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Earlier today, the Department of Labor published a new rule requiring overtime pay for workers who make up to $50,400 a year are eligible for overtime pay if they exceed 40 hours a week.

The idea, championed by President Obama, is this: If more employees are eligible for overtime pay (the average American worker makes less than 50 grad a year), then businesses will either pay their hardest-working employees more, or hire more workers to avoid paying the additional overtime penalty. The DOL estimates about 5 million people will benefit from this new ruling.

So this is wonderful, right? It’s well-known that for many people, employers can require more than 40 hours a week at no extra pay because employees are salaried and not hourly. The Cato Institute offers an opinion:

“In the very short run, employers affected by this expansion may have little choice but to pay their employees higher total compensation; in the very short run, employers have few ways to avoid this added cost.

But in the medium term, employers will invoke a host of methods to offset these costs: re-arranging employee work schedules so that fewer hit 40 hours; laying off employees who work more than 40 hours; or pushing such employees to work overtime hours off the books.

And in the longer term, employers can simply reduce the base wages they pay so that, even with overtime pay, total compensation for an employee working more than 40 hours is no different than before the overtime expansion.

So, expanded overtime regulation will benefit some employees in the very short term; cost others their jobs or lower their compensation in the medium term; and have no meaningful impact on anything in the long term.

Is that a victory for middle class economics?”

We at CRI agree with Cato. Just like with every other “well-intentioned” government law, those who are likeliest to “suffer” from it (in this case, employers), will find a way around it, especially in the long-haul. Employees who demonstrate clear value will likely not have to worry about their jobs, but anyone who doesn’t demonstrate clear value should be concerned. While many will benefit right away with the increases in pay, new hires may find their base pay is lower, so their potential overtime is lower. After all, time-and-a-half for a worker at $8.50 an hour is much less than at $15 an hour.

Plus, those who benefit now could see hours cut or, if the overtime pay began to turn business revenues from a profit to a loss, the businesses will lay off employees to stay in the black. This is what’s happened for many people as a result of the ACA: turning full-time workers into part-time in order to avoid the penalty, or simply paying the penalty and dumping people into the health exchanges, since that’s cheaper than offering health insurance. And with insurance companies asking for premiums increases, things are not looking up for American workers.

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The lifeblood of Delaware is the multitude of businesses incorporated in the state, some of which do not even exist within Delaware’s borders beyond a P.O. Box in Wilmington, and yet they pay taxes that make up a substantial portion of the state’s revenue. For years Delaware has been the premier place for a company to incorporate, and over half of all U.S. corporations are incorporated in the first state, in large part thanks to the state’s first rate court system that deals with businesses fairly and expediently. This means that it is cheaper to go to court in Delaware, and that means less costs that businesses have to absorb into their bottom lines or pass along to their customers. Although Delaware’s business court system remains the best in the country, other states are catching up.

State lawmakers have done their best to offset the savings offered by Delaware’s efficient court by creating ludicrous financial burdens on businesses and their employees that keep them away from the state. Because of these costs, many companies decide it is not worth it to open up actual offices in Delaware and subject themselves to the high taxes imposed by Delaware. Furthermore, many employers stay out of Delaware because their employees do not want to live there, because of failing schools and high crime, especially in Wilmington. Hundreds of millions of dollars in wealth has fled New Castle County in the past 15 years, undoing much of past efforts to attract business into the state. The state should be leveraging its accommodating courts to attract businesses to establish an actual presence in the state, rather than scaring them off with high taxes and unattractive communities.

Other states have also begun to attempt to reform their courts to make them more business friendly; both Nevada and North Dakota have improved the regulatory burdens they impose on states, and North Dakota especially has worked to reduce the tort costs inflicted upon its companies. In all likelihood the measures taken by theses states will poach some corporations from Delaware and will cut into growth in the number of new incorporations in the first state. It is a testament to the success and foresight of Delaware’s model that other states are attempting to emulate it and in a sense beat Delaware at its own game. For now Delaware’s courts still remain the most accommodating in the country, but other states are working to provide their own alternatives. Given the state officials complacency in making Delaware competitive, the possibility of other states surpassing Delaware grows by the minute.

States like North Dakota offer a vastly more hospitable tax climate compared to Delaware. North Dakota is making the smart decisions Delaware is not, attracting companies into the state with a potent combination of friendly courts and a sensible tax policy, that work in tandem to create a great offering. Meanwhile Delaware’s tax burdens offset the benefits its courts offer, wiping out any net-gain the courts might provide to a company looking for a place to start or expand. Overall it often makes more sense for a company to do business in North Dakota than Delaware, when one combines the combined effects of the states’ regulatory and tax policies. North Dakota is working to attract the P.O. Boxes and then turn them into offices, while Delaware only expands the financial burdens of doing business in the state and watches those P.O. Boxes disappear.

