Saturday, March 29, 2014

An imagined Q&A between the Mayor of Seattle and a local reporter about inequality In Seattle

Reporter:     Mayor Murray, you've established an
                    Inequality Committee to consider a 
                    $15/hour minimum wage in Seattle.

Mayor:        Yes, that's right.  We’re determined to reduce the excessive inequalities of wealth and income in Seattle.

Reporter:     Well, if you’re really serious about reducing inequality, then why is the Seattle City Employees’ Retirement System planning to triple its investment in Private Equity?

Mayor:        Private Equity?  You mean the sort of thing Mitt Romney was involved in?

Reporter:     Yes, it's the province of the very wealthy, and Private Equity investors enjoy one of the most unjust loopholes in the Federal tax code.

Mayor:        Which loophole is that?

Reporter:     It's the so-called "carried interest" loophole that allows Private Equity investors to pay lower tax rates than most Seattle workers pay.  (See here and here).

Mayor:       That is unfair!  But the City of Seattle can't do anything about the Federal tax code.

Reporter:    Well, not directly, but Private Equity firms hire lobbyists to preserve this tax break, and Seattle invests money with these firms. (See here).

Mayor:        OK, I take your point.  But the Seattle Retirement System must act prudently, not politically, when it invests.

Reporter:    Yes, of course, but did you know that the Seattle Retirement System's largest investment in Private Equity, a $20 million bet on a Private Equity firm located in the Cayman Islands, is now worthless? (See here and here).

Mayor:       All investors make mistakes.

Reporter:    Granted, but according to the Retirement System’s own website (here), Seattle's Private Equity investments have underperformed their benchmark by 7.5%/year over the last five years, and by 1.5%/year since April 2007.  And these figures don't even include the high fees charged by Private Equity firms.  

 Mayor:       (Sigh) That's depressing.  Have you talked to the Retirement System's private financial advisors?

Reporter:    Oh, they love Private Equity.  But then they get much higher fees when Seattle invests in actively managed funds like Private Equity.

Mayor:        So, the upshot is that, by getting out of Private Equity, Seattle can make better investments and strike a blow against the unjust tax loopholes that benefit the very rich.

Reporter:     Well, many economists, including several Nobel Prize winners, think so.  (See here).

Mayor:        Maybe I should talk with Councilmember Licata; he's the Chair of the Seattle City Employees’ Retirement Board.

Reporter:    You've both said you wanted to address inequality.

Monday, January 27, 2014

Ms. Sawant's Socialism, Seattle City Light, and a Market Socialist Alternative

Seattle City Light is the child of Socialist, Populist, and Progressive movements that coalesced around “public power” more than 100 years ago. And what a marvelous creation City Light has turned out to be, providing Seattle with the cheapest electricity of any major U.S. city.
But even a municipally-owned utility must occasionally raise its electric rates. Facing a revenue shortfall, City Light Superintendent Jorge Currasco pleaded his case for a temporary rate surcharge before the new Chair of the City Council’s Energy Committee, Kshama Sawant. Publicola, a local, web-based, news source, reported the encounter as follows:
“At the first meeting of the city council's energy committee this morning, the new energy chair, council member Kshama Sawant, made it clear that this whole socialism thing is no joke . . . Sawant objected to the potential [electric rate] surcharge on the grounds that it would be ‘unacceptable at a time when working people are already struggling.’" "‘The council has an obligation to make sure this doesn't happen’” (my emphasis).
Ms. Sawant didn’t actually advocate “no rate increase whatsoever.”  According to the Seattle Times, the Socialist Councilmember said, “If there are any rate increases to come, they should fall on big corporations that can afford it and not on working families.”

This is just the sort of policy question where the socioeconomic categories of Socialist orthodoxy can become a distraction. It’s true that City Light divides its customers into classes, but they're not the classes of Das Kapital. Rather, there’s a residential class, several commercial classes based on their volume of energy consumption, and a special rate for low-income customers.

To be sure, this classification system could be changed so that it corresponded more closely to Ms. Sawant’s favored categories. City Light could establish a “large corporation class” that would pay the highest electric rate, a “business class” that would pay a somewhat lower rate, and then, say, three “residential classes” based on household income. Leaving aside the legal and administrative difficulties involved, what effects would such a classification scheme have? 

