When Parrots Make Policy: Ron Knecht and the Great Trickle Down Hoax

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Ron Knecht is the Nevada state controller.  He is a true believer in the Trickle Down Hoax and associated subsets of this egregious rationale for corporate welfare.  Not sure about the validity of this assertion? Read Knecht’s own words.   Mr. Knecht is most upset about the spending approved by the last session of the Legislature, sufficiently upset to grace Nevada editorial pages with his latest diatribe.

The first proposition in Knecht’s screed is that we are under-reporting the level of Tax Burdens on Nevada citizens.  His second major point is that “substantial empirical research shows that the numbers that determine the impact of government on economic growth and the public interest are total government spending amounts, not only those from particular accounts or sources. Research cited in our Controller’s Monthly Report #1 (at controller.nv.gov) shows that total public-sector spending, including state and local levels, has been too big a fraction of our economy for over 55 years.” [EDFP]

There are two problems with this paean to Koch Corporation Economic Theory. 

Problem One:  The assertion assumes that all government spending has a negative relationship to economic stability or growth.   Gross Domestic Product Formula

For an individual who has an academic background in mining economics, it’s remarkable that he’s possibly forgotten the good old, often cited, GDP formula in which “G” for government is part of the formula by which we measure the economy of both the states and the nation. Nor can we assume all governmental expenditures are counterproductive.  If, for example, the Federal government  decided to close Nellis AFB, what would be the impact on the Nevada economy?   Here’s the answer: (pdf)

As of 2012 there were 32,771 included in the base employment figures. 8,186 active duty military, 20,231 dependents, 289 reserves, civilian employees totaling 868.  There were 563 “non appropriated funds” civilian employees, and 2,055 on-site contract civilians; 579 “other civilians” were employed at the base.  The estimated dollar value of the jobs created at Nellis AFB was $229.7 million.  Expenditures at Nellis (federal and state) totaled $5,071.4 million.

Problem Two: Since the argument that all government spending is necessarily excessive is untenable, Mr. Knecht falls back on a subjective observation: “total public-sector spending, including state and local levels, has been too big a fraction of our economy for over 55 years.”   We’re left with at least two questions about this assertion. First, how big is “too big?”  Secondly, what’s magical about speaking of the last 55 years (since 1960)?

There is no way to objectively answer the initial question, the percentage of state and local spending relative to the GDP ranges from 5.9% in 1948 to 11.4% in 2014.  We could be dramatic and declare that this represents a 93% increase in state and local spending from their own sources over a 67 year period, but then we have to remember we’re speaking of 67 years, and the annual increase is an unimpressive 1.38%.

The percentage of state and local governments from their own sources as a percentage of GDP was 8.4% in 1960.  This would yield a 36% increase over the last 55 year period, an annual increase of 0.6545.   Even if we extend the numbers as globally as does Knecht in his discussion of expenditures and include federal, state, and local outlays, the total expenditure as a percentage of GDP was 25.7 in 1960 and 31.7 in 2014, an increase of 23% over the 55 year period, or  0.4181 annually. [OMB download Table 14.3]

State Local Expenditures GDP There’s nothing particularly dramatic about the state and local expenditures chart, and even less about the total outlays of the federal, state, and local expenditures.

Fed State Local Spending percentage of GDP The annual increases simply do not support the level of histrionics associated with the clamor from right wing politicians for decreased government spending.  Further, there is no reason not to take the numbers back as far as they go – to 1948.  There’s nothing magical about the last 55 years, certainly nothing in the actual numbers, which supports the assertion that we’ve experienced some form of grotesque increase in the level of spending as a percentage of GDP.

Problem Three:  Hyperbole doesn’t equate to substantiation. Knecht continues:

“This continued metastasis of government has slowed economic growth significantly over the last half century, directly damaging the public interest and producing an ever grimmer (not better) future for our communities and children. And Nevada politicians and special interests have played a substantial role in this uncaring destruction, especially those who supported this year’s taxing and spending blowout.

What are the true facts? First, state spending’s (sic) already excessive burden on our lives and wellbeing has increased 10 percent faster in the last decade than the incomes of Nevada families and businesses. (Due to changes in reporting categories, there is no pre-2004 total spending data comparable to figures since then; otherwise, we would use it. Hence, meaningful comparisons to earlier years such as 1992 are not possible.)” [EDFP]

These paragraphs don’t represent an economic argument, they are an ideological one.   Again, there’s an un-anchored assertion, that without the increase in government spending there would have been greater overall economic growth.   Since there’s no empirical data available because we can’t undo the government spending in the last 50 to 67 years, we’re left with an assumption – that all the revenue collected and spent by various levels of government would automatically have been re-invested in productive economic activity.   

