A Primer on the Federal Funds Rate

By: Andrea Ferrell

What’s the relationship between the Federal Funds rate and the 10 year treasury?

As the U.S. economic expansion crosses the ten year mark, the Federal Funds rate has been under a magnifying glass. The rate is the Federal Reserve’s, America’s Central Bank, main tool in controlling monetary policy as well as a  tool for the government to control reserve requirements and keep inflation in check. Generally,  if the Federal Reserve sets a higher Federal Funds rate, it causes a reduction in money supply and other short-term rates to increase, thus lowering inflation and controlling price fluctuations. As of this writing, the Federal Reserve is aiming for a 2% inflation rate, which would ensure that the U.S. economy does not “overheat” with excessive inflation.

Prior to the 2008 Financial crisis, the Federal Reserve would set a target rate and adjust this rate depending on how strong or weak the economy was at the time. This fixed rate proved to be detrimental as the rate was not able to make small adjustments to market swings between meetings and inflation skyrocketed. Over the course of 2008, the crisis deepened and the Federal Open Market Committee the Fed funds rate from 3.5% to a floating target between 0 and 0.25% as a tool to bring down other short term rates. The floating target range, though does not determine the actual rate. Rather the overnight supply and demand by banks for loans performs this function.

After the 2008 financial crisis, the Federal Reserve used an expansionary approach where rates were cut in an effort to spur consumer spending. Having a new target approach allowed the Federal Funds rate to move between two set rates and for more adjustments when there were sudden movements in the markets, as opposed to the prior rigid rate. Likewise between 2008 and 2015, the Federal Reserve began to use Open Market Operations to purchase long term securities and treasuries as a tool to stimulate long term growth and raise long term rates. In 2015, the Federal Reserve began to use a contractionary approach, whereby short-term rates were raised in an effort to cool inflation and keep economic expansion on track, as too much inflation can erode the value of a currency. The current target is now between 2.25% and 2.5%, with the current rate moving for the last few months within the said interval from 2.33-2.4%.

The Federal Funds rate has a ripple effect on the so called “yield curve” for U.S. issued Treasury Bills, and consequently longer term bonds and notes, as both are competing short-term investments. The  curve generally follows Treasury Bills in increasing yield, as longer term Treasuries are riskier and require a higher return to entice investors. Experts often talk about this yield curve, which is a snapshot of  treasury rates on a given day. An inverted yield curve (where shorter bills have a higher yield than longer bills) could arguably imply an upcoming recession. The yield curve inverted in 2005, 2006 and 2007 preceding the 2008 crisis. While these events occurred over a year before the 2008 recession, this inverted yield curve shows that investors see more risk in the near future than the far. Many investors look to the ten year Treasury as a way to gauge future outlook because the ten year influences other financial tools like mortgage rates. Since 2018 began, the ten year treasury has been between 2.3% and 3.25%,  showing some, but not complete, correlation with the increases in the Federal Funds rate.

So why do people look at the spread, or difference, between the Federal Funds rate and the ten year treasury? Both of these securities are competing with each other for investor money, so a narrow spread implies a flattening yield curve and more cautious investors.For example,  on February 8 2019 the spread was 0.23 percentage points, while in January of 2018, the spread was 1.17 percentage points, showing how investors  have more trepidation about the future.

Now, should the ten year rate  be higher with the Fed Funds Rate hikes? Well yes and no. In an ideal world, with no other variables, the Ten Year Treasury should increase with hikes in the Federal Funds rate, as this rate sets the yield curve; however, the ten year yield is influenced by other variables like consumer confidence data and domestic and foreign growth, all of which decrease the correlation between Treasuries and the Federal Funds Rate. For example, when retail sales were lower than expected for December 2018, treasury yields decreased from 2.706% to 2.659%, showing how investors entered safer investments.  With the possibility of more rate hikes in the upcoming year, the spread between this rate and the ten years’ yield is going to be an interesting financial tool to watch as a gauge of the health of the US economy.

Works Cited:

Image source: https://www.inkcinct.com.au/web-pages/cartoons/past/2007/2007-531-interest-rate-rise-lever-23Aug.jpg

10 Year Treasury Rate – 54 Year Historical Chart. (n.d.). Retrieved from https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

Chen, J. (2018, December 30). Federal Funds Rate. Retrieved from https://www.investopedia.com/terms/f/federalfundsrate.asp

Chen, J. (2019, February 05). Inverted Yield Curve. Retrieved from https://www.investopedia.com/terms/i/invertedyieldcurve.asp

Federal Funds Rate – 62 Year Historical Chart. (n.d.). Retrieved from https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

Federal Reserve Bank of St. Louis. (2017, October 06). How Might Increases in the Fed Funds Rate Impact Other Interest Rates? Retrieved from https://www.stlouisfed.org/on-the-economy/2017/october/increases-fed-funds-rate-impact-other-interest-rates

Harper, D. R. (2018, November 21). Understanding Treasury Yield And Interest Rates. Retrieved from https://www.investopedia.com/articles/03/122203.asp

Hazel, R. L. (2017, December 5). The Evolution of U.S. Monetary Policy[PDF]. Richmond, VA: Federal Reserve Bank of Richmond.

Policy Tools. (n.d.). Retrieved from https://www.federalreserve.gov/monetarypolicy/openmarket.htm

U.S. Department of the Treasury. (n.d.). Retrieved from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield

Using the yield spread to forecast recessions and recoveries. (n.d.). Retrieved from https://journal.firsttuesday.us/using-the-yield-spread-to-forecast-recessions-and-recoveries/2933/

Housing in the time of Sanhattan

By: Mithul Roy

Exploring New York’s growing reputation as the launchpad for tech firms and its impact on the city’s housing sector.

Amazon pulled an April Fools prank way back on Valentines Day when it abruptly withdrew its planned new NYC HQ2 in Long Island City, and with it the 25000 jobs the proposal promised. The massive project had been backed by tax cuts and the promise of job creation and meant that housing prices in the city and surrounding boroughs soared by 10 to 15% upon news of Amazon’s impending arrival and largely reverted back upon news of Amazon’s departure. The debacle also raised questions about the impact of the city’s growing reputation as the next Silicon Valley.

According to a new WSJ study, New York, Beijing, Tokyo, and London make up the top of the list of cities gearing up to become the next center of tech innovation. New York ranked number 1 on the list and is projected to surpass demand in Silicon Valley by 2023, according to a KPMG survey of 740 tech industry leaders in a dozen countries. Access to Wall Street, a diverse workforce, and top tech talent are all major factors in New York’s high ranking. The use of cloud computing means that firms no longer have to be based in any particular location, making expensive and overcrowded San Francisco far from the only option for tech firms. This is especially true given how the competition for programmers is pulling up salaries, rapidly escalating the average prices of homes, (which in many parts of the San Francisco Bay Area are above $1 million), and driving many high-tech workers to live elsewhere.

New York is already home to the second largest concentration of startups outside the San Francisco Bay Area, with more than 7,000 startups to be specific, which as of 2017, have raised $12 billion in venture capital funding. This sum is almost twice the $6.4 billion secured in 2014 and  is only expected to grow. As the second-largest producer of billion-dollar “unicorn” startups in the U.S., and the second-highest performing startup ecosystem with an estimated valuation of $71 Billion, New York’s tech sector employs over 326,000 people who have average wages that are 49 percent higher than average private sector wages in the city. Moreover, the industry is the third-largest and fastest growing part of the New York economy presently. This trend is supported by the fact that there are also now more A.I and machine learning positions in NYC than in San Francisco, venture capital funding for which grew by 463 percent from 2012-17.

Large and small tech companies are considering New York as a second home, with Google announcing a $1billion+ investment in a new 1.7million square feet office complex in NYC in addition to its planned purchase of the Chelsea Market building for $2.4 billion and further plans to lease more space at Pier 57 along the Hudson. This doubles Google’s current 7,000 employees in NYC by 2020. Google joins Uber, Twitter, Salesforce, Spotify and Facebook, (which alone employs 2000) in their venture east. In fact, New York’s 100 biggest local tech companies — including Etsy, Oath, Shutterstock, and BuzzFeed — currently employ more than 38,000 people, 80 percent of whom have plans to expand the number in the near future.

