Category Archives: Economics

The Fiscal Ledge

With less than 12 hours to go, there is not a deal to avoid the fiscal cliff, but like most negotiations, it seems like something will happen.  We may avoid the cliff, but even if we do, almost everyone’s taxes will go up.  The payroll tax (a different tax from income tax) has been in holiday for years and the payroll tax holiday is likely to expire.  Negotiations have not focused on extending this break as well.

A family making $50,000 will have taxes increase about $1,000 through the payroll tax.  The Washington Post has the details.

The reintroduction of payroll tax is not nearly the tax increase if we go over the cliff, but don’t expect that a deal will mean that your taxes will be equal to 2012.  The moderate increase in government revenue can help begin to deal with debt and lagging service spending without the level of disruption that the “cliff” scenario tax hikes could bring.

Projecting Your Fiscal Cliff

Lawmakers are down to the wire in negotiating a deal to avoid the “fiscal cliff.”  What does it exactly mean for individuals, households and families?  The Tax Policy Center (a joint venture between the Brookings Institute and the Urban Institute) has an in depth calculator where you can compare your taxes based on the different plans that are being discussed.  The Washington Post has also used the calculator to project a number of typical family scenarios (as well as a few extremes).

Almost every situation leads to higher taxes on everyone, but some situations are worse than others.  If you are wondering what will happen without a deal or with one of the current proposals take a look!

How Long Will It Take To Get to 6.5% Unemployment – Brookings Investigates

The Brookings Institute examined how long it will take to return to 6.5% unemployment recently.  The level is important because the Federal Reserve set it as the benchmark rate at which it would begin to increase interest rates again.  This matters for anyone thinking about starting a business, buying a home, or borrowing money.  They conclude that even under the most optimistic of scenarios, we won’t hit 6.5% until early 2014, but it could be as long as 2018 if we continue sluggish job growth.  Read the report for a deeper look and an interactive tool!


Which Measuring Stick(s) Do You Use?

Countries, states, cities, and regions have long considered a number of economic measures as key indicators of success or prosperity.  Life is more complex than just economic outcomes though.  Quality of life is important, and it is made up of a number of different factors.  The environment, public health, transportation, public safety, and civic life all matter, but they are far from inclusive of all of the things that we can use to understand how communities are doing.  In an effort to think about other indicators of success, the OECD has started the Your Better Life Index.  The index only presents data at the national level, but it allows users to see how OECD countries rank in metrics other than traditional economic measures.  The OECD has also published a book that inspired the index How’s Life.  It describes the other ways that nations can measure their progress and allows users to see countries ranked based on the things that are most important to them.

The index would be especially helpful if it was available at smaller geographies – maybe the regional or city level.  Someday, when data is better integrated, it would be especially interesting to be able to compare one’s neighborhood with other places across the globe.  Users may be able to be inspired by certain quality of life metrics in neighborhoods they see in cities across the globe, or they might be able to see where their community is going.  While economic indicators are important, it is encouraging to see an early effort to use a broader spectrum of community indicators.

Exit, Voice, and Loyalty in the Context of Education Reform

The charter school movement has caught on in Pennsylvania, and particularly in the Philadelphia region.  In the Undergraduate Urban Research Colloquium that I organized and taught this spring, I learned from one of the student’s research projects that half of all charter schools in the state are in the city alone.  There are a number of views on charter schools both positive and negative.  I generally subscribe to the view of John Chubb and Terry Moe, who have advocated for choice in schooling.  The analogy that they use is that choice and charters represent bottom up change, which alone is not enough, but coupled with top down change in regulations and policy, can make a big difference.  The piece to read by the authors is called Choice Is a Panacea.  (It is under copyright, the link shows a search where you may be able to find it through an institutional subscription).

I want to present an alternative view though.  Albert O. Hirschman,  an incredibly important and readable economist published Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States in 1970.  In the book he presents three different responses to declines in quality.  The two main responses are exit and voice.  They are somewhat self explanatory – exit is when someone leaves or chooses to change to a different supplier.  Voice is when someone speaks up to try to improve quality in whatever they are purchasing.  If you use education as an example, it puts the idea of school choice on its head.

Through studies of state monopolies, Hirschman found those who were most likely to respond to quality were almost always those who were less responsive to price and willing to pay a premium for quality.  The typical upper-middle income family of four in the school choice example are the people he is talking about if the theory is applied to school choice.  These educational consumers were more likely to exit to a higher quality option, maybe in the suburbs, or maybe in a private school in the city.  Classic economic theory would suggest that competition would raise the bar for city public schools by causing corrective action through competition.  Instead he found that competition tended to lead to further decline in these institutions.  He found that poor train service was tolerable because high end customers could use highways and private cars instead of the train.  Instead of train service improving, it simply catered to a less demanding customer, who did not have the choice.  His study of train service was abroad, but it sounds similar to the domestic transportation story.

So for schools, in the exit, voice, and loyalty theory, choice will likely not improve educational outcomes for those who remain in traditional public schools.  (***As I write this, a general assumption is that charter schools are better than traditional public schools, partially because there is more demand for them than seats in a classroom.  Whether charter schools, as a class, in general lead to better educational outcomes or learning has little support in the empirical research.  The exemplary charters like KIPP and the Harlem Children’s Academy certainly do though.  One potential reason that parents like charters over traditional public schools is they are smaller and perceived to be safer.***)  A more broad, and some would say more pessimistic, view of the school choice strategy is that it isn’t about improving educational outcomes for the population of learners in a city, but more for providing an alternative for the high end customers.  This makes the choice not about what school to attend, but what city or suburb to live in.

Given the decades long exodus of population from cities like Philadelphia, one can hardly fault programs like the Penn Alexander school.  It is very small scale, and to some degree does help capture more property tax and wage tax for the city.  The debate on what the school has done to the community is for a different discussion, but demand has been so high that last year some news began to leak that not all students in the catchment area would be admitted to the school.

The news, for many new residents who bought specially for the school, was obviously upsetting, but led to Hirschman’s second concept – voice.  Voice is about becoming active and working to change the quality of something that you do not necessarily have an alternative for.  Since many new families paid big money for housing in the catchment, they were not especially able to uproot and move somewhere else (given the downward trend in home prices) and became a captive, quality conscious consumer of public education.  Coalitions of parents began to visit the neighborhood public elementary school started to hold meetings about how they could contribute to make the school as good as the Penn Alexander school.  The West Philly Coalition For Neighborhood Schools became more active in efforts to improve the school, and from different news reports and discussion sites, it appears that confidence in these schools is building.

The simple answer to education reform in the exit, voice, and loyalty theory is to nationalize, or at least regionalize schools.  Realistically this isn’t going to happen.  Also, the situation with the captive parents around Penn Alexander is unique and difficult to replicate.  The broad conclusion is to find ways to increase participation from the most quality conscious in order to help others.

The theory also gives a different perspective on whether or not charter schools, enhanced place based schools (like Penn Alexander) and even city wide magnet schools will improve educational opportunities for all.  The theory suggests that choice limits broad based improvement, but our political system favors choice.  Charters may end up being a way to for cities retain high income families, but the theory suggests that they must be coupled with targeted policies and new practices for neighborhood public schools as well.