Jack Massih

CRI Intern

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This guest post is provided by Jack Massih, CRI’s summer intern. This is his debut post.

Connecticut recently decided to walk off of a cliff with its tax hike on businesses, and unsurprisingly the affected companies are looking to move to friendlier climates. Governors from Florida, Texas, Georgia and even New York quickly jumped at the opportunity, calling CEO Jeffery Immelt to explain why their state is the best place for GE’s new home. Delaware, with its business friendly reputation, ostensibly seems a natural place for GE to plant its new headquarters, but Delaware has fallen behind other states in offering a pro-business atmosphere, and if GE does decide to move, it is a near certainty they will not relocate to Delaware. For a State that has historically acted to accommodate businesses, this is a troubling development, indicative of the disastrous path state leaders have charted for Delaware.

As the current General Assembly looks to raise the personal income tax on the state’s wealthier families and raise the gross receipts tax on businesses, it is easy to forget there was a time when Delaware actually cut taxes and streamlined regulations to attract businesses and their employees to the first state. Lawmakers and Governors worked hard to woo the banking industry into Wilmington, and they adroitly maneuvered to land AstraZenica’s corporate office. Such policies paid off massively for Delaware, and even though tax rates were decreased, revenues grew as people and businesses flocked to the first state. In recent years many other states have prospered thanks to this pro-growth model, and Delaware was the pioneer of such policy, but state lawmakers have forgone this proven path to success in favor of increased taxes and ever expanding regulations.

One merely needs to examine the wealth migration into and out of Delaware to understand that families and companies vote with their feet. Money is still coming into the state from surrounding states in the mid-Atlantic and northeast, but much of it is offset by wealth leaving the state for even sunnier financial climates in the south. Delaware seems to be nothing more than a layover on the flight of money out of the region, rather than a permanent destination. Smart decisions to cut taxes sensibly will entice that money to stay within the state, boosting revenues and infusing communities with cash, while reckless tax hikes and wanton government spending will permanently scare it away. Delaware is straddling the line between being a winning state or a losing state, and current decisions by the General Assembly threaten to push it into the losing camp.

The risks of Delaware’s loss in competitiveness go beyond families and businesses leaving the state, there is also the loss in growth due to companies choosing not to relocate or expand into Delaware. Not only does the state run the risk of turning away established businesses and residence, it stands to lose out on the next generation of AstraZenica’s and banking firms. As firms like General Electric looking to relocate pass over Delaware, the state will lose out on the important revenue growth these income-earners and employers will bring, and its options to meet its ever growing spending commitments will invariably shrink to increasing taxes and/or making drastic discretionary cuts to state services. Both unsavory options inevitably push people out of the state and leading to an increasingly vicious cycle of austerity as people abandon the state and the tax base decreases further.

In order to avert such a scenario state officials need to drop their current tax and spend predilections and carefully examine their options to make Delaware more competitive. The bad news is that in many respects Delaware is lagging behind many other states; its tax burden is one of the highest in the country, and it is one of the few states that levy both a corporate income tax and a gross receipts tax. However this also means Delaware’s lawmakers have many routes to take in order to make Delaware more attractive to businesses. What Delaware should do is examine the states that have lined up to court General Electric and attempt to recreate their environments. In many cases these states have no personal income tax or no corporate income tax, a lower overall tax burden, and sensible regulations that make it easier to conduct business.

Delaware was once an expert at making itself hospitable for businesses and workers and it must rediscover that talent or it will lose out to states that recognize the need for sensible regulations and tax policy. The beauty of the federal system is the competition it engenders between the many states, encouraging creativity and common sense while punishing irresponsibility and complacency. If Delaware wants to keep its reputation as the first state for business, it must abandon its current self-defeating policy of constantly raising taxes to meet swollen budgets, and it must instead make itself attractive to business through the pursuit of pro-growth policies that will allow the state to reap the advantages of a healthy economy. The sooner citizens come to this realization the sooner Delaware can work to restore its waning competitiveness.

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This article is based off a column originally published in FEE

If this was yours, would you complain? nauticexpo.com

The presidential race is heating up and both major political parties have populist candidates- that means candidates who are running on the kind of anti-establishment, anti-greed platform the left, middle, and right generally agree on.