One of the major draws of New York is the diversity of its human capital, increasingly an important part of the hiring process. A survey by Accenture and Tech found that 74 percent of respondents believed that New York’s diversity of industry will enable tech companies to attract top talent, and a staggering 89 percent of tech talent attribute diversity as a key attraction to move to NYC. Indeed, as one of America’s largest and most diverse cosmopolitan city, it boasts over 410,000 women-owned businesses, over twice that of any other U.S. city, and ranks first among 50 global cities for its ability to attract and support women-owned businesses. Additionally, as the international center for fashion, advertising, publishing, culture, and hospitality, New York is also in the unique position to offer ease of networking, creating partnerships, and raising capital combined with top notch human capital, all of which are important and time saving factors to tech startups.

The booming tech sector, however, has raised concerns over its impact on the city’s housing market and cost of living. Amazon’s HQ1 in Seattle reportedly caused an initial 35% increase in Seattle housing prices with a price rise of 73% and 31% higher rents in the last five years alone and about a 90-140% rise over the past decade. A testament to the speculative investment spurred by anticipation of Amazon’s move is the surge in contracts signed for home purchases;  135 deals in Long Island City between November and February, over twice last year’s 48 deals over the same period. Interest in condos has skyrocketed with a 10% to 15%  increase in prices, and   a nearly 200% increase in condo sales since the November Amazon announcement compared to the same period last year. Furthermore, these price hikes were also accompanied by a decline in price cuts despite a slow market until October. New York, however, has a larger and more responsive housing supply than Seattle, a more mature public transit infrastructure, deeper labor markets, and better air accessibility, and the impact on housing prices and rents in the city may not be as robust as that in other up and coming cities for tech innovation.

Concerns over increased gentrification have also been a worrying issue for New York residents since only fewer than 12% of current Queens’ residents, who on, average have an income of $67,700 can afford listed homes in the borough. Woodside/Sunnyside, which includes Long Island City, is currently home to 135,767 residents with median household incomes $63,494 as of 2016 and a poverty rate of 10.1 percent. Long Island City and the surrounding communities of Astoria, Sunnyside and Woodside are already the most expensive neighborhoods in Queens, with an average rent of just over $3,000 per monthand nearby Hunter’s Point, Williamsburg, Greenpoint also expected to feel upward pricing pressure as more workers look for affordable housing options outside Manhattan. Projected growth for the New York metro area of 3.0 percent is more than offset by double that in  predicted rate of price growth, making an already unaffordable housing market even more unapproachable to Queens locals and pushing them out of their current homes.

Current renters may find it increasingly difficult to access affordable housing with the incoming stream of highly-paid professionals joining the city’s population. According to New York University’s Furman Center, the share of low-income households in Queens that were severely rent burdened in 2016, those who spent more than 50 percent of their income on rent —was 48.7 percent, the highest share of all five boroughs. Over the past year alone, local rents and housing prices have risen 4.7% and 5% respectively and while current homeowners stand to gain from their growing home equity, the dream of home ownership may get further away from younger professionals and lower income households. The influx of new residents is also likely to put pressure on the city’s parks, schools, and water and sewer infrastructure.

The long term effect of such rapid expansion of the city’s tech industry is largely unknown.

Hudson Yards, a new high investment project, is anticipated to be a self-contained, gated community for high income professionals, largely insulated from the city, and making little contribution to changing the city’s infrastructure or culture. With only 4% of the development being dedicated to affordable housing, it poses the risk of widening the already large wealth inequality in the city while making little effort to manage the density of New York.

It’s not all negatives, however. The arrival of Amazon played an important role in Seattle’s ranking as the fastest growing U.S city, and could aid in New York’s growth as well. Higher taxes from these highly paid tech professionals (Amazon employees on average make $150,000 annually) are a lucrative asset to the city. In fact tenants of low-income housing broadly supported the Amazon move, hoping the influx of high income professionals would boost local business and communities while more affluent residents ran a NIMBY campaign over the risk of rising rents.

Furthermore, New York City is one of few cities that was equipped to best absorb HQ2 with minimal disruptive impact due to its well built inventory of real estate. According to a recent analysis from HotPads, New York would have required the fewest additions to rental stock — just a 1% boost even if all 50,000 of the Amazon HQ2’s jobs landed in the City, and a less than 0.1% increase in rents, equating to less than $1,391 over the next 10 years. Before the Amazon announcement, Queens was marked by a local oversupply of luxury condos and a shortage of affordable housing, with a glut of luxury rentals—and to a lesser extent, condos. Landlords and developers were slashing prices and offering concessions and it seemed as though the it could take years for the housing market to return to an equilibrium. Even with Google’s upcoming expansion into the city, the NYC housing market is unlikely to see any big shocks, mainly since there are already plenty of homes to go around and the overbuilt inventory is expected to keep prices from getting out of control.

All in all, there is little cause for immediate concern; but with such a fast growing sector, the future of the City’s housing market and impact on communities seems to be a question yet to be answered.

Image source: https://pando.com/2013/01/09/new-york-isnt-the-next-silicon-valley-and-san-francisco-isnt-the-new-manhattan/

Works Cited:

Yale, Aly J. (8 Nov. 2018). Amazon HQ2 In Long Island City: Will Rents And Home Prices Mirror Seattle’s Growth? Forbes, Forbes Magazine, Retrieved from www.forbes.com/sites/alyyale/2018/11/08/amazon-hq-in-long-island-city-rents-and-home-prices/#1287d7a8f0a3.

Maki, Sydney. (14 Feb. 2019). Without Amazon, Expect Long Island City Housing Frenzy to Fizzle. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2019-02-14/without-amazon-expect-long-island-city-housing-frenzy-to-fizzle

Anonymous. (6 Mar. 2019). New York could overtake Silicon Valley as a tech hub by 2023.The Real Deal. Retrieved from https://therealdeal.com/2019/03/06/new-york-could-overtake-silicon-valley-as-a-tech-hub-by-2023/

Anderson, Mae. (17 Dec. 2018). Silicon Valley East: Google plans $1B expansion in New York. AP News. Retrieved from https://www.apnews.com/53f183b0ba0b4b839cd41916dcfcdf53

Gonzalez, Guadalupe. (8 Nov. 2018).Why New York City’s Tech Scene Is Heating Up. Inc. Retrieved from https://www.inc.com/guadalupe-gonzalez/nyc-tech-scene-heating-up-google-amazon-offices.html

Natapoff, Sam. (15 Sep. 2018).Why New York City is giving Silicon Valley a serious run for its money. Salon. Retrieved from https://www.salon.com/2018/09/15/why-new-york-city-is-giving-silicon-valley-a-serious-run-for-its-money/

Anonymous. (19 Nov. 2018).Why New York is Poised to Surpass Silicon Valley. Medium. Retrieved from https://medium.com/@BrainStation/why-new-york-is-poised-to-surpass-silicon-valley-e9e17d44dd6f

Etherington, Cait. (11 Feb. 2019). Learning from Seattle: How Amazon could shape NYC real estate6sqft. Retrieved from https://www.6sqft.com/learning-from-seattle-how-amazon-could-shape-nyc-real-estate/

Passy, Jacob. (14 Nov. 2018).What Amazon’s HQ2 will mean for house prices. MarketWatch. Retrieved from https://www.marketwatch.com/story/what-amazons-hq2-means-for-homeowners-home-buyers-and-renters-in-the-chosen-city-2017-10-20

Trapasso, Clare. (31 Jan. 2019). Will Amazon Actually Deliver for NYC and DC-Area Housing? Realtor.com. Retrieved from https://www.realtor.com/news/trends/amazon-hq2-long-island-city-crystal-city-reality-check/

Capps, Kriston. (15 Feb. 2019). Without Amazon HQ2, What Happens to Housing in Queens? CITYLAB. Retrieved from https://www.citylab.com/equity/2019/02/amazon-hq2-queens-long-island-city-condo-rent-real-estate/582847/

Minimum Wage in the Era of Automation

By: Jae Seung Lee

Will higher minimum wage lead to less employment? How will new technology affect low-wage workers?

