As economic stimulus, the USPS is an incredible deal

Photo by Graeme Pow.

I haven't written about it on here before, but I've had pretty harsh things to say about the USPS over the past few years. As someone who frequently extols the virtues of urbanism and is bothered by the outsize subsidies associated with rural life, it irks me that I pay the same to ship a letter as someone who lives 50 miles from the nearest post office. Perhaps more importantly, I'm just not convinced that first class mail delivery is a strictly necessary government service in the year 2013. This was all no big deal as long as they were profitable, but now they're losing billions a year.

The Postal Service is on track to lose about $10 billion this year. And to be fair, a big part of the reason for that is a Congressional mandate, unique to the USPS, that they pay their future retirees' health benefits out to 75 years in the future. They tried to save a few billion dollars a year by cutting Saturday service, but that was quickly squashed by yet another Congressional mandate, this time requiring that they maintain six-days-a-week service.

But in a time of continuing high unemployment, maybe we need to look at this from another perspective. To get that perspective, let's look back a few years. As the job losses caused by the financial crash of 2008 were peaking, we passed a $787 billion stimulus package to save and create as many jobs as possible, and according to the CBO it was somewhat successful: as many as 3.3 million jobs were saved. Taking that number as a given, this means that each job cost at least $238,000. This was spread over three years, and for various reasons its misleading to say each job actually cost that much, but we'll just accept it for now.

By contrast, the USPS employs about 522,000 people (though that number is declining rapidly) who earn an average of about $50,000 a year and get some pretty nice federal benefits. Good middle class jobs, in other words. If the Postal Service loses $10 billion this year and keeps all of their employees, it'll cost taxpayers about $19,000 per job saved. If we got that kind of return on the 2009 stimulus we could have put every unemployed and underemployed person in America back to work, and then some.

How many federal workers do you know whose wages are mostly covered by user fees? Photo by komunews.

Now, part of the point of the stimulus was to keep people employed long enough for the economy to get back on its feet, not to subsidize those jobs year after year into infinity (which is part of why the $228k per job number is misleading). To get to that level of spending, though, we'd have to subsidize the USPS at its current loss levels for over 10 years. At a time where unemployment is still over 7%, is deficit reduction still such an imperative that we can't afford to keep the Postal Service afloat as it reorients itself over the next several years? Can we really hope for such a good employment deal in any other spending package?

Some people might argue that the USPS isn't like other federal organizations--they're a business, not a public service organization or entitlement like Medicare, so its not the taxpayer's responsibility to shore them up when they get in trouble. But if they were really a business, could the US Congress mandate that they, and they alone, spend billions of dollars on costs that won't be incurred for another three quarters of a century? If it wasn't a public service, could Congress force them to provide their services six days a week, no fewer?

Maybe I'm overlooking something obvious, but I don't see how our lives would be significantly worse as a result of dropping to five-, or even three-day-a-week first class mail service (letter-type mail, not larger packages). We're forcing them to deliver every day because we find it convenient, that's all. We have the power to override the business decisions of the Postal Service for the sake of our convenience and we exercise that power, so as long as we retain that power the responsibility flows both ways. They have to do as we say, but when that gets them in trouble it's on us to bail them out.

I'm not proposing that we preserve employment into perpetuity--it's pretty clear that the USPS is on its way out eventually, or at best will be a much, much smaller organization in the not-too-distant future. In particular, I think we should be discussing whether six-day service is necessary anywhere, and especially where it's most expensive to provide. But anyone who's experiencing any kind of righteous indignation about Postal Service financial losses needs to look first to their Congresspersons, and themselves. Then they need to look at the unemployment number and think about whether this is really the best time to be laying off more people from well-paying, useful work. Even if its not strictly necessary.

Infrastructure investment is about safety and mobility, not construction jobs

The Columbia River Crossing proposal, in Portland, Oregon.

Any time someone makes the case for new infrastructure investment you can count on two things: 1) use of the word "crumbling," and 2) an enthusiastic remark about the number of construction jobs created. Jobs are always important, but in the case of investment in roads, rails, bridges, sidewalks, etc., there are few things less relevant to a project's value. We build and maintain our transportation infrastructure to provide for the movement of people* and goods and to ensure the safety of the users of that infrastructure. These are the primary measures by which we should judge the virtue of such investments; job creation doesn't even belong on the list.