One of these candidates, the avowed Socialist Bernie Sanders, believes the world is a zero-sum game: If I have, then you don’t, and vic-versa. He does not see the potential for us both to have, but sees the possibility that I can take from you and vice -versa. In a recent speech, Sanders lamented that people are spending money on deodorant or sneakers when children are hungry. He literally said:

“You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country. I don’t think the media appreciates the kind of stress that ordinary Americans are working on.”

Not to be outside, a comedian named Louis C.K. followed up with a joke on a similar note:

“My life is really evil.

There are people who are starving in the world, and I drive an Infiniti. That’s really evil…. There are people who are like born and then they go, “Oh, I’m hungry,” and then they just die, and that’s all they ever got to do.

And, meanwhile, I’m in my car — boom boom, brrr! — like having a great time, and I sleep like a baby…. I could trade my Infiniti for like a really good car, like a nice Ford Focus… and I’d get back like twenty thousand dollars, and I could save hundreds of people from dying of starvation with that money.

 And every day, I don’t do it.

Louis C.K’s joke reflects a common complaint about markets—that markets enable people to purchase luxury goods while other people starve.”

This article is about debating whether it’s bad to purchase big-ticket items, especially when roughly 47 millions Americans are receiving SNAP benefits (aka food stamps), when so many young people live in crime-ridden areas and have parents who cannot afford to move their child to a safer school, 93 million-plus working-age Americans do not have a job, and median household incomes have fallen since 2008. When you look at the hundreds of millions of us struggling in this economy, it’s easy to get disgusted with the wealthy, some of whom probably don’t deserve their wealth (like if they earned it illicitly or obtained it by some other means than honest work), and who go drink $900 a bottle wines in restaurants in the swanky parts of Manhattan or who fly around in private jets that the rest of us can only see from the ground.

But what is a “luxury good”, and why are we taxing it? Most people would not argue that a private jet is “luxury”. What about deodorant? Most of us need that! And if one deodorant is $5 and one is $50, is the $50 deodorant “luxury”, how about Hermes belts, some of which run into the four digits. Are these luxury, or necessity, since all of us who wear pants need belts?

The reason classical liberal economic policies, such as the ones CRI advocates for, work is because the true value of an item is determined by those who buy it, not by society at large, and not by government officials who are taking guesses. There is no one item everyone in America owns, not by brand, and not by type. Most people have cars and car insurance, but not everyone does. Certainly there is no book or movie everyone’s seen or dog/cat food all dog/cat owners use, if they use it at all. Those who use or consume a particular product figure out what the value is and pay accordingly. if the collective value becomes too high for us, and we determine we don’t need or want that product or service anymore, we just say no (unless the government mandates it). If Hermes wasn’t making money selling belts for thousands of bucks, they’d stop doing it. Clearly, some are willing to pay for that, so they keep making it, and thus keep their workers employed.

Those goods and services we value more will end up having more people working in those industries, and the industries will less support lose ground. This is why there are lots of gun manufacturers, but far fewer bow and arrow makers. Or, more car manufacturing plants, but fewer horse and buggy plants. Why some people decide to fly first-class as opposed to economy on the same airplane, or even choose one airline over another, or to fly or not to fly. Market forces generally determine that the lower something costs, the more it will be purchased. For the same reason those of you who buy books on your book reader might stock up on paid books under $5, but if books were all $25, you’d buy far fewer of them (we assume you aren’t addicted to ‘free-books). When goods and services are cheap, we can consume more of them, building more industries and making more people prosperous. This is why keeping tax rates as low as possible is so important- the more cost you add, the less people can and will purchase something. This is how a person with just a two hundred dollars can buy a DVD Player, two six-packs, chips and dip, and still have enough for a month’s electric and water bill while $200 wasn’t enough to buy a DVD player when they first came out. So if you managed to buy one, you didn’t have left-over for anything else.

Therefore, it’s unreasonable to suggest that buying luxury goods is somehow bad. Yes, a millionaire could give $25,000 to a charity, or to the government, to feed, clothe, or house poor families. But if that millionaire purchased a new car at $25,000, that would help keep the auto workers, the truck drivers, and the car dealer owner and his/her employees employed. Diffusing the money among them is no different than diffusing money among the millions of hungry kids. Yes, some businesses don’t always pay or treat their workers fairly, but these businesses are absolutely in the minority.

So the next time a politician tries to tell you that luxury items are evil because they are expensive,and redistributing the wealth is the only logical solution, walk away.