Picture2

This March, the Maryland General Assembly passed a bill of phasing in a minimum wage increase to $15 an hour by 2025. California, Illinois, Massachusetts, New Jersey, New York and Washington D.C. enacted increases in statutory wage to $15 in upcoming years. Wage floor hikes are gaining momentum in the Congress as well. In January, Democrats introduced a bill, the Raise the Wage Act, that would increase the federal minimum wage to $15 per hour by 2024. It will likely face opposition in the Senate, where Republicans hold the majority. States in which minimum wages are either below or equal to federal minimum wage, $7.25 an hour, will have to adapt this new federal standard. While federal subcontractors have been paid at least $10.35 per hour since 2018, federal minimum wage has not increased since 2009.

Picture3

The first minimum wage law in the United States was passed in Massachusetts in 1912. Several other states also passed the minimum wage provisions that cover a fraction of demographics such as female and teenage workers. In 1938, the Fair Labor Standards Act enforced federal minimum wage for the first time in history. Institutionalists viewed this as an efficient method to diminish poverty by guaranteeing minimum income.

However, George J. Stigler, the Chicago economist, argued that the optimum minimum wage can work only when labor demand and supply satisfy certain conditions, which he believed to be immeasurable with tools of his time. He claimed that the optimum wage can vary with “occupation and [the quality of worker],” that it varies among firms, and that it also varies with time, “often rapidly.”  He pointed out that “hourly rates are effective only for those who [are employed]” and that hourly earnings do not translate to annual earnings due to seasonality, overtime and shifts. Until the early 1990s, the general consensus on the issue had been that minimum wage decreases employment and earnings.

Picture4.png

Since Card and Krueger (1994), economists have been divided on the employment effect of minimum wage. By comparing employment growth at fast food restaurants in New Jersey and Pennsylvania, David Card and Alan Krueger (condolences to Professor Krueger’s family and colleagues) found that a rise in the minimum wage has no negative effect on employment. Their data is based on two waves of phone-call surveys on fast-food franchise restaurants: employers that hire low wage workers the most and also comply with the minimum wage regulations. Their paper’s result is based on difference in difference (“DID”) approach with NJ, where the minimum wage rose from $4.25 to $5.05, as a treatment and PA, where the minimum wage was constant, as a control. NJ and PA were chosen due to its adjacency, which minimize the heterogeneity between the two states other than the uprating. For about a year-long sample period, stores in NJ hired 0.59 person/store more than before while stores in PA hired 2.16 person/store less. This striking result re-kindled the debate on minimum wage.

David Neumark and William Wascher used the payroll data instead to analyze the same phenomenon. Replicating the same DID approach Card and Krueger used, the authors found “NJ minimum-wage increase led to a 3.9% to 4.0% decrease in fast-food employment in NJ relative to the PA control group” and attribute the other paper’s error to “substantially more variability” of unreliable phone call surveys. As a response, Card and Krueger published another paper using data from the Bureau of Labor Statistics and concluded there is no significant effect. Other literatures including Powell (2016) that construct synthetic control group and Clemens and Wither (2014) that uses triple difference models also vary in results as they use different sources of data, compare dissimilar regions or demographics and set diverse control groups.

Overall, the past literature has been limited to empirical analysis of minimum wage. Most of the papers are concentrated on estimating general employment effect of minimum wage. There has been lack of detailed discussions on causal relationship between minimum wage and dependent variables and in-depth analysis of structural transformation. Lordan and Neumark (2017) is a very significant paper as  it is the first to look into the share of employment and change in labor market’s structure in response to minimum wage in context of automation. The paper offers a great insight to policy makers in the age of automation and artificial intelligence, in other words, rapid conversion of labor to capital.

Picture5

Technological advance and increased mechanization indeed have changed the U.S. job market. The United States has lost 6 million manufacturing jobs in stark contrast to increase in manufacturing output between 1990 and 2014. Over the same time period, healthcare and social assistance have added roughly 9 million jobs. Increase in productivity due to such change and decreasing cost of capital relative to cost of labor contribute to different compositions of capital and labor within firms. However, minimum wage legislations, by raising the cost of labor artificially, may distort the original relationship between labor and capital. Many unskilled workers with automatable jobs are vulnerable to such sudden changes while some skilled workers benefit from this phase of development.

Lordan and Neumark’s empirical analysis draws on monthly pooled Current Population Survey (“CPS”) data of low-skilled individuals with high school diploma equivalent or less from 1980 to 2015. The authors used a Routine Task Intensity (“RTI”) proxy from Autor and Dorn (2013) and Autor et al. (2015) to measure how much of “the tasks within an occupation are automatable”. Based on repeatability, codifiability and other characteristics, the authors determined how plausible substitution with technology is for each occupation. For example, two main sources of routine intensive tasks are blue-collar manufacturing and codifiable administrative support jobs.

With the proxy, the authors estimated the share of employment with area fixed effects, which are state effect dummy variables interacted with urban or non-urban area effects, and year fixed effect. The authors also measured differences in effects by age, race and sex. In an aggregate level of analysis, the paper measured effect on share of employment by different demographics and industries. A caveat here is that agriculture and mining industries are excluded due to low representation in many states. Using the data from Annual Social and Economic Supplement (“ASEC”) of the CPS, the authors were able to capture transitions to other jobs or non-employment with narrow occupation codes and broad industry codes.

Picture6

A potential problem with these estimation analyses is “whether [the] wage variation is correlated with shocks to low-skill labor markets”. If endogenous policy affects the shocks, then the identification of causal effect may not be right. However, as the paper’s results are estimations of effects on a subgroup of low-skilled workers, it is very unlikely to have an endogenous policy chosen specifically for the group. The individual level analysis is even safer since it is controlled for “yearly shocks to states, and [the] urban and nonurban separately”. On the other hand, such restrictions may control for shocks correlated with minimum wages as well.

The authors found a 10 percent increase in minimum wage causes 0.31 percentage point decrease in the share of low-skilled workers’ automatable jobs. The effects are particularly large in manufacturing, transport and service sectors and significant. Manufacturing jobs’ elasticity in the shares is -0.18 while average elasticity of all industries is -0.10. Degree of drop in shares is also very strong among older groups, especially in manufacturing. Younger generations are less sensitive in general and more elastic in-service sectors.

Low-skilled labor market with low entry barrier can be either reduced in size or inundated with excess supply of workers from other sectors. According to Mckinsey research, as of 2015, 64% of the 749 billion working hours spent on manufacturing-related activities globally were automatable with current level of technology. The automation potential chart confirms the paper’s estimate of low-skilled workers’ job security after minimum wage uprating: Manufacturing (60%) and Transportation and warehousing (60%).

Picture7

In the paper’s estimate, employment retention rate also declines largely in manufacturing, and it is significant in services. There is not much correlation between two industries with significant results, yet the retention rate varies significantly by demographics. Especially in manufacturing, older and younger workers’ implied elasticities of the probability of becoming unemployed are -0.28 and -0.17 each. This highlights a vulnerable group, older workers, that has been often ignored in previous literature.

Older workers are vulnerable to employment shock because there is less room for improvement or attainment of human capital compared to younger workers. Returns to investment in human capital decrease over time, and it eventually becomes lower than the opportunity cost of funds; unemployed senior worker is unlikely to find another job. As a worker gets older, it becomes more costly to invest in skills, and his or her human capital diminishes over time. When a firm looks to save costs by reducing labor, low-skilled elder workers are likely to be chosen due to these reasons. According to Coile, Levine and McKnight (2014), workers nearing retirement age are generally more likely to have health problems, too. Potential employers’ reluctance to hire them extend period of unemployment and end of company sponsored healthcare coverage increase health risk of people age 55 or older.

Picture8.png

In terms of job-switching, the paper’s results indicate significant adverse effect of minimum wage with elasticity of the probability of losing or switching, -0.15. Effects on all the industries except retail are significantly negative. Higher minimum wage seems to push low-skilled workers at automatable job to move to service and retail as well. This implies reduction of those jobs in other markets and excess supply in service and retail labor market.