Before we attempt an answer, let us take sides with Ms. Sawant's implicit premise that electric rate-setting is not merely a technical matter. In the first place, 
City Light’s allocation of costs is, in fact, a zero-sum game, a kind of “class struggle” to invoke a familiar, if exaggerated, metaphor. Lower rates for business mean higher rates for residential customers and vice versa. More importantly, City Light’s allocation of costs determines how the "surplus value" created by the utility’s investment in low-cost hydropower is divided among its customers. Why not distribute this bounty in a way that primarily benefits “working families”?
Here's the problem: City Light's customers aren't passive pieces on a chess board that can be moved around at will. The City can enact laws and regulations, but that's not the end of the matter. If the electric rates for small business customers were cut in half, these customers would consume more energy, which isn't good for the planet. And if Boeing's electric rates were doubled, they could either invest in more energy efficient technologies or move their operations to Tacoma, which offers very attractive power rates to large industrial customers. Although Tacoma’s working families could benefit from such a shift, it’s hard to imagine how Seattle’s working class would come out ahead.
Generally speaking, the allocation of utility costs is not the best means of addressing inequalities of wealth and income. Electric rates have a significant impact on energy consumption, and they should reflect the social cost of this consumption, including the externalities associated with Greenhouse Gas emissions. If the social cost of electricity is 10 cents/kWh, then all customers should pay a (marginal) rate of 10 cents/kWh. If some customers pay only 5 cents/kWh, while others pay 15 cents/kWh, overall investment in energy-saving technologies won't be efficient.
To address such problems, the Polish economist and Socialist, Oskar Lange developed a model of “market socialism,” which combines public ownership with market-like pricing in order to advance both equality and efficiency. In Lange’s scheme, prices (including electric rates) would be set to promote efficiency, while the distribution of income would be dealt with separately. Lange favored a “social dividend” whereby the "surplus value" created by publicly owned enterprises would be distributed to the public in the form of annual dividend payments.
It's worth mentioning that Seattle City Light resembles a "market socialist enterprise" in some respects. Although the "surplus value" created by the utility’s hydroelectric investments isn't paid out in dividends, it is returned to the public in the form of low-cost energy. And City Light has made an effort to design electric rates to promote efficiency, taking account of the costs associated with climate change.

Yet the utility's present rate structure is by no means optimal. Currently, most of City Light's residential customers pay marginal electric rates roughly equal to the social cost of energy. This is accomplished through an "inverted rate" where a first "block" of electricity is priced very low, but additional consumption is priced at a much higher rate. By contrast, commercial customers are charged a more or less "flat rate," which is significantly less than the social cost of energy. 

If the City Council cares about efficiency, the Earth, and the future generations who will inhabit it, then the Council ought to consider restructuring City Light's rates along Langean lines.

Luckily, there's a good model that's already been put into practice by British Columbia’s hydroelectric utility.  B.C. Hydro has developed, implemented, and refined special "commercial conservation rates" that promote the efficient use of electricity in ways that benefit all of B.C. Hydro’s customers, especially in the long run (see here and here). Why doesn’t Seattle City Light have such a rate structure? Perhaps the Market Socialist impulse is greater in B.C. than in Seattle, but that could change if Ms. Sawant is so inclined.

Thursday, January 23, 2014

Equality of Opportunity in Seattle

If you're born to parents in the bottom 20% of the income distribution, what are your chances of reaching the top 20%? The first table below shows the top 10 "opportunity" cities, and the second shows the bottom 10 (out of the 50 biggest cities). More at the Center for Equitable Growth. Very good Seattle, relatively speaking.

Monday, January 20, 2014

On the $15/Hour Minimum Wage: You Can’t Govern by Rhetoric Alone; Well, You Can, But You Shouldn’t