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A few weeks ago President John Stapleford (yea, that has a nice ring to it) published an article praising Governor Markell for making the decision to ask state employees to contribute a little more to their healthcare plans. He wrote:

“State employee and retiree health care costs have been rising exponentially and are not sustainable. The claims have jumped 20% over the past three fiscal years and the latest Pew Trusts analysis estimates that the State of Delaware has unfunded long term health care liabilities of $5.6 billion.

Data from the U.S. Bureau of Labor Statistics shows what the Governor proposes is not onerous. The State pays for almost 91% of the employee’s health care premium. Nationwide, state and local governments pay 87% and the average in the private sector is just 79%.

According to the BLS, the average pay for workers in service-providing industries in Delaware was $51,647 in 2013 while the average pay for Delaware state government employees that year was $53,450. The 2013 BLS occupational wage survey for Delaware shows an average wage of $39,130 for full time workers in protective service occupations while 2013 State of Delaware payroll data shows annual pay for full time workers in the Department of Corrections to be over $46,800.”

After publishing this article, we heard back from state employees, upset by our article. Some unfriended us on Facebook. Others unsubscribed from our e-mail blasts. I even received on particularly upset letter with a five-dollar bill saying the following:

“As a State of Delaware employee, I work hard for my paycheck. I do not have a flashy job and am not in a position where I will ever receive accolades for my wondrous feats. When I retire, no one of acclaim will come to speak at my send-off party, if I’m lucky enough to have my friends pay to have one. I am grateful to have the ability to contribute to a retirement plan that will help supplement the meager social security check that I will receive when I am eligible under the rules of the Federal Social Security Administration….I am a fan of your organization, but would love to see some positive support for the hardworking State Employee.”

This particular letter is upset over our Transparent Delaware website, where we wrote:

“Caesar Rodney requested the State Pension Data as part of our Freedom of Information Act (FOIA) effort and received this response from the State Office of Management and Budget.

“The release of pensioner information is addressed in Delaware Code.  Specifically, 29 Del. C §8308 (d) states as follows:
‘(d) All records maintained by the Board or the Office of Pensions and Investments relating to the pensions or pension eligibility of persons receiving pensions from the State or other post-employment benefits and who are not presently employed by or serving as officers of the State or its political subdivisions shall be confidential.’

Accordingly, your request for state pensioner information as contained in your December 16, 2011 request cannot be fulfilled.”

Many other states now release State Pension information for public use.

Caesar Rodney would have to go to court to secure the release of the Pension data even though the release of that data is forgone because it is taxpayers’ money. ”

We have a large number of supporters who are current and retired state employees, so let’s set the facts straight and respond to our letter writer.

No one at CRI hates state employees. Nor do we assume they are collectively a lazy, undeserving bunch. Delaware needs some number of competent, hardworking state employees, and this letter writer is correct that most of them receive middle class wages and not the six figures much of the leadership gets.

But what this letter writer misses, and what many state employees miss, is that they are receiving their salaries from taxpayers in the private sector. Regardless of where it comes from, if the government provides it, the private sector paid for it in some way. If government were completely honest about spending, we would not need to threat a lawsuit. But we as taxpayers have a right to know what they are giving to others, and while this letter writer may believe his or her pension is too meager to be noticed, the collective pension total of all state employees is very high- just how high, we don’t know.

AS for the complaints that Markell was wrong to ask state employees to contribute more to their healthcare plans, they are not being asked to pay more than anyone in the private sector, nor do we want it taken away in its entirety. But for many people, it’s difficult to see past their own personal lives. Most of those who voted in our poll to say taxpayers should pay more because state employees haven’t received COLA raises since Markell took office are missing the point that their private sector counterparts aren’t doing much better.

The reality is, Delaware spends too much money. Unfunded liabilities are a problem and private sector tax collection from individuals and businesses has declined the last two years, not even counting the casino troubles. This is a big reason why most of the referendums to raise property taxes to pay for the public schools were voted down- it isn’t because people hate teachers or don’t want to see the local public school succeed. In fact, all of us at CRI join the majority who want to see public schools do well because when all schools succeed, all children have the opportunity to succeed to. This success can and should include traditional public schools.

But people are tired of paying money into a system with mediocre to poor results. They are tired of being excluded from the policy-making process, all while told they need to cough up more or else they’ll prove they don’t like teachers, et. al. Why should taxpayers continue giving money to a system which has failed?