The experience of 2007-2008 should have given us an example of what can go wrong when money isn’t transferred in ways described by classical economic theory.  Money didn’t necessarily move from investors into plant expansion and greater employment – too much went to feed the Wall Street Casino, into increasingly sophisticated financial products which had more interest in Bubble Manufacturing than in creating financial stability.  Perhaps in some utopian, and essentially academic, system money not spent on taxes would have been put into research, development, manufacturing, and sales efforts – but in the very real world of modern finance that’s not how the system works.  Mutations such as the management theory of shareholder value, and the rise of the Financialists, insured that the old illusions don’t make a solid foundation for current realistic economic discussions.

Additionally, as noted with the Nellis AFB example, not all government spending is universally considered economically counter productive.  Nor can it be effectively argued that government spending doesn’t enhance economic stability and promote growth.   Investments in infrastructure, such as the national highway system, can lead to decreases in production costs, and increases in output, yielding a net rate of return above that of private capital as shown during the forty year period from 1950 to 1989. [Rand pdf]

Knecht also attempts to create a cause and effect relationship between “excessively burdensome” taxation/spending and stagnant wages.  Welcome to the land of Post hoc ergo propter hoc.   Controller Knecht’s diatribe manages to ignore the effects of “gains in labor productivity, the division of earned income between labor and capital profits, and the allocation of labor compensation among wages and nonwage benefits.” [Brookings]  Nor does he cite the trends related to full employment, declining union density, the misclassification of employees, and the race to the bottom in labor standards. [EPI]  Knecht’s also omitting a new notion, “downward nominal wage rigidity,” in which workers in a buyers market are fearful of losing all employment so will settle for lower wages. [RCM]  [Economist]  Even the hard-right Federalist Society, of which Knecht is a member, cites “reduced labor demand,” “increased labor supply,” (and gratuitously tosses in the Affordable Care Act) as causal factors in wage stagnation.  In short, his simplistic, post hoc ergo propter hoc argument misses the point from the left, the center, and the right.  He might as well argue that wages have grown slowly since the beginning of the general economic recovery,  mid 2009, because Serena Williams won the Wimbledon Tournament on July 4, 2009.

Problem Four: Here’s another leap of logic which borders on the inexplicable.  Knecht’s syllogism appears to be: (1) Nevada has a median state and local tax burden; (2) Local governments are subsidiaries of the state; (3) Therefore, the state is responsible for negotiation results between local governments and local public employees.

“In fact, Nevada’s total state and local tax burden – that’s what matters, not headcounts – has risen to the midpoint: 25th or 26th in the U.S., depending on how measured. Because local governments are subsidiaries of the state and governed by it, legislators and governors bear significant responsibility for local spending too – especially the excesses caused by state laws allowing public-employee unions to drive local spending ever higher.”

There’s almost nowhere to begin with this other than to assume Knecht believes that local employee contracts are to blame for “excesses” in local spending.  Again, we’re in subjective territory.  How much is too much?  How much, for example, is too much to pay a police officer or sheriff’s deputy for being willing to engage with some of the most dangerous people in the state?  For being targets for radical right wing lunatics while the officers are trying to catch a bit of lunch in a pizza establishment?  How much is too much for a firefighter – how many people are willing to run into instead of out of a burning building? 

How much is too much to pay a county social worker?  The average caseload for a Child Protective Services investigator in Clark County is 18. The average case load for those responsible for supervising foster care is 13.  Or, to put it another way social workers are responsible for about 25 children per worker. [LVRJ]  The recommended standards are 12-15 children per social worker in foster family care, 12 active cases per month for initial assessment and investigation for every social worker; 17 active ongoing family cases per social worker with no more than one new case assigned for every six open cases.  The standard for a combined assessment and investigation in ongoing cases is 10 ongoing and 4 active cases per social worker. [CWLA]  

While hard cap number ratios may not reflect the flexibility needed to handle all local cases, recruiting and retaining trained professionals who are responsible for assessment, service planning, implementing and monitoring services, advocacy for children or adults who need basic services, interdisciplinary  and inter-organizational collaboration, record keeping,  and practice evaluation and improvements. [SWorg pdf] And, all this for about $45,000 to $66,000 per year.