Just as an example, take the proposal for the Columbia River Crossing bridge between Vancouver, Washington and Portland, Oregon. This controversial project would cost at least $3.1 billion (and as much as $10bn) and would provide an average of 1,900 construction jobs per year while being built. Even if costs came in at the low-ball figure of $3.1 billion, that works out to more than $1.6 million per new job, and those are jobs that would only last a few years at most. If the goal is cost-effective job creation then this proposal fails spectacularly.

The obvious point here is that the purpose is not cost-effective job creation. Rather, the value of the bridge itself is what will make this pencil out as a good investment, or not. The cost of the bridge must be weighed against its ability to improve mobility (for both economic and social purposes) and/or increase safety; those measurements, along with the much more speculative and therefore secondary considerations of "added value" or " private investment potential," are the only things that can yield a good return on investment for a product of this nature, or any transportation project for that matter.

The value of 1,900 jobs--or even 10,000--is insignificant relative to the cost of construction, and if keeping those costs low is one of the goals of the project (as it should be), fiscal prudence may work at cross-purposes to maximum employment. And that's okay. Construction jobs may be a nice bonus, but they're only worthy of consideration and celebration after the value of the project itself has been evaluated and maximized. If cost-effective job creation was the goal, we'd be better off paying people $50,000 a year to dig and refill holes all day or pick up garbage off the side of the road.

*The people in question may vary significantly from neighborhood to neighborhood and region to region--this will be dependent on the values of those communities. Some will prioritize the movement of cars and trucks while others will prioritize transit, walking, and/or bicycling. Among these sets of priorities there will certainly be differences in return on investment that should be evaluated critically, but the point is that mobility and safety still must be the primary considerations regardless of who the users of that new or improved infrastructure might be.

The repatriation-financed infrastructure bank plan, as structured, is a TERRIBLE idea

The new iPad, and a bunch of money, from appadvice.com.

By now everyone's heard of Apple's incredible network of tax shelters, which just in the last several years has saved them tens of billions of dollars in corporate taxes. Pretty much everyone except Rand Paul finds this reprehensible, but while Apple may be the best in the game when it comes to tax avoidance, they're far from the only player. Other big companies like Amazon and Microsoft do the same thing, keeping profits overseas so that they don't have to pay US taxes on them.

In many cases those companies would really like to bring that money back stateside, either to invest in their business here or (more commonly) to pay out dividends or buy back stock from investors. To do that, however, they'd have to pay 35% of those repatriated profits as tax. And no one wants to do that unless they have to.

Fortunately for these mega-corporations, they often don't have to. In 2004, under the Bush administration's leadership, Congress passed a law allowing a tax repatriation holiday, meaning that for a short period of time any profits brought back into the country would not be taxed. The purpose was to ensure that something productive would be done with that money--that it would be reinvested in US jobs and business needs. As the Treasury describes, however, this is not what happened:

In assessing the 2004 tax holiday, the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends. Today, when U.S. corporations have ready access to cash they have accumulated and are holding here in the United States, it is even harder to make the case that a repatriation holiday will unlock new investment and job creation.

And perhaps even worse than all that, now that we have a history of allowing businesses to repatriate their earnings tax-free they have far more incentive to keep their money overseas as long as they can bear, waiting until the next time we forget ourselves and give them another opportunity to cheat the system--and the American public.

"Hey."

On cue, in steps Congressman John Delaney (D-Md.).

His proposed legislation, the Partnership to Build America Act, would create a federal infrastructure bank funded by $50 billion of repatriated corporate profits. Companies would bring their money back to the US, buying infrastructure bank bonds that pay out a low yield over fifty years, and they would pay full taxes on the money repatriated to purchase those bonds. This sounds great because it would take money that's currently sitting overseas doing nothing and use it to fund up to $750 billion in infrastructure projects (via leverage) with a heavy focus on loans and public-private partnerships. It almost sounds too good to be true!

And of course it is, because the catch is that this is much more a repatriation tax holiday than it is an infrastructure fund. Although the ratio sounds somewhat up in the air, Delaney suggests that for every $1 brought back, taxed, and used to purchase bonds, $4 could be repatriated tax free*. In effect, this would reduce the tax burden of repatriated funds by 80%; instead of paying the full 35% corporate tax rate (which is admittedly too high), they would pay a mere 7%. This is exactly what companies like Apple have been waiting for, and would be an utter validation of their tax avoidance strategies.