If state employees feel disrespected, they should understand the current system is the problem. The way we do business is simply unsustainable and unless changes are made, we really will collapse, and this is not a blog for conspiracy theories or nihilistic predictions. CRI is a government accountability organization, and as long as our state government officials are not held accountable for their actions, then CRI will continue to support policies which reduce the burden on the private sector and hold the government accountable for how they spend our money.

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Legislative Hall in Dover, Delaware

This article originally appeared at the Watchdog.org website on January 20, 2015. Read the original at http://watchdog.org/193657/legislative-priorities-2015-delaware-way/

Last week was the first week the state Legislature was in session, but they will soon adjourn for budget and finance hearings before getting back to lawmaking in mid-March. Five new representatives and one new senator took their oaths of office for the first time, but this Legislature looks almost identical to the last one: the Democrats control the governor’s mansion, the House of Representatives 25-16, down from 27-14 last year, and the Senate 12-9, down from 13-8.

Notably absent from the last General Assembly were bills to make Delaware’s economy more free as the state—well-known as the “Switzerland of America” for its easy incorporation process and fair Court of Chancery—faces competition from Nevada and North Dakota for corporate business and from the Sun Belt for jobs. This year the Caesar Rodney Institute hopes to see legislation to address the following issues:

1. Education Savings Accounts: Delaware has “school choice”-IF your idea of school choice is to allow a child to transfer from one public school district to another (provided that district has room).While that’s better than nothing, that’s not really school choice.

CRI supported a bill last year called the “Parent Empowerment Education Savings Account Act” (PEESAA) which would have introduced Education Savings Accounts as an option for low-income and special-needs students who are the most likely to need additional services not being offered by the traditional public schools. This bill was tabled in the House Education Committee but we hope ESA’s and other bills encouraging school choice are brought up this year.

2. Prevailing Wage (PW): Delaware has an insanely wide range of wages a that business who wants a public construction contract has to pay its employees to get the contract.

Every January the state Department of Labor mails out its PW survey to union-friendly contractors and conveniently “forgets” to remind non-union-friendly construction companies to ask for, and return, the survey. This results in wage variance like $14.51 per hour for a bricklayer in Sussex County, but $48.08 per hour for the same job in Kent and New Castle Counties. Not to be outdone, boilermakers get $71.87 an hour in New Castle County, but “only” $30.73 in Kent County.

These high rates prevent many construction projects from being started and make those which are done more expensive for taxpayers. If the PW won’t be eliminated, we hope the state will instead use the U.S. Occupational Employment Statistics survey. This would reduce rates by almost 40 percent on average and free up nearly $63 million of spending from the State’s FY15 capital budget, including almost $18 million for more school capital improvements.

3. Make Delaware the next right-to-work state: Delaware is not a right-to-work (RTW) state and, between that and our inconsistent-as-applied PW law, many businesses outside the state choose not to move here. Incorporating and buying office space in Wilmington for some high-paying executive jobs is one thing. But Moody’s Analytics in late 2013 said Delaware was the only state at immediate risk of falling back into a recession and a lot of this is due to more businesses closing than opening in Delaware. Pass legislation to end forced unionization and support pro-job growth policies instead.

4. Tax and regulatory reform: Only five states have a Gross Receipts Tax, which is a tax on revenue generated before profit and loss is factored in. Three of those states have no further taxes on corporate earnings and the only other state (Virginia) that does has lower tax rates. Between this tax, high personal and corporate income taxes, franchise taxes, and overall over-regulation by state agencies, Delaware is increasingly threatening its “Incorporation Golden Goose” as Nevada and North Dakota work to take business from the state. This needs to be addressed.

5. Work to lower energy prices: Delaware has electric rates 25 percent higher than the states we compete with for jobs like nearby Virginia. We import close to one-third of our electricity from out of state, the highest rate in the nation. Some of this is due to our geography, but a lot of it is due to the state’s failure to build a network of natural gas pipelines from the Marcellus Shale to Delaware.

Coupled with the state’s participation in the Regional Greenhouse Gas Initiative (RGGI) carbon tax scheme and taxpayer subsidizing of “green” companies like Bluewater Wind (gone), Fisker Automotive (didn’t build cars in Delaware), and Bloom Energy (still has not brought the promised 900 high-paying full-time jobs), Delaware cannot grow its economy if energy prices are high. We want the Legislature to pass natural gas pipeline extension and end participation in RGGI and subsidies for “green” companies.

What issues do you think the state Legislature should focus on this year?