Of course, there’s always that pesky teacher’s union – driving up the costs of public education – since there’s no way to run a school without teachers.  The current Clark County salary schedule begins at a non-too-impressive $34,637 and terminates for an “ASC + PhD” on step 15 at $72,331.  The median household wage in Nevada is $53,042.   In the private sector a doctorate in economics will get a person about $98,200 early in his or her career; a doctorate in statistics will get a person about $99,900 in the early years, increasing to approximately $128,000 in the later years.  [Payscale]

Aside from declaiming, without context, that salary negotiations are a significant driver of “excessive” local spending, Knecht also ignores another picky detail – population. In 1960 there were approximately 291,000 residents of the state of Nevada, 285,278 to be more exact.  By 2010 there were 2,839,000 residents.  There was an 895% increase in the population of the state in last 50 years.  This is the point at which “headcounts” do matter, it obviously takes more people to deliver services to 2.8 million persons than it does to provide them to 291,000.

NV Population 1960 2010

And now comes Controller Knecht’s finale, discounting efforts made by legislators to address spending issues in a rational manner:

“…as if hearing every detail of the budget means that politicians make the right decisions. Legislators can’t really know the value of each spending proposal when they hear almost exclusively from proponents, most of them paid for by our tax dollars to advocate for their interest, not for voters, taxpayers and the public interest. They certainly can’t determine its net social value unless they get equally extensive testimony in the same hearings on the damage done by the taxes needed to fund each item – and they never do that.”

There are a couple of features which require untangling in this paragraph. First, a person can be an advocate for social workers and also be a voter, a tax payer, and a person concerned with the public interest.  An advocate for highway funding is also a voter, a taxpayer, and concerned with the public interest.  There is no way to compartmentalize people, their advocacy, and their public spirit.   In Mr. Knecht’s taxonomy anyone who advocates for better police, fire, education, and social services, or highways, health inspections, public mental health services, parks, wildlife, and libraries – is not advocating “for the public interest.”  As if the public interest lies solely in diminishing these services in the name of “smaller government.”  This isn’t an economic argument – it is completely, totally, an ideological statement; and, it’s judgmental to boot.  So also is the term “net social value.”

“Net social value” is one of those buzzwords associated with radical right wing economics of austerity, and unfortunately it comes without any real meaning. [Guardian] It’s related to the economic term “social return on investment,” which is only slightly more precise.  “Social Return on Investment is an analytic tool for measuring and accounting for a much broader concept of value, taking into account social, economic and environmental factors.” [NewEcon]   Knecht’s context seems to place the “net social value” proposal closer to the Cost Benefit Analysis methodology and not quite so analogous to the SROI calculations.  Analysis in these terms can get very mushy very quickly.

For example, in purely economic terms (and ones Controller Knecht may find troubling) one of the best SROI or “net social value” or just old fashioned economic stimulus spending is the SNAP program.  A USDA Study designed to test whether or not SNAP benefits improved the economy found that an increase of $1 billion created about $1.79 billion in economic activity (GDP.) Or, that every $5 in new SNAP benefits generates about $9 in economic activity. [USDA]

If we expand the terms to include socially beneficial activities the measurement becomes more difficult to manage. How, for example, do we measure the quantitative benefits of public libraries?  Several states have made the attempt and most have returned results which might be at variance with Mr. Knecht’s ideological preferences.  South Carolina reported that for every $1 spent on public libraries contributed $2.86 in value to the state’s economy.  Florida studied 17 public libraries and demonstrated about $6.40 in economic benefit for every $1 in their budgets. [ALA]

Mr. Knecht assumes that “net social value” cannot be determined unless there  is equal weight given to the opponents of government spending for government services.  This, in turn, assumes that the arguments of the opponents are of equal quality and veracity as those of the proponents.  The evident extrapolation of Mr. Knecht’s argument is that any advocacy of government spending on government services must be self-serving, and therefore cannot be in the public interest. However, what are we to make of a hypothetical argument advanced by public health nurses that the state invest more in the inspection and regulation of out patient surgical centers? Simply because some such centers do not care to be inspected and regulated are we to assume that there would be a “negative net social value” to the increased number of inspections? What are legislators to do?  Knecht advises “focus?”

“Above all, they can’t make the right decisions if they substitute laboring over program details for focusing on the premier fact that government is already so big – even while still growing – that it has slowed economic growth to a long-term crawl and thus damaged our communities and children’s futures. If they really cared, they’d address and fix that first.”

Repeat the drum roll: Larger government = slow economic growth. As we’ve seen earlier in this post, that argument doesn’t stand under even cursory scrutiny.  This is a highly subjective point of view, and informed more by ideology than by economics.   If our legislators “really cared” they’d go over those program details, looking for ways to streamline services without compromising the basics, and in doing so would address issues in education, public safety, public health, and the quality of life in Nevada – without resorting to ideological blinders.  We could use more wise owls, and fewer parrots?

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