The negative effects have grown over the years in general which reflects increased influence of automation due to easier accessibility or perhaps higher levels of minimum wage. Relatively larger effects on oldest workers attribute to lower probability of retention in vulnerable jobs and unwillingness to switch to safer occupations. Higher skilled workers, those work at places with high share of low-skilled automatable jobs, are more likely to benefit from the automation. Significantly positive results for youngest and middle age groups but oldest groups, again, imply that jobs that utilize the automation require skills that are more difficult for older workers to obtain.

Picture9

European Central Bank’s research suggests that the most popular adjustment channels in response to minimum wage are cuts in non-labor costs, product price rise, and improvements in productivity. To save labor costs, firms tend to reduce hiring rather than laying off directly. However, direct layoff is not the sole effect of minimum wage on employment. Increase in productivity of capital can cause adjustment of labor and capital thereby causing negative employment effect. For instance, fast food franchises, which are major employers of minimum wage workers, have been installing kiosks for higher efficiency. McDonalds is planning to install them to most of its 14,000 locations by 2020. They will likely replace cashiers and reduce training costs of entry employees. As restaurant business is labor heavy, the firm is more elastic in response to labor cost change.

Likewise, retail industry is going through a huge transition of automation. Similar to Amazon Go, which will enable automatic bills without waiting in lines for store personnels, Walmart’s Project Kepler will offer cashier-less service at stores, give product recommendations and facilitate purchases through messaging. Amazon’s recent move to raise its standard wage to $15 an hour and its lobbying effort for federal minimum wage raise will likely pressure Walmart, Target and Costco to match their wage to retain and attract employees. In contrast to other firms that have thousands of physical outlets with in-store workers, the e-commerce giant takes much less damage in raising their wage. The more automated a company is, the less likely it will be hurt by higher labor cost, or higher minimum wage. Simultaneously, firms which had higher share of labor will look to decrease it through innovation.

Picture10

According to Autor and Salomons (2018), “labor’s share of value added was steady or rising in the 1970s” and “fell steeply in the 2000s.” Based on data of 28 industries of 18 OECD countries since 1970, labor-share displacing effects of productivity growth have become more pronounced over time, especially in 2000s. Estimates of the paper confirm that “automation [has become] in recent decades less labor-augmenting and more labor-displacing.” Two other industry-level measures of automation and technological changes, patenting flows and adoption of industrial robotics, also confirm the same result. Thus, big corporations’ effort to automate their business in response to higher labor cost is displacing labor even more today.

Innovation is inevitable. Firms develop new technology and apply it to boost their profits. During this process, skilled workers may find more opportunities in newly created markets while medium or low-skilled workers may be displaced from original jobs through automation. Minimum wage is one of main public policies intended to guarantee these workers higher standard of living, but it does not necessarily protect them from labor displacement. Perhaps, its uprating accelerates conversion to capital. Business climate is changing faster than ever, and its trend of increasing share of capital to produce leaves low-skilled or older workers vulnerable. As a new era of innovation dawns, society now calls for urgent and innovative approaches to fix the current labor market.

Photo:

  1. EPA (Mike Nelson)
  2. Reuters (Lucas Jackson)
  3. US Government (Department of Labor)
  4. Card and Krueger (1994)
  5. Industry Today
  6. US Bureau of Labor Statistics; Mckinsey Global Institute Analysis
  7. Getty Images (Paul Taggart)
  8. Getty Images (Leon Neal)
  9. Wall Street Journal (Kevin Hagen)
  10. Lordan and Neumark (2017)

Work Cited:

Autor, D., & Salomons, A. (2018). Is Automation Labor-Displacing? Productivity Growth, Employment, and the Labor Share. Brookings Papers. doi:10.3386/w24871

Bader, H. (2019, March 04). Minimum Wage Hikes Are Wiping Out Jobs. Retrieved from https://www.cnsnews.com/commentary/hans-bader/minimum-wage-hikes-are-wiping-out-jobs

Bodnár, K., Fadejeva, L., Iordache, S., Malk, L., Paskaleva, D., Pesliakaitė, J., . . . Wyszyński, R. (2018). How do firms adjust to rises in the minimum wage? Survey evidence from Central and Eastern Europe. IZA Journal of Labor Policy,7(1). doi:10.1186/s40173-018-0104-x

Card, D., & Krueger, A. (1994). Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. American Economic Review,84(4), 772-93.

Ingraham, C. (2018, January 11). What does a $15 minimum wage do to the economy? Economists are starting to find out. Retrieved from https://www.washingtonpost.com/news/wonk/wp/2018/01/11/what-does-a-15-minimum-wage-do-to-the-economy-economists-are-starting-to-find-out/?utm_term=.5b43ef0a8bdf

Lordan, G., & Neumark, D. (2017). People Versus Machines: The Impact of Minimum Wages on Automatable Jobs. National Bureau of Economic Research.

Neumark, D., & Wascher, W. (2000). Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment. American Economic Review,90(5), 1362-1396.

What happens when older workers experience unemployment? : Monthly Labor Review. (2014, October 01). Retrieved from https://www.bls.gov/opub/mlr/2014/beyond-bls/what-happens-when-older-workers-experience-unemployment.htm

Wood, P. (2019, March 21). Maryland lawmakers give final OK to increase minimum wage to $15 an hour. Retrieved from https://www.baltimoresun.com/news/maryland/politics/bs-md-minimum-wage-final-20190320-story.html

Renewables in the United States

By: Jae Seung Lee

What’s the impact of the United States’ exit from the climate agreement and its new energy policies?

Picture2

On June 1, 2017, US President Donald Trump announced the US’s exit from the Paris Climate Agreement, an agreement signed within the United Nations Framework Convention on Climate Change (“UNFCCC”) to mitigate greenhouse gas. Even though there has been no other withdrawal, the United States’ exit raised concern among the signatories. Kyoto Protocol, the predecessor adopted in 1997 to stabilize temperature and cut emissions, failed to bring major carbon emitters to the table for a binding climate treaty. It was a landmark accomplishment of global efforts to reduce carbon emission. However, the protocol lost its power following the withdrawals of countries with most carbon emissions due to ‘economic’ reasons. Because of the similarities between the two treaties, the US’s exit may trigger other developed nations’ exit.

Furthermore, in stark contrast to the current global trend of fighting climate change, the current US government plans to continue to ease the relevant regulations. The Clean Power Plan (“CPP”), proposed by the Environmental Protection Agency (“EPA”) under the previous administration to meet targets of the Paris Agreement, has been stalled by the current administration’s effort to revamp the coal mining industry. The CPP’s proactive measure, which enforces utilities to build new renewables, has been met with fierce opposition from the coal industry. Scott Pruitt, the former administrator of the EPA, argued potential benefits of its repeal amount to 33 billion dollars. While many believe these rollbacks have come at an alarming speed, given that the earliest possible effective date of the exit is November 2020, the impact of these new policies may not be substantial in short term.

The current administration’s actions are not without opponents, however. On the day of the US’s official withdrawal, a bipartisan coalition of governors formed the United States Climate Alliance, a forum where states committed to reducing greenhouse emissions can work together to uphold the principles of the Paris Agreement. Most of the states, except some coal-heavy states in the Midwest and Deep South, are likely to meet or exceed emissions requirement for the CPP unless there are price hikes of natural gas, which makes oil more attractive. State-level legislation calling for more renewable energy, cheaper natural gas, and improvements in solar/wind utilities will encourage more green investment.

Picture3

To add to the issue, in December 2017, President Trump signed a new bill, the Tax Cuts and Jobs Act. Cutting the corporate tax rate from 35% to 21%, the new tax law boosted after-tax profits by reducing the tax liabilities of all companies. While many companies gain from this cut, it will cause damage to the renewables market because of its unique investment structure: tax equity.