I obviously care a great deal about funding the infrastructure investment this country needs, and it's difficult to pass up nearly any opportunity to further that cause. But the fact is that if an infrastructure bank is a good idea with repatriated funds then it's also a good deal with taxed or borrowed money. Especially in an era of rapidly falling deficits and near-zero borrowing costs, there's no reason to reward US corporations' dishonesty with a $14 billion windfall just to try to keep the lights on.

Hopefully this proposal will be seen for the stealth repatriation tax holiday that it is and get shut down quickly, and we'll find a more reasonable way to fund the maintenance and mobility investments we require.

*It's hard to be sure if this is exactly how it would work--the description at Transportation Issues Daily, the linked article that describes this proposal is not 100% clear. It might actually allow businesses to buy bonds with money already in the US so that they're actually not paying tax on any repatriated money.

Improving credit, not relaxing standards, should be focus for home loans

Zachary Goldfarb reports at the Washington Post that the Obama administration is pushing banks to make loans to those with weaker credit scores, contending that strict standards are leaving many applicants behind financially. If the problem is that many recession-stricken and younger first-time buyers are trying to get loans with poor credit, maybe the first step toward improving matters should be to target the cause: a lousy understanding of credit itself.

As I've discussed before, homeownership is rewarding enough without the incentives the federal government provides (often at the expense of renters). While our promotion of sub-prime mortgage loans was far from the primary cause of the financial collapse of 2007/2008 it definitely made it worse, and many of those who were convinced to take those loans experienced particularly tragic financial hardship. The idea that the Obama administration is so ambitious to revive the housing market that they'd resort to such drastic measures is a disappointment. It should be clear by now that we shouldn't be so reliant upon any one sector for economic growth, whether it be housing, finance, or anything else.

When it comes to credit, most people understand that paying their bills is central to a good score, but beyond that things get shaky. Ultimately the things that matter are to a) have multiple kinds of credit, b) utilize low percentages of your credit limits, and c) pay your bills on time; most everything beyond that is just tweaking for optimization. Despite this, about a quarter of the nation has credit scores under 600 ("poor credit"). There is clearly room for improvement.

Part of this is genuine hardship. Families that go through a serious illness often end up in collections or bankruptcy from medical costs, through no fault of their own--more than half of bankruptcies in the U.S. are due at least in part to medical bills. (Fortunately, the Affordable Care Act will help to reduce this number once it is in full effect.) People lose their jobs and the recession has been especially awful for many of the now long-term unemployed. Things happen, and sometimes no amount of knowledge about the consequences will prevent them from happening anyway.

There are also improvements to the home loan system that can be made, and the Obama administration is right to point them out. A more subjective analysis of individual applicants is completely warranted--someone with a few collections from five years ago (within the reporting time-frame) but consistently on-time payments since then is very likely a safe bet, for example. And Federal Housing Authority loans that allow smaller down payments are also sensible--being required to spend months or years putting away ten or more percent of a mortgage's value before making the purchase is crazy. Money in those amounts is effectively losing value due to inflation and housing appreciation, and once the decision is made to purchase a home it's wasteful to keep spending money on rent rather than investing it in a home.

Low credit scores impact far more than just your chances of approval for (and interest rates on) a mortgage loan, from passed-up rewards on credit cards to higher rates on auto loans to rejections on apartment applications. Rather than focusing on getting more people into homes despite their credit scores, lets first work on nationwide credit education so that people can take advantage of all the benefits of improved credit, not just a government-mandated loophole for home loans. Help people to understand and earn good credit and homeownership will follow, along with a whole host of other broad-based benefits.

Infrastructure stimulus is different

The theory behind stimulus spending is that when private spending and investment fall short of expectations, government can step in and make up the difference. Things like temporary payroll tax cuts, extending unemployment benefits, and grants for states to keep teachers in schools are great examples of ways the federal government can assist individuals, businesses, and cities, but they differ from infrastructure spending in a key way: while most stimulus measures are only needed as a response to recessions and shortfalls in consumer demand, investing in infrastructure and maintenance is something we need to do--but haven't--in booms as well as busts. What they share, however, is that recessions (and their recoveries) are always the best time to make these expenditures.

Why is this the best time to spend on infrastructure? Contracting is very cheap right now since construction companies are so desperate for business. Borrowing costs for the federal government are so low that investors are willing to accept a year-over-year loss on their bond purchases, after inflation (which is also exceedingly low). Unlike during a boom, we can be confident that public expenditures won't be crowding out private investment. And, of course, more people will have construction jobs, which lowers the unemployment rate directly as well as indirectly when those newly-employed workers start spending their money in the broader economy.