According to Seattle P-I reporter, Joel Connelly, Kshama Sawant’s speech at the January 12, 2014 Labor Temple rally for a $15/hour minimum wage included the following remarks here:
It is “the nature of capitalism to crush small business . . . capitalism overwhelmingly sets up small business for failure,” Sawant argued.  Addressing the argument that a $15 minimum wage shock might be too much for small business, she added:  “Small business should not be protected on the backs of workers.”
Ms. Sawant’s rhetorical exuberance suggests a “power pyramid” with big corporations at the apex, small business in the middle, and workers at the bottom.  Does it follow from this socio-economic understanding that the $15/hour minimum wage should be applied uniformly and without delay to all businesses, large and small alike?
I’m not sure, but here are a few things to consider. The first is that a $15/hour minimum wage in Seattle would have relatively little effect on the total labor costs of large corporations, which hire labor all over the world.  If a corporation’s Seattle operations accounted for 5% of its total labor cost, and 10% of its Seattle labor force were to get a 50% wage increase, then the corporation’s total labor costs would only increase by 0.25%. 
Now, consider small business.  If a small business is entirely local, then its “Seattle operations” account for 100% of its total labor costs.  And if 10% of its employees were to get a 50% wage increase, then this small business’s total labor costs would increase by 5% (20 times more than the corporation’s labor cost increase!).
Now, if for simplicity, we assume that labor accounts for 100% of all business costs, and that all businesses raise their prices in proportion to their increased labor costs, then the goods and services sold by big businesses subject to Seattle’s minimum wage would rise by 0.25%, while the prices charged by small businesses in Seattle would rise by 5%.  All else remaining the same, this increase in “small business prices” relative to “big business prices” would reduce the Seattle market share of small business and increase the Seattle market share of big business.  It’s hard to imagine that Ms. Sawant (or anyone else) would welcome this outcome.
There is, however, at least one countervailing consideration on the other side of the ledger, and it concerns the effect of increased spending that could result from a $15/hour minimum wage.  Since small businesses in Seattle get a much larger share of their total revenue from local sales than large corporations do, and since a substantial part of the increase in wages would be spent in Seattle, small businesses would enjoy a disproportionate share of this increase in sales revenue.

Where does all this leave us?  I’m not really sure, except to say that, when it comes to policymaking, the results of new legislation tend to be more appealing when you’ve thought things through in some detail.  And, on this score, I commend Councilmember Nick Licata for sharing the first of a series of issue papers on the minimum wage here.

Sunday, January 12, 2014

Liberals & Socialists: Can’t We All Just Get Along?

Relations between Liberal and Socialist Parties are often difficult and their coalitions rare and fragile.  But sometimes the tensions seem artificial and unnecessary, or so I concluded after reading Salon’s interview of Mayor Ed Murray regarding his Executive Order to create a $15/hour minimum wage for City employees.

Salon Reporter: “The argument was made to me, by the newly elected socialist council member Kshama Sawant, that both you and your opponent were ‘very carefully avoiding’ the $15 issue until it was brought up by her campaign and by fast food workers. Do you think that’s a fair criticism?”
Mayor Murray’s Reply: “It is absolutely incorrect, and it’s really sad to see progressives questioning other progressives’ motivations . . . I have a history as a legislator working on issues related to the – related to poverty, related to civil rights.”  “When progressives are divided and questioning each other, we lose every single time.”
Reading this, my sympathies were mainly with the Mayor.  What’s to be gained by agitation following this impressive act?  Why not graciously delight in having moved the $15/hour goal significantly forward and gear up to push it further?
Well, it turns out that, on closer inspection, this is pretty much what our Socialist Councilmember did!  Here’s Ms. Sawant’s Official Statement on the matter:

I am pleased to hear about Mayor Murray’s executive order to begin the process of making $15/hour the minimum wage for all city workers. This move towards $15 for an estimated 600 city employees is an important step in the right direction and a victory of the growing movement of low-wage workers. It starkly demonstrates the unprecedented political momentum for a $15/hour minimum wage for all of Seattle.

As an immediate step, I appeal to Mayor Murray to insist that the thousands of city subcontractor employees not covered by today's order also be raised to a minimum of $15.

But most importantly, the message to take away from today's announcement is how impactful grassroots movements can be, and how rapidly change can happen when working people rise up and make themselves heard. Workers, low-wage workers in particular, can play the decisive role in winning a $15/hour minimum wage for all of Seattle. This needs to be done by building an independent mass movement.
Yesterday, a new organization was launched called 15 Now to help carry this struggle forward. I appeal to those who want to join the movement to sign up at All those who want to get involved should come to the 15 Now kickoff rally on Sunday January 12th at 2:30 pm at the Seattle Labor Temple.”

This statement seems just about right to me: “pleased to hear about the Mayor Murray’s Executive Order,” “I appeal to the Mayor” to take the next step, and we’re creating “a new organization . . . to help carry this struggle forward.”

I'd also hazard the guess that if Mayor Murray were responding to Ms. Sawant's Official Statement rather than to the provocative question posed by the Salon reporter, he would have been equally generous.