Improving efficiency and profitability contributed to the growth of the renewable energy market; in the U.S., this is largely due to tax equity financing. Tax Equity investors passively own renewable projects and gain federal and state income tax benefits with a small return of cash flow. Moreover, these investors are distinct from other equity investors because they cannot be involved in project level management except for downside cases. Flip structure, as its name suggests, enables them to take active control when the project underperforms.

There are two available tax credits: Investment Tax Credit (“ITC”) and Production Tax Credit (“PTC”). ITC is an upfront tax credit against the capital expense used to build a project, and PTC, popular for wind projects, is a tax credit based on the amount of electricity the project produces. Both became less attractive to investors after the tax cut because companies now have fewer tax liabilities. Also, PTC is scheduled for phase-out in 2021. Consequently, the tax reform will be a significant blow to renewable projects’ sponsors looking to raise capital.

Picture4

Wind may take a hit from decreasing tax credits, yet, there seems to be a new promising sign of growth through offshore wind. Due to their location in the ocean, the construction cost of offshore turbines was initially very expensive; that said, the price has decreased substantially over the last decade, and they generate more electricity compared to onshore wind turbines due to higher wind speed. Hence, offshore wind farms are becoming more and more attractive.

Relative to the history of offshore wind energy production in Europe, the United States is almost two decades behind. Such a large gap stems from different financing schemes; European policies such as the Feed-in Tariff and Contract for Difference induce more investment by minimizing risk exposure, a limited amount of tax equity discourages investors in the US. In 2018, Europe installed 2.6 GW of new offshore wind capacity, of which 85% is attributed to the United Kingdom and Germany. Europe now has 105 offshore wind farms with 18.5 GW capacity. In contrast, the first U.S. commercial offshore wind farm, Block Island Wind Farm near Rhode Island, is only 30 MW and began operating three years ago.

However, starting with new legislation in Northeastern states, the U.S. has been slowly gaining momentum. In 2016, Charlie Baker, a Republican governor of Massachusetts, signed an energy law that requires utilities to procure 1.6 GW from offshore wind farms in the next 10 years. The construction of 1.6 GW projects is estimated to generate a total of $1.4 billion to $2.1 billion. Anticipating similar economic benefits, other states, including New York and New Jersey, have joined the fray.

The Bureau of Ocean Energy Management (“BOEM”), an agency within the U.S. Department of the Interior, is supportive of these new projects. BOEM has successfully executed lease sales in New England, Virginia, Maryland, New Jersey, New York, and North Carolina since the inception of its renewable energy programs. The Department of Energy has also projected continued growth in this sector: 3 GW, 22 GW and 86 GW for 2020, 2030 and 2050, respectively.

Picture5

Apart from its impressive track record in renewables, the United States is a leading natural gas producer. Natural gas supplies one-third of domestic primary energy and is a primary heating fuel for half of US households. Due to soaring demand of the international market, the U.S. is building more Liquefied Natural Gas (“LNG”) export terminals. With more LNG terminals built in Louisiana, Texas, Maryland, and Georgia, the country will double its export capacity by the end of 2019. This will make the U.S. one of the three largest LNG exporters. Its vast deposit of shale gas and rapidly increasing export capacity prompted more competition among global competitors: Qatar and Australia. Uncertainty due to China’s 10% tariff on U.S. LNG caused a delay of investments in the facilities; however, global demand of LNG is projected to increase consistently, and other major LNG importers such as Japan and South Korea will continue to purchase U.S. LNG to appease the U.S. during its trade wars.

Hydraulic fracturing (“Fracking”) largely contributed to a dramatic increase in gas production. Fracking has cut energy production cost, thereby offering lower energy prices. Recent roll-back of its strict regulations will boost the production even more. As natural gas only produces 50 ~ 60% less carbon monoxide than coal when it is burned at an energy plant, it is considered to be a decent alternative for coal and petroleum. As a result, its share of the domestic energy mix has increased rapidly, and it is the largest among the mix as of today.

Despite its advantages, the natural gas industry prompted environmental concerns. The most controversial one is fracking. It made the resource accessible and secured a significant amount of energy, but it uses an excessive amount of water, may trigger earthquakes, and poses risks of leaking chemicals to drinking water or air. Some energy researchers argue that the carbon footprint of liquefying the gas and transporting it with pipelines and vessels may be bigger than the one of coal. Natural gas is indeed a stable source of energy that relatively emits less carbon, but it remains a fossil fuel nonetheless.

Picture6

Incentive-driven corporations pursue profit maximization. In a Wood Mackenzie study, rates of return of conventional energy projects are found to be much higher than those of recent renewable projects. Oil explorations’ IRR is 8 to 15%, and North American onshore production’s return is 33% on average. These are much higher than the returns of renewables, which are 5% and 7% in wind and solar respectively in a developed country. At least for now, it seems reasonable for large energy conglomerates to pursue what they have been doing well.

Quantifying positive and negative externalities in the energy industry is very difficult. Like fracking, revolutionary methods of using resources can create another problem. Natural gas is deemed to be a bridge fuel from carbon-intensive petroleum to eco-friendly energy, but it is also blamed for detaining transitions to renewables. Tax credits, which guarantee revenue to make renewables’ long-term contracts attractive, thereby reducing carbon emissions, can phase out anytime soon if Congress does not approve its extension. Ironically, technological innovations and environmental policies put the industry on the horns of a dilemma. Conflicts between interest groups hinder society from realizing greater initiative of improving the environment and producing sustainable energy. It is now more than ever for policymakers to consider not only economic benefits but also health and welfare for future generations.

Photo:

  1. Open Access Government
  2. United Nations
  3. Brennan Linsley (AP Photo)
  4. U.S. Department of Energy
  5. Getty Images
  6. Robotic Industries Association

Work Cited:

Deign, J. (2018, April 11). The US Wind Sector Toasts Trump’s New Love of Offshore. Retrieved from https://www.greentechmedia.com/articles/read/us-wind-sector-toasts-trumps-new-love-of-offshore#gs.detW8rYg

DiChristopher, T. (2018, August 21). Trump administration to replace Obama’s Clean Power Plan with weaker greenhouse gas rules for power plants. Retrieved from https://www.cnbc.com/2018/08/21/trump-administration-to-replace-obamas-clean-power-plan.html

Energy Explained. (2018, May 16). Retrieved from https://www.eia.gov/energyexplained/?page=us_energy_home

Environmental Impacts of Natural Gas. (n.d.). Retrieved from https://www.ucsusa.org/clean-energy/coal-and-other-fossil-fuels/environmental-impacts-of-natural-gas#.XF5SDlxKhIN

European Offshore Wind Capacity Jumped in 2018. (n.d.). Retrieved from https://www.maritime-executive.com/article/european-offshore-wind-capacity-jumped-in-2018

Kaplan, R. D. (2012, December 19). The Geopolitics of Shale. Retrieved from https://worldview.stratfor.com/article/geopolitics-shale

Liquefied Natural Gas (LNG). (n.d.). Retrieved from https://www.energy.gov/fe/science-innovation/oil-gas/liquefied-natural-gas

LNG growth to propel oil and gas industry’s carbon emissions -WoodMac. (2017, September 20). Retrieved from https://www.reuters.com/article/lng-emissions/lng-growth-to-propel-oil-and-gas-industrys-carbon-emissions-woodmac-idUSL5N1LZ4K9

New York Activities. (n.d.). Retrieved from https://www.boem.gov/Renewable-Energy-Program/State-Activities/New-York.aspx

Pfahl, G. (2010, July 19). ITC or PTC for Your Renewable Energy Project? Retrieved from https://www.renewableenergyworld.com/articles/2010/07/itc-or-ptc-for-your-renewable-energy-project.html

Plumer, B., & Popovich, N. (2017, October 10). How Will the Clean Power Plan Repeal Change Carbon Emissions for Your State? Retrieved from https://www.nytimes.com/interactive/2017/10/10/climate/clean-power-plan-emissions-your-state.html

U.S. Energy Information Administration – EIA – Independent Statistics and Analysis. (2018, October 29). Retrieved from https://www.eia.gov/tools/faqs/faq.php?id=427&t=3

U.S. Energy Information Administration – EIA – Independent Statistics and Analysis. (2018, December 10). Retrieved from https://www.eia.gov/todayinenergy/detail.php?id=37732

Vigeant, P., Borges, D., Burns, M., Captain, & White, B. (2018). 2018 Massachusetts Offshore Wind Workforce Assessment(Rep.). MA: Massachusetts Clean Energy Center.

Vitelli, A. (2018, July 30). Offshore Wind Is Likely The Next Big U.S. Renewable Sector. Retrieved from https://www.forbes.com/sites/mergermarket/2018/07/30/offshore-wind-is-likely-the-next-big-us-renewable-sector/#69119e4c4182

Walton, R. (2018, January 16). Lower corporate tax rates no boon for renewables, analysts find. Retrieved from https://www.utilitydive.com/news/lower-corporate-tax-rates-no-boon-for-renewables-analysts-find/514810/

WindVision: A New Era for Wind Power in the United States(Rep.). (2018). Department of Energy.

Student Loans: The Next Big Economic Bubble?

By: Chitanya Ajjarapu

A chronic increase in the costs of education suggest another bubble has formed.

It’s been more than a decade since the great recession of 2008 rattled our financial markets and economy, and when we are asked what caused the recession or the factors that lead up to it, one answer remains infamous: the housing bubble. Long story made incredibly short, the housing bubble refers to a very fast paced and large increase in the value of houses. A trend that continued until 2006. The bubble “popped” when these housing prices fell back down back to their regular values. The crash then occurred because so many financial flows were connected to the prices of housing. As economist Alan Blinder describes it, a bubble is a “large and long-lasting deviation from an asset’s fundamental value.” Because of the subjective nature of the description, many economists have trouble identifying bubbles in foresight, and can only recognize one after it pops. However, with the housing bubble still relatively fresh in our minds, many are trying to identify and curb bubbles before too many factors rely on it and they pop. Many are starting to speculate that a new bubble that is existing in our times is student loans.

First, to be recognized as a bubble, at least in Blinder’s eyes, the asset’s change in value needs to be able to be defined within the three criteria: large, long-lasting, and deviation from the fundamental value. Let’s start with large: using 1940 as a reference point, the yearly tuition to attend the private university Yale, one of the highest ranked universities in the world, would have cost $450 per year, adjusting with inflation to about $8,200 in current times. This is a far cry from the $53,000 it costs each year to attend Yale today, more than five times the previous amount. It’s been nearly 80 years since the blissful days of cheaper education, and the price arguably had to rise as consumer tastes changed and started to view education as inelastic and necessary, but whether or not this warrants a five times increase is up for debate, which moves into the next question, what is the fundamental value of an education?

It’s hard to put a price on the fundamental value of an asset, especially if that asset is education. With all assets, a “fundamental value” requires looking at the historical costs of the asset, the yields it procured, and people’s rapidly changing views on it. If we take a different approach and value the education based on what the students give up, the opportunity cost of the education, we can ask what the fundamental value of an education should be. In addition to the tuition that students have to pay, they also give up the opportunity to work for four years instead of going to college. Such work averages out to $35,256 per year. Combining this with the average cost of tuition $34,740 gives a bachelor’s degree an economic cost of about $280,000 over the four years. Therefore, theoretically speaking, the value for bachelors education has to exceed this cost in order to have some kind of return on investment, and it definitely does. A bachelor’s degree can’t expire, and is capable of pulling an average of around $60,000 per year, meaning that on paper such a degree is paid off in 5 years. An unfortunate truth that is looming over all of us is that the sacrifices made are a lot more complex than this.

Experts suggest that nowadays 8 million students are defaulting their federal loans. The balance for the whole nation has reached $2 trillion, and a lot of that money won’t get paid back. The pressure that is put on such students is immense. While in the housing bubble, sleazy mortgage lenders were enticing financially illiterate families to buy houses they couldn’t afford and then selling them off up the derivative chain to investors, now it is the government that is holding on to the loans, and a multitude of factors pushing students to take the loans. When these loans are defaulted, student credit scores are butchered, and many will find trouble being able to finance cars and houses. Sacrifices that definitely deviate from what the fundamental idea of an education should be. The last point is also equally as hard to define: long-lasting.

What year should we use as a reference point? At what point did the price of education stop reflecting the real value that comes along with it and start riding the psychological euphoria that causes a rise to bubbles in the first place? These are all questions that are easier to answer about a bubble once it has popped and its damages have spilled over onto the economy, but that hasn’t happened yet, and might not happen for a long time. Till then, we can only use historical data to see how much prices have risen over the years.

Picture2

Indeed, even viewing the prices relative to more contemporary times, the fact that price is greatly deviating from the financial returns is staggering.

You may be asking yourself, will the student loan bubble give rise to problems the same way the housing bubble did? Luckily, the silver lining to the incredibly large and dark cloud is that it “probably won’t”. The key difference between the two bubbles is who the beneficiary to these assets are. In the housing bubble, unscrupulous practices and incentives drew in crowds with minimal regulation and responsibility allowing them to run amok and collectively leave a razed economy in its wake. The federal government holds student loans, with a sole, inherently altruistic purpose of providing educations to those who cannot front the money themselves. Furthermore, the loans are not being packaged and sold off the same way mortgages were, and the fact that it is in the hands of the government gives it an implicit insurance that defaults of such loans won’t financially ruin colleges and universities across the nation. Our economy can sleep easy at night knowing this fact, but what about our metaphorical homeowners; the students who borrowed so much and fearfully may get so little?

A key factor in the housing crisis was that when the housing value fell below their mortgage, even prime homeowners walked out and chose to default. This is much harder to do regarding student educations. Can a student walk away from all the work they put into their education already? Can they decide that an education is simply not worth the financial costs anymore, and walk away from their degree. These are questions that are simply too hard to answer, and are questions that many of us hope not to have to answer in the future. A bitter truth that is becoming realized is that the costs to keep oneself educated is growing increasingly steep, but it is as Barack Obama once said, “You think education is expensive? Wait till you see how much ignorance costs.”

Works Cited:

Blumenstyk, G. (2013, July 25). Post navigation. Retrieved from https://www.chronicle.com/blogs/ticker/ignorance-isnt-bliss-when-it-comes-to-quotations-about-ignorance/63681

Costs. (n.d.). Retrieved from https://finaid.yale.edu/costs-affordability/costs

CPI Inflation Calculator. (n.d.). Retrieved from https://www.bls.gov/data/inflation_calculator.htm

Hardiman, K., Gazette, C. P., & Ap. (2018, October 22). The student loan bubble might be about to pop. Retrieved from https://www.washingtonexaminer.com/red-alert-politics/the-student-loan-bubble-might-be-about-to-pop

Josephson, A. (2018, May 15). The Average Salary by Education Level. Retrieved from https://smartasset.com/retirement/the-average-salary-by-education-level

Miller, D. (2017, February 22). Student Loans – A Multi-Generational Curse. Retrieved February 23, 2017, from https://milleronthemoney.com/student-loans-multi-generational-curse/

Sourmaidis, D. (2018, September 25). Rising Tuition Costs and the History of Student Loans. Retrieved from https://www.studentdebtrelief.us/news/rising-tuition-costs-and-the-history-of-student-loans/

The $1 trillion student loan market begins to implode – Department of Education shows two-year default rates at for-profit colleges up to 15 percent. Student loan debt increasing at a rate of $170,000 per minute. (n.d.). Retrieved from http://www.mybudget360.com/one-trillion-dollar-student-loan-market-begins-to-implode-student-college-debt-for-profit-debt-lower-wages-higher-costs/

The NCES Fast Facts Tool provides quick answers to many education questions (National Center for Education Statistics). (n.d.). Retrieved from https://nces.ed.gov/fastfacts/display.asp?id=76

Wage and Hour Division (WHD). (n.d.). Retrieved from https://www.dol.gov/whd/minwage/chart.htm

Photos retrieved from:

Student Loans – A Multi-Generational Curse

The Skills Gap

By: Daksh Sharma

Skill Spreads are widening and need to be closed to better secure a more productive economic future.

There is a fierce debate over how to educate the future workers of America. But with the rapid advancement of technology, employers are finding it harder and harder to hire people with the right skills. This “skills gap” is prevalent in both soft skills, such as communications and leadership, as well as hard skills such as computer fluency, technical writing skills, and foreign language proficiency. Moreover, multiple surveys find that graduating seniors are overconfident about their career readinesses. For example, 79.4% of graduates consider themselves proficient in oral and written communications, while only 41.6% of prospective employers believe the same. So then what are the main drivers of the skills gap? This article will discuss the skills gap broadly across the American labor market, education’s impact on it through credential inflation and a few ways some new and innovative companies are attempting to close the gap.

Perhaps the most obvious example of the skills gap lies in the tech industry. Colleges simply cannot keep up with the ever-changing landscape of technological innovation as the ability to code becomes more and more of a necessity due to businesses’ heightened online presences. But of course, modern technology affects many jobs outside of tech. For example, the job of a graphic designer looked much different 20 years ago. Back then, almost all students were trained to design for print, but as the web came along, the demand for web design increased. After the invention of the smartphone, there was a demand for mobile design. Graphic designing became digitized, and completely new skills were required.  Such developments are a headache for both employers and job candidates. Employers are wary of hiring someone who does not have the proper skill set while candidates are less willing to apply for jobs that may render their skills obsolete in a few years.

It is also significant to note that some sectors of the economy have a slightly different problem: the aging workforce. Some skilled trades jobs, such as machinists, are filled by older workers. In 2014, more than 60% of machinists in Seattle, New York City, and Cleveland are at least 45 years old. In Chicago, 29% are at least 55. The amount of new hires is disproportionate to the number of retiring workers because high-school graduates are not getting the necessary vocational training.

While skills reign supreme in some fields, the diploma is increasingly in demand for other fields. After the 2008 financial crisis, data from a 2016 report from Georgetown’s McCourt School of Public Policy show that by that year, 99% of jobs created in the recovery went to workers who had at least some college background. The recession wiped out many blue-collar jobs which were primarily replaced by higher-skilled professional jobs such as consulting and business services.

Many of the jobs which require a degree today did not require one in the past. For example, in 2014, 65% of the job postings for Executive Secretaries and Executive Assistants required a B.A. But looking at the already-filled positions, only 19% of people actually had one. This new trend is due to credential inflation. More and more students are going to college, so employers expect a higher general level of education. As a result, they may filter out otherwise-ideal candidates for the positions. Bryan Caplan, in his book The Case Against Education, argues more than half of the benefit from getting a college education comes from its signaling benefits. Employers are reassured that earning a degree in and of itself is proof of an intelligent and hardworking individual.

Although it is significant to note that some jobs resist credential inflation, especially those with strict licensing standards. For example, all Respiratory Therapists must meet certain certification requirements, meaning employers do not have to extrapolate a potential employee’s competency from the mere fact of their graduation. But other employers still use a B.A as the first step in their recruitment filters. This requirement has broad implications for the two-thirds of the U.S. workforce who do not hold a bachelor’s degree. Middle-skill careers (those obtained with more training than a high school diploma but less than a B.A) are becoming closed off because many entry-level jobs, such as IT help desk technicians, are unattainable without college experience.

To be sure, many companies still assess their potential employers holistically. They look for people whose work ethics, personalities, and passions are aligned with those of the hiring company, and are often willing to teach skills on the job. For example, IBM has become more open to hiring workers who simply demonstrate the prerequisite skills rather than merely having a bachelor’s degree. But one thing is certain: on the job training has been decreasing over time. In 1979, young workers would receive about 2.5 weeks of training a year, which fell to only 11 hours by 1975. Furthermore, company training started to focus on things like workplace safety instead of skill building. By 2011, only 1 in 5 employees reported receiving on the job training in the past 5 years.

Many organizations have dedicated themselves to pick up the slack of higher education. MissionU, for example, is an alternative to college and focuses not only on building tech skills but also teaching business skills such as performing research, working on projects, and presenting those projects. Another organization, College for America (CfA), launched by Southern New Hampshire University, is the first skill-competency program to obtain federal funding. CfA students complete projects which demonstrate competency in personal and social skills and content knowledge to create job candidates who are competent in real-life scenarios which demand both soft and hard skills.

On the other side, Peter Cappelli, professor of management at the Wharton School of Pennsylvania believes that companies themselves should take the initiative to train their employees instead of expecting candidates to perfectly adapt to their new jobs. Professor Cappelli argues that universities “are not good at providing what employers want, which is work-based skills and experience. Instead, employers need to be much more involved, not just in telling schools what they want but in providing opportunities for new grads to get work experience and learn the relevant expertise.”

The existence of organizations like MissionU and CfA only help bridge the skills gap for the select few who enroll. Meanwhile, credential inflation makes the hiring process more difficult as employers try to find competent workers. Perhaps the best solution is for companies to spend money and guarantee their employees’ long-term success, even if it comes at a short-term cost.

Works Cited

Image Source: https://pixabay.com/en/puzzle-missing-particles-654963/

America’s Divided Recovery. (2016, November 29). Retrieved from https://cew.georgetown.edu/cew-reports/americas-divided-recovery/

Cappelli, P. (2014, September 05). What employers really want? Workers they don’t have to train. Retrieved January 20, 2019, from https://www.washingtonpost.com/news/on-leadership/wp/2014/09/05/what-employers-really-want-workers-they-dont-have-to-train/?utm_term=.f8bed6e1e09e

Credentials Gap. (2014, September). Retrieved January 20, 2019, from https://www.burning-glass.com/research-project/credentials-gap/

Freifeld, L. (2014, January 24). Solving Today’s Skill Gaps. Retrieved January 20, 2019, from https://trainingmag.com/solving-todays-skill-gaps

Selingo, J. J. (2015, January 26). Why are so many college students failing to gain job skills before graduation? Retrieved January 20, 2019, from https://www.washingtonpost.com/news/grade-point/wp/2015/01/26/why-are-so-many-college-students-failing-to-gain-job-skills-before-graduation/?utm_term=.bde8e54f9ec4

The Skills Gap: A National Issue That Requires A Regional Focus[PDF]. (n.d.). Emsi.

 

Liberal Arts v. Vocational Education: Finding Common Ground

By: Merly Lopez

It’s safe to say that at one point or another, everyone considering (or enrolled in) a liberal education has pondered what it yields for them in the future and whether the financial value of it is worth investing in.

A vocational education replaces the traditional university route by providing students with a “hands-on” education that hones in on skills specific to a field, such as truck driving, food service, cosmetology ,plumbing and hair styling. A liberal arts education, on the other hand, is more difficult to define given that it’s been evolving for centuries since its establishment in early American colonial society and is based on more abstract concepts. In the U.S., a liberal arts education is defined by Jill Tiefenthaler, an economics professor and president of Colorado College, as “educating the whole person, and preparing students to excel in a range of careers and, most importantly, live lives rich with meaning and purpose.”

Historically only accessible to the top 0.01% of society, a liberal-arts education is now the go-to for the majority of students who pursue a higher education. It doesn’t focus on any specific skill, but instead, it seeks to instill the student with a versatile education in various subjects such as math, literature, science, and even the arts. But many still ask themselves if a vocational education is one worth undertaking in the place of a liberal one. Which of the two prepares the student for a wholesome future that is both personally gratifying and economically successful in the U.S.? This article explores this central question by sampling different reports  and analyses on the issue and will explain that perhaps, the solution is an integrative one rather than a binary one.

In the analysis of liberal arts education in the peer-reviewed scholarly journal ASHE’s Higher Education Report, it is argued that although vocational studies prepare one to be effective members of the workforce, it doesn’t encompass other essential aspects of a democratic life in the U.S., such as civic duty and cultural awareness. A liberal arts education is aimed at teaching foundations to build on, such as mathematics and communication, when you are employed so that your options are plentiful. Dr. Howard Gordon, a Professor in the Department of Teaching & Learning at the University of Nevada and the author of “The History and Growth of Career and Technical Education in America”, responds to this argument by simply stating that although useful, a liberal arts education is not enough to keep a society strung together and doesn’t tend to the needs and wants of the student. Gordon claims that while it is important to give a well-rounded education, it’s more important to keep in mind the end goal of students in college: to have a guaranteed employment opportunity right after, which a vocational education all but assures.