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Since 2008 America has seen a greater number of businesses close than open. According to Gallup, roughly 6 million businesses out of 26 legally recognized actually function; the rest are inactive or exist only on paper. Of these 6 million “real” businesses, 3.8 million employ 1-4 employees. Only about 108,000 businesses in America (2% of “real businesses”) employ 100+ people. If we continue to kill off small business with over-regulation and over-taxation, how will the government be able to pay its bills, short of more printing, borrowing, and cancelling debts?

From Gallup: (article truncated for space)

“The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

The U.S. Census Bureau reports that the total number of new business startups and business closures per year — the birth and death rates of American companies — have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.

You may not have seen this graph before.

Until 2008, startups outpaced business failures by about 100,000 per year. But in the past six years, that number suddenly turned upside down. There has been an underground earthquake. As you read this, we are at minus 70,000 in terms of business survival. The data are very slow coming out of the U.S. Department of Census, via the Small Business Administration, so it lags real time by two years.

Here’s why: Entrepreneurship is not systematically built into our culture the way innovation or intellectual development is. You might say, “Well, I see a lot of entrepreneurial activity in the country.” Yes, that’s true, but entrepreneurship is now in decline for the first time since the U.S. government started measuring it.

Because we have misdiagnosed the cause and effect of economic growth, we have misdiagnosed the cause and effect of job creation. To get back on track, we need to quit pinning everything on innovation, and we need to start focusing on the almighty entrepreneurs and business builders. And that means we have to find them.”

No matter how much some people will try to convince you the Roaring Twenties are back, the reality is that we have far too many businesses closing and not enough replacing them.Businesses do open and close all the time, but a lot of business closings are small businesses getting shut down because of government policy via regulation and taxation. A lot of these policies are Cronyist policies pushed by big business to weaken their competition, which is smaller stores. Thus for example, a big chain like Costco can safely come out in favor of the minimum wage increase knowing it will end up hurting the roughly 80 percent of businesses which employ nine or fewer people, while at the same time reaping the benefits of “caring” for their employees (note: we don’t object to Costco paying its employees well; we applaud it. But just because Costco might be able to afford a wage increase doesn’t mean every business can).

Crony business policies, government bureaucrats who make new regulations to justify their jobs, politicians who want to “do something” to get votes, and a well-intentioned but misinformed public which votes for things like minimum wage hikes  all result in a decline in new business startups and jobs lost and never created in the first place. We at CRI support economic policies which make it easier for people to start businesses and create new (hopefully well-paying) job opportunities without sacrificing necessary regulations and basic standards of decency. But unless we fundamentally change the way our country is operating, that 70,000 per year decrease in total businesses operating in America will increase in number.

Help support CRI! Your support allows us to research and provide analysis to the public on policies which will best grow the economy and create jobs. An end to the prevailing wage, Right to Work legislation, an end to Delaware’s gross receipts tax and lower corporate income taxes and personal income taxes, health care reform which encourages innovation from the private sector, and energy policies which would give people more choices would go a long way to helping Delaware, and America, make a sound economic recovery for all. Please consider making a contribution today.

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Earlier this week Business Insider UK published an article titled, “Conservatives will hate this: Proof That Government Spending Cuts Hurt Economic Growth”. From the article:

“… austerity subtracted about 0.76 percentage points off the real growth rate of the economy between the middle of 2010 and the middle of 2011. If real government spending had remained constant at mid-2010 levels and everything else stayed constant, (yes we know these are big assumptions) the US economy would now be about 1.2 per cent larger.

There’s a secondary conclusion, too: War is good (economically), it turns out.”

They provided a graph (created by Matt Klein of the Financial Times) with data from the U.S. Bureau of Economic Analysis (BEA) “proving” that Keynesianism works. Without public spending, the author argued, our economy can’t grow.

US govt spending growth contribution detail

Enter the Foundation for Economic Freedom, whose founder Leonard Reed once published the famous short story “I, Pencil.” You absolutely should read this, by the way. An economist named Robert Murphy points out the fallacy in the calculations made for the graph above:

“Edwards (the author of the Business Times UK article) seems to think that the above chart shows at least a correlation between government spending and economic growth. After all, he wrote that the BEA chart “seems to show that government has a pretty straightforward effect on GDP.” But… the chart does nothing of the kind.

Look carefully at the legend. The various colored rectangles are different components of government spending. Specifically, the rectangles indicate how the change in each component — positive or negative — relates to the change in overall GDP. The black line is not GDP growth, but is instead the sum of the various components of government spending… if we take the BEA’s word for how much each component of government spending contributed to GDP growth in each quarter, then we can stack those numbers on top of each other and even add them up! Contrary to Edwards, the FT chart doesn’t “show” anything at all, except that the BEA each quarter announces how much various components of government spending contributed to, or subtracted from, GDP growth.

