knowing that future legislatures will clean up the mess.

This seems to cross party lines. It was the Republican-dominated Congress that pushed the infamous Bridge to Nowhere.

But, the researchers argue, as legislature gets closer to a 50/50 split of those that are fiscally responsible and those that are spendthrifts, the possibility of gridlock increases. With gridlock, the status quo prevails and spending will not increase as much as the high spenders would like. In that way, political competition leads to fiscal responsibility.

Neat idea, but can you prove it?

The authors do not provide any statistical evidence supporting their model, but past research seems to be consistent with their model.

For example, statistical analysis published in the Review of Economic Studies finds that increases in political competition are associated with:

  • Lower tax revenue as a share of state personal income, meaning residents have greater disposable income;
  • A higher level of infrastructure spending by state governments; and
  • A higher probability that a state uses a right-to-work law, which makes it easier for employers to hire workers and easier for job-seekers to get work.

Thus, there is some evidence that greater political competition is associated with higher growth rates of state personal income per person.

Competition: It’s good for business and good for government.

No good deed goes unpunished: A look at the $15 an hour minimum wage

There’s an old expression, “No good deed goes unpunished.” Raising the minimum wage may sound like a good deed. But, it delivers a lot of punishment. And, it punishes those that it seeks to help.

For example, for the past few years, youth unemployment in Oregon has been about five percentage points worse than the U.S. as whole. The labor force participation of Oregon’s youth has been declining faster than the rest of the U.S.

In other words, young people looking for work cannot find work. And—even worse—it’s so hard for the young to find a job that they’ve given up looking.

However, as unemployment has grown and labor force participation has shrunk, Oregon has seen a steady rise in the state’s minimum wage to among the highest in the country.

This is not some crazy coincidence, or an episode of Portlandia where young people come here to retire. It’s because it is too expensive to employ young people or unskilled people. It’s because of Oregon’s sky high minimum wage.

It’s not only about the young. It’s about the unskilled, the elderly, the disabled, the person trying to get his or her life back on track.

Most economic evidence indicates that increasing minimum wages are associated with reduced employment. Indeed, a recent comprehensive review of the research by the U.S. Congressional Budget Office finds that the negative impacts are felt through wide portions of the economy with youth employment disproportionately damaged. CBO’s analysis is based on an increase in the federal minimum wage. State-level impacts are likely to be larger as many employers operate in a national labor market and can shift staffing across state lines.

We can see that observation play out in a few figures. The figure below shows that, since 1990, wage and salary income in Oregon has declined relative to the rest of the U.S. In 1990, the average Oregon worker made about $550 less per year than the rest of the U.S. The most recent data shows that the average Oregonian earns about $3,400 less than workers in the rest of the U.S. However, over that time period, Oregon’s minimum wage has grown to be among the highest in the country. In fact, the figure at the top of this post shows that as Oregon’s minimum wage has grown, so has its relative decline in wage and salary income.


The minimum wage bills under consideration in this legislative session would likely reduce total wage income in the state. The steep minimum wage increases being proposed would take income from one group of Oregon workers in order to benefit another group of Oregon workers, without increasing—and likely decreasing—total Oregon wage income. While some employees would see a modest increase in their annual salaries, tens of thousands of Oregonians would be unable to find employment and would have no wage income.

In fact, it is very likely that the gains to those who will see a boost in their wages would be more than offset by the losses to those who cannot find work at those wages. In other words, Oregon workers—as a whole—would be worse off.

In July 2014, the Legislative Revenue Office concluded that raising the minimum wage by just $2 an hour would have a long-run negative impact on employment and incomes.

The recent article published by the Journal of Political Economy titled, “How Effective Is the Minimum Wage at Supporting the Poor?” concludes that:

[t]he costs imposed by the minimum wage are paid in a way that is more regressive than a sales tax.

What the research finds that that the biggest chunk of a minimum wage increase gets eaten up in payroll and income taxes. Then, the rest of the increase gets eaten up by paying higher prices because minimum wage increases get passed on to consumers in the form of higher prices.

In other words, after the government gets its cut, minimum wage earners end up paying for their own minimum wage increases. It’s a bit like shifting money from one pocket to another, while dropping a few coins along to way that get picked up by the tax collector.

Watch the testimony before the Oregon Legislature: