The View From 1776

Three recent editorial page articles in the Wall Street Journal document a basic economic truth.  When wages or taxes are too high, profits are diminished and businesses stop hiring and ultimately lay off workers.  Our Big Three automakers stand as egregious examples.

President Franklin Roosevelt found that he could punish his enemies, those he called “economic royalists” (i.e., businessmen), by taxing profits to the vanishing point.  But he could not compel them to throw good money after bad by revving up production and hiring workers.  Under New Deal state planning, to do so would have meant only losing more money.

Voters and politicians should keep that in mind as the Democrats move toward more regulations, higher taxes, and continuation of inflationary Federal spending.

The first of the Journal’s pieces, which covers the New Deal, was posted under The Raw Deal.

The other two essays, which describe current interventions, are reproduced below.

Yankee Ingenuity

By LEWIS M. ANDREWS and DANIEL GRESSEL

HARTFORD, Conn.—New England is supposed to be liberal territory. Massachusetts recently elected a Democratic governor; Democrats control both houses of the legislature in New Hampshire for the first time in more than 100 years. Overall in the region there is only one Republican member of the U.S. House of Representatives—Chris Shays of Connecticut.

So what chance does an anti-tax ad campaign have in the Nutmeg State?

It turns out quite a lot. In April the Yankee Institute launched an ad campaign explaining that Connecticut only enacted its income tax in 1991, but that job creation in the state has since been at a virtual standstill. And that anyone interested in learning more should log onto our Web site ( http://www.YankeeInstitute.org ).

Our ads went up in two places. First we rented a digital billboard facing the state capitol. (We wanted legislators to see it.) Second, we put up posters in rail stations serving commuters headed to New York City. We know a lot of displaced New Yorkers move to Connecticut because they want more house for their dollar and because they want to pay less in taxes. And we suspected that many of these commuters have been quietly disgruntled over growing tax bills in their new home state.

This year, moreover, Republican Gov. Jodi Rell has proposed hiking the state’s income tax by 10% (to 5.5% from 5%) to raise money for Hartford and other city school districts. And one idea kicking around the legislature was to create a new, higher tax bracket for “the wealthy.” In this case, a 6.95% income tax on top income earners (something those commuters to New York City would probably love). The government’s apparently limitless appetite for higher taxes comes at a time when the rainy day fund is topped out and the state is enjoying a $900 million surplus.

We didn’t expect what happened next. Our Web site saw a significant jump in new viewers—many of whom were apparently reading two studies we put up on the site. One runs through the state’s anemic .06% job growth from 1991 to 2006. Over the same period the nation as a whole grew private sector jobs by 27%. The other chronicles all the rosy promises made by politicians as they pushed to create the state’s income tax.

Many Nutmegers may not remembers this, but in 1991 those favoring an income tax hike promised that it would bring in sufficient money for public schools, take the heat off of property taxes and not endanger the state’s position as the “Switzerland of New England.” None of that seems to have happened. Many towns seem to be more pinched for school funding now then they were before the income tax was imposed (when factoring in inflation and population growth).

Within days of our ads going up (and they are still up), the institute started receiving requests to take our message onto talk radio and television. At the same time a very small minority of Republicans in the State Assembly, led by Rep. Lawrence F. Cafero from Norwalk, realized that now was their moment to make a run against the tax-and-spend politicians in the legislature. They designed a no-tax-increase budget that polled better than either Ms. Rell’s original tax hike or the Democrat majority’s budget (which included the tax hike on the “wealthy"). Republicans even began meeting in secret to express displeasure with Ms. Rell’s leadership.

By the end of May, two months into our campaign, Ms. Rell backed away from her own tax hike. In early June, the legislative session ended without an agreement on the state’s budget. A special negotiating session between Gov. Rell and legislators has just ended, and it contains no increase in the state’s income tax—something thought impossible just months ago.

Our experience challenges a widely held belief that it is difficult to have a political impact by taking a serious, complex argument to the general public. By combining the old sound-bite media of billboards and posters with a sophisticated Web site, the Yankee Institute did precisely that—and for a fraction of what it would cost to buy broadcast time.

The most interesting assumption we tested with our campaign, however, is the notion that the Northeast is hopelessly and (with the exception of New Hampshire) solidly liberal. What we’re finding is that even rank-and-file Democrats aren’t happy to pay more to get less in government services. Given a choice between dumping more money into a failing public school system or enacting cost-effective reforms like charter schools and merit pay for teachers, voters aren’t likely to throw good money after bad.

Perhaps that’s one reason why the number of local taxpayer groups has doubled in Connecticut over the past four years, and in an increasing number of cities and towns voters are rejecting budgets when they come up for a vote. The state’s Advisory Commission on Intergovernmental Relations found that the number of towns able to pass budgets by the beginning of the 2002-2003 fiscal year was “the fewest number” since it started tracking such things. This year the number of budgets failing town referenda is on track to set a new record.

Luke Finnestad, who lives in Milford, Conn., spotted the Yankee Institute poster at the train station in Bridgeport and immediately thought of the industry that city has lost. It’s fitting, he told us, that he should spot the poster there. Bridgeport, in Fairfield County, was once a part of Connecticut’s “gold coast,” he said. It’s not a gleaming city anymore, however, because the state, as Mr. Finnestad noted, has one of the “highest tax rates in the country.” He’s not the only one who has noticed.

Mr. Andrews is the executive director of the Yankee Institute. Mr. Gressel is a member of its board of directors.

Minimum Wage, Jobless Kids

July 3, 2007; Page A16

Congress recently raised the federal minimum wage to $7.25 an hour by 2009, in the name of helping low-income families escape poverty. But a sobering new report from the New York City-based Center for an Urban Future shows how minimum-wage laws are already hurting the unskilled and inexperienced.

The “Summer Help” study assesses New York City’s publicly funded Summer Youth Employment Program (SYEP), which each year matches tens of thousands of young people between the ages of 14 and 21 with employers ranging from the local library to investment banks. New York’s teen employment rate is 16.9%, the lowest of any big city and half of the 34.6% national average. The program provides these young people with a valuable introduction to the labor market, not to mention some spending money and less idle time to make mischief.

Today, however, the New York program serves 20% fewer young adults than it did in 1999, and last year it turned away 30,000 mostly black and Latino applicants. The report cites minimum wage-increases in the Empire State—one of 30 states that mandates a minimum higher than the federal floor—as a factor in the program’s decline.

“The higher state minimum wage that went into effect in 2005,” writes author David Jason Fischer, “added to the challenge of funding SYEP by increasing the cost per participant, making it difficult to keep SYEP enrollment levels the same without year-over-year budget increases or additional administrative cuts.” New York’s minimum wage increased once again this year to $7.15 from $6.75, adding another $3.5 million in costs.

The harm from minimum-wage laws is well-documented, and even government job programs aren’t immune. As an antipoverty measure, these laws are inefficient because most people who are poor already earn more than the minimum, and most who do earn the minimum aren’t living in poverty. They are retirees, homemakers, part-time workers, and teenagers in the Big Apple—fewer of whom will have summer jobs in the future thanks to the higher minimum wage.

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