After this discussion, we can see why pretty charts from the FT showcasing government spending’s “contribution to GDP growth” quarter by quarter don’t really mean anything. It’s the same for the ex post “empirical” analyses that concluded that the Obama stimulus package “saved or created” such-and-such million jobs. The underlying models that generate these estimates assume a Keynesian world, and thus cannot test whether the Keynesian model is correct.”

Even though the government prints and issues money, it’s the private sector (both businesses and consumers) who determine the value of a good or service. The government can only run on money taken from the private sector; printing into eternity is Quantitative Easing, which causes inflation if too much is printed. So they tax or borrow it from the people. If government spending really did save economies, both Delaware and America would have people making record amounts of money instead of seeing wages stagnate. The Federal Reserve would not have to continue holding interest rates low in order to convince people to buy things like homes or cars or take out student loans.

Check out CRI’s analysis here and here.

The bottom line is, Keynesianism does not work in the real world, despite efforts by its supporters to say it does. The less the government spends, the less the government needs. Even The News Journal noted that in a recent editorial.

As we approach 2015, here’s to more free markets and less government spending at all levels.

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Today is Giving Tuesday, a day created by the UN and 92nd Street Y nonprofit to encourage people to consider giving to a nonprofit/charitable organization instead of buying more stuff for the holidays.

As someone who currently works at a nonprofit, I can’t emphasize enough how critical donations are to keeping the organization running. I know stories abound about nonprofits where the CEO’s and top executives pull in six or seven figure salaries and very little that’s donated goes to the actual mission. That may be true for a small number of larger nonprofits or shady enterprises, but I can assure you the vast majority of us who work in nonprofits are not rolling in money.

So please find a charity (like the Caesar Rodney Institute, hint hint) and make a contribution today. You can also visit smile.amazon.com and choose a nonprofit you want Amazon to contribute to. For every dollar you spend on Amazon they will make a small contribution to your designated nonprofit. It won’t cost you any money and it’s an easy way to give.

So what are you waiting for? Support #GivingTuesday today!

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Happy Thanksgiving! We hope you have a happy and safe holiday.

For this week’s post we are going to respond to the post of blogger Lyman Stone, a grad student at George Washington University’s Elliott School. In his November 21 blogpost titled “North Dakota, Illinois, and Delaware: A Boom State, a Struggler, and a Winner”, he wrote about Delaware’s migration and why the state has had an overall increase in people from 2000-2010 (source: U.S. Census). His top four points and our response:

1. “Many of the people Delaware loses, as I’ve already shown, are richer people. That is to say, Delaware is exporting its richer people (many of them retirees) to states like Arizona, Florida, Virginia, and Texas. Meanwhile, it is inundated with floods of lower-income, somewhat less-educated individuals. Delaware’s in-migration includes very high rates of retiree migration and migration of the young.”

Delaware lost roughly $480 million in net wealth from 2000-2010, predominately from New Castle County (source irs.gov). Some of that wealth went across the border to Chester/Media, PA; many of the top 1% retired to Florida or Arizona, but many people did stay in Delaware and moved to Kent or Sussex Counties where property is even cheaper and cost of living is lower than New Castle County. Delaware’s low property taxes attract retirees mainly from DC, MD, NJ, and NY. Young people move to New Castle County for the corporate jobs. But Lyman is missing this point: Families with school-age children tend not to stay in Delaware. (see here and here). Unless the parents can afford a private school or get to a good charter school, the parents more often than not leave for PA. A graph within the presentations in the links shows a huge drop-off with parents with at least one child aged 5 or older leaving for places like Valley Forge or Media while parents with children 0-4 stay in Delaware. So it’s like “come when you’re young, leave when you have a family, return when you’re ready to retire”.

2. “Once again, like Illinois, Delaware has lots of high-traffic borders and nearby border metro areas, thus we can fruitfully look to policy variables as one part of the explanation. Delaware has income taxes at a similar rate to most of its regional peers (though much higher than Virginia’s) and is in the minority of states in that it still has an estate tax. In that regard, it is peculiar that so many retirees would choose it.

That is, until we recall Delaware’s three most salient tax features: it has no sales tax (thus reducing cost of living), among the lowest property taxes in the nation (reducing cost of living), and funds its infrastructure through tolls and user fees more than any other state (reducing burdens on people who drive less: young and old). Its taxes overwhelmingly fall on businesses, but it attracts businesses by offering highly favorable legal and regulatory conditions.”