But for those who choose to believe that "stimulus" is just code for big government, socialism, etc., or that it doesn't actually boost the economy, infrastructure--particularly maintenance--is still a sensible way to spend our money. As has been widely reported, including on this blog, the U.S. has an estimated $2.2 trillion infrastructure backlog. Whether we choose to spend that money now or later, it's going to be spent. The longer we wait the worse the degradation and the more expensive each of those repairs will be, and the more it will cost us in vehicle wear-and-tear, lost productivity, and injuries and lost lives as pipes burst and bridges crumble. If we've got to make the investment either way, let's do it now, while the costs are least and the benefits greatest.

Are our programs working? Do we even want them to?

In light of all the talk about limiting and eliminating certain tax deductions I wanted to address them in a bit more general way than I did in my post about the mortgage interest tax deduction. Once a tax expenditure like the MITD is in place we tend to go to great lengths to study its effects and to ensure that it's achieving its goal(s), but rarely do we revisit whether that goal is actually worth pursuing. It's now taken for granted, for example, that the MITD has the effect of increasing homeownership rates to some degree; only recently, however, have we begun to question whether pushing those rates up at the margins is actually an economically or socially beneficial outcome. In the case of the commuter tax benefit, we're still not seeing much discussion outside of transit advocacy blogs and organizations about why we're giving car drivers a more valuable benefit than transit users (currently, $240 vs. $125). It's a policy that's completely contrary to the economic and environmental goals of our country, giving cars an arbitrary financial advantage over transit, and yet it persists.

Employer-based health insurance is probably the most significant example of this. (At $131 billion per year, it's certainly the biggest.) Logically, getting your insurance through your employer makes very little sense. It cedes the decision of what insurance company you use to the business owners and/or HR staff, as well as which programs they'll offer within that insurance company's suite of coverage options. Even more importantly, most businesses are fairly small so their bargaining power is extremely limited--even in the case of a massive corporation like Boeing or Microsoft, their leverage is insignificant compared to that of an entire state, or the federal government. This means higher costs for smaller businesses, and even for the bigger businesses costs can never compare to those of national programs like Medicaid and Medicare. We've enshrined the value of employer-based health insurance despite these and other faults, not because it's superior but because it's simply the way things have always been. We look at the system and see that it generally works okay, but by what standard? Relative to any other country's system of health care provision it fails on nearly every metric.

Nationally we're at record lows in terms of government revenue, and this has many causes. Partly it's been a giveaway over the last decade to the most well-off among us. Everyone though, not just the rich, has had their tax burden reduced, so there's more to it. Businesses are also contributing a smaller and smaller share of GDP to government revenues. I strongly feel that we need policy changes that result in increased revenue, but I'm willing to resist that impulse for some sensible revenue-neutral reform. We spend about $250 billion a year on employer health insurance, mortgage interest, and property tax deductions, and there are many other smaller deductions that make just as little sense from a social engineering perspective (and make no mistake, all tax expenditures are social engineering--and that's okay). We need to do something about them.

I'd like to see these programs reduced and revised in a way that redirects more money toward useful government programs or reduces the deficit, but completely offsetting these deductions with tax rate reductions would be a step forward, at least, and probably more politically palatable. Without raising any new revenue we'd be simplifying the tax system and removing distortions, encouraging people to use their money in rational ways, not just those that are preferred by their government. Some people would pay more, of course, but it would level the playing field such that everyone received some benefit, rather than just those who chose to accept the government's soft coercion. (Or, as is often the case, those who needed no encouragement and are essentially being handed free money in exchange for doing what they were going to do anyway.) This streamlining would also almost certainly increase productivity and encourage economic growth that actually did increase revenues faster than baseline. 

If any of that's ever going to happen, though, we need to stop worshiping at the altar of the familiar and traditional. Until we do we'll continue to be beholden to these wasteful programs whose goals are no longer aligned with our values, and probably never were. There are plenty of worthwhile tax expenditures, we just need the courage to evaluate them on their merits and not their history or constituency. In each case, need to decide whether targeting deductions at special groups (health insurance consumers, homeowners, car drivers) is superior to lowering costs for everyone. Where the answer is no, we need to shed these burdensome expenditures and move on to a more simple, sensible system.

*Note: I changed the title because no one got the reference to the Bushism "Is our children learning?"