Delaware has a gross-receipts tax, a tax on business revenue BEFORE profit and loss is considered. Only Virginia has both a gross receipts and income tax, both of those rates are lower there than Delaware. The result has been that Delaware has had more businesses closing than opening and we are 51st in the country in jobs created by existing firms (Source: deconfirst.com). This means no state or DC is worse than Delaware at getting businesses already here to hire more people. The state is very good at helping start-ups but not good at helping established businesses, especially medium-sized businesses.

Delaware’s Court of Chancery is known for its fairness, and incorporation laws are lax. This is favorable to larger businesses to want to headquarter here, which is why the Wilmington area has so many corporate offices with high-paying administrative jobs. This is a good thing for the state but again, this benefits larger businesses and not small- or medium- sized businesses.

3. The net result of Delaware’s policy choices is that “New Economy Index” produced by the liberal-leaning Progressive Policy Institute ranks the 2nd best in the nation, the conservative-leaning American Legislative Exchange scores 27th in their “Rich States, Poor States” publication, the business-backed Tax Foundation (disclosure: my former employer) ranks 14th-best, and even the libertarian Mercatus Center identifies as 17th “most free” in their Freedom in the 50 States report. A report by 24/7 Wall Street found Delaware to be the 13th best-run state in the nation, and academic measures of state corruption rank Delaware no worse than middle-of-the-pack. In fact, it is a real challenge to find any organization that scores Delaware poorly on any major policy metric or index.

Corruption in Delaware is not as bad as it is in places like Illinois, Rhode Island, California, or Louisiana. But saying it’s “good” is more on an indicator of how corrupt those states are. Delaware’s small size means “everyone knows everyone” attitude impacts the government but the state is not very forthcoming with state pension data or with how education dollars are being spent. That said, we are better than every other Mid-Atlantic state besides Virginia. We posted on the Tax Foundation’s analysis.

4. Likewise, Delaware has one of the lowest average price levels of any state in the region (except Virginia), and that price level is lowest in southern Delaware, where in-migration is highest.

I’ve repeatedly cast Delaware as a state that’s providing opportunities: for the young, for the less educated, and also for regional retirees who may not have the money for a bigger relocation to Texas or Florida (or who may not want to pay property and sales taxes in those states). That’s because Delaware’s migration record is simply the strongest across the most different categorizations of almost any state, especially among states without major oil and gas reserves. I’d love to hear more from people familiar with Delaware on how the state attracts people: beaches with rising popularity? corporate headquarters? retirement communities? strong university recruitment? sprawl from Philadelphia?

To Lyman’s final point, Delaware IS a very attractive place between Philly and Baltimore/DC. We are a train ride or short drive from all three cities and only three hours from New York City. The Beaches draw in tourists and retirees, and there is some Philly sprawl in the Claymont area. But Delaware is beginning to lose our status is a “tax haven”, now that Nevada and North Dakota are competing with us for our corporate business. The state spends way too much money and like most states will suffer from having to choose between Medicaid and public education once the federal government cuts back on its Obamacare obligations by 2019. Our three casinos are losing money and, barring a change in visitor habits ore legislative policy, will go out of business; 6% of our state’s revenue comes from casino taxes. We have a state carbon tax and cap-and-trade system (Regional Greenhouse Gas Initiative) which is costing so much money CRI’s Energy Policy Director Dave Stevenson and our board member John Moore are suing DNREC to prevent a new carbon tax fee from being imposed on residents and businesses.

Delaware’s population is aging at a faster rate than the nation as a whole; right now half the state receives Medicare or Medicaid. By 2030 that number will be closer to 67% at current migration rates. Sussex County is already 25% senior citizens and that number grows ever year. As much as we at CRI love our seniors, someone has to help pay for Medicare/Social Security/ public housing assistance/public transportation, and other quality-of-life benefits seniors need to enjoy their retirement since we know the Feds won’t meet their future obligations.
Because of its strong migration record in a highly competitive area, other states could benefit from studying Delaware’s experience and determining which policies they can adopt for their own states.

Please don’t pass a gross receipts tax or block natural gas pipeline from reaching your states. We have high electricity prices and a mediocre public education system. Don’t be so aggressive and seizing abandoned property, even down to the Amazon gift cards which went unused. End the prevailing wage and establish a Right-to-Work law if your state doesn’t have one yet.

What do you think about Lyman’s blog post or our response?

Please consider eliminating your state’s sales tax and lowering property taxes, and have a court system which is seen as quick, efficient, and fair.

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