Although a vocational education is more likely to offer immediate guarantees than a liberal one, there is uncertainty on the effectiveness long-term. In their research-based analysis on vocational education, economists Eric Hanushek, Ludger Woessmann, and Lei Zhang state that there is clear evidence that the “initial labor-market advantage of vocational relative to general education decreases with age.” In other words, the performance observed when one enters the technical job market isn’t consistent as time progresses, and this may be due to a number of factors, an important one being technological advances. The life-cycle of the employment in vocation fields is important to consider given that you don’t want to just secure a job immediately after college, but for the decades that follow and an education fixed on specific skills may not be able to offer that.

Moving past the theoretical dynamic of the argument, a study done on behalf of the Association of American Colleges and Universities revealed what employers are seeking from incoming students. Two of the values they argue are essential in the workplace are “integrative learning” and “knowledge of human cultures and the physical and natural world.” Integrative learning encompasses the idea that a student must not only learn a subject by the books but that they are exposed to the field hands-on (what vocational education succeeds at). Integrative learning is what can be seen in, for instance, an electrical technician school. It is the idea that the student learning and simultaneously integrating the concepts learned into the practice of a specific skill. The latter, on the other hand, asks of the employee to be aware of  “global issues and developments and their implications for the future, the role of the United States in the world, and cultural values and traditions in America and other countries” which are characteristics attributed to a liberal education given that they span concepts beyond those of tangible and immediately applicable skills.

The study doesn’t make a claim for any form of education, only concepts which employers believe if students are equipped with, would benefit not just a given company, but society at large. The study also looked at what the main objective should be in the nation’s colleges (well-rounded education or focus on a specific skill), and 56% (majority) of employers decided both. It’s evident that this common ground isn’t something sought after just by students, but by their future employers as well.

Ultimately, it goes without saying that the concept of a one-dimensional education is outdated. In order to prepare students with the necessary tools to thrive in terms of their own financial wellness and for the betterment of the nation, one must consider the gray area between a liberal education and a technical one. There is already movement within many liberal arts institutions which seek to incorporate integrative learning in their curricula. Take, for example, Harvard University, one of the oldest institutions of higher education in the U.S. that has been based on the liberal arts style since the 17th century. Not only are the students expected to take courses within the program of General Education, but they are expected to choose a specific concentration to begin specializing in. This new requirement is a step forward, being taken by many other universities, to merge experiential learning with liberal learning.

Works Cited

Image Source: https://www.inc.com/samuel-edwards/great-job-sites-for-recent-college-graduates.html

Shaat, D. (2014, September 19). Creating alternatives for students seeking a postsecondary education. Retrieved October 10, 2018, from http://www.aei.org/publication/creating-alternatives-for-students-seeking-a-postsecondary-education/

Decatur, S. (2016, June 30). The Myths and Realities of a Liberal Arts Education. Retrieved October 10, 2018, from https://www.aspeninstitute.org/blog-posts/myths-realities-liberal-arts-education/

Hart, P. D. (2016, December 28). How Should Colleges Prepare Students To Succeed In Today’s Global Economy? Retrieved October 10, 2018, from https://www.aacu.org/sites/default/files/files/LEAP/2007_full_report_leap.pdf

Pascarella, E. T., Wolniak, G., Cruce, T. M., Seifert, T. A., & Blaich, C. F. (2005). Liberal arts colleges and liberal arts education: New evidence of impacts. ASHE Higher Education Report.

Gordon H. R. D. (2003) “The History and Growth of Vocational Education in America. Second Edition”

U.S. Department of State (2018, Jun. 22). “The U.S. Economy of the1960s and 1970s.” ThoughtCo, thoughtco.com/us-economy-in-the-1960s-and-1970s-1148142.

Hanushek, E., Woessmann, L., & Zhang, L. (2011, November 21). Vocational education facilitates entry into the labor market but hurts employment at older ages. Retrieved October 16, 2018, from https://voxeu.org/article/pros-and-cons-vocational-education-new-evidence

Freeland, R. (2018). A Third Way: Integrating Liberal and Professional Education. The New England Journal of Higher Education. Retrieved October 16, 2018, from http://www.nebhe.org/thejournal/a-third-way-integrating-liberal-and-professional-education/

Tienfenthaler, J. (2013, April 10). The value of a liberal arts education. Retrieved October 16, 2018, from https://hechingerreport.org/the-value-of-a-liberal-arts-education/

Impacts of the New NAFTA

By: Shiv Soin

Is the new Nafta the definition of a good deal?

On September 30th, 2018, the United States, Mexico, and Canada collaboratively reached an agreement that would change the current iteration of the 1994 North American Free Trade Agreement, commonly referred to as NAFTA, which was created to strengthen the economic might of North America. This new agreement, dubbed the United States-Mexico-Canada Agreement (USMCA), was, in large part, a result of long-winded attacks from U.S. President Donald Trump on the existing deal and how Americans were losing profits and jobs from their participation in NAFTA. After a strenuous negotiation process, has Donald Trump been able to improve the issues he saw in the original trade agreement and, more importantly, what do these new guidelines mean for Americans and North America as a whole?

Tariffs

Under NAFTA, Canada maintained high tariffs on U.S. dairy products in order to protect Canadian dairy farmers’ market share. This tariff was only imposed after American imports exceeded their individual quotas, but President Trump has expressed his desire to increase dairy imports to Canada despite the quota. After negotiations, Canada has allowed for more U.S. dairy products to enter the country.

Another major point of contention revolved around the United States imposing tariffs on steel and aluminum on Mexico and Canada under Section 232 of the Trade Expansion Act of 1962. Both nations wanted protections from these tariffs, particularly Canada, who has found these tariffs insulting considering the close relationship between the two nations. Although most of the tariffs will remain intact, the U.S. has signed a “side agreement”, which protects Mexico and Canada from any automobile tariffs America will impose.

Auto Industry

One of  USMCA’s  priorities is to increase car manufacturing in North America rather than having car companies resort to cheaper production in Asia. To accomplish their goal, the three nations have agreed that automobiles must have 75 percent of their components manufactured, increased from its current 62.5 percent threshold, within the three member nations to qualify for zero tariffs.

USMCA has also increased the wages of car workers. At least 40 to 45 percent of the work done on automobiles must be done by workers earning $16 an hour. This wage is three times higher than what is currently earned in Mexico, which is the purpose of the provision.

Labor Rights

The USMCA agreement increases labor regulations, especially in Mexico. Mexican workers must be allowed to organize and form unions, as well as increase their safety regulations and protect women from discrimination in the workplace.

Chapter 11 and Chapter 19

Under NAFTA, Chapter 11 allows investors to challenge government policies that would hurt their businesses. In the USMCA, this provision has been eliminated from Canada and the U.S. and has been limited in Mexico.

The preservation of Chapter 19, which created an independent commission to resolve trade disputes between the member nations, was critical to Canada. It wanted to keep the United States accountable for their trade policies. Despite Trump’s desire to remove this provision, Chapter 19 remains in the USMCA agreement.

Intellectual Property

The intellectual property protections under NAFTA have been adapted for the increasingly digital world. Copyright terms have been extended to 70 posthumous years of the author from the original 50. E-commerce has also been directly addressed by ensuring no surcharges on electronically purchased products.

It’s almost impossible to predict the full impact trade deals can have on a nation. However, it’s still possible to see some of the possible benefits and loses the USMCA could produce.

One key requirement is that 75 percent of car components must be made from North America, up from 62.5 percent. Because of this stipulation, car manufacturers would be investing more money in the the U.S. rather than abroad. However, some companies may be de-incentivised from producing cars domestically, which could move the industry abroad.  Another key requirement is the increase in minimum wage for workers. This increase could lead to a movement toward automation and a decrease in labor.

On an international level, USMCA could be seen as a targeted measure to combat China’s rising influence in the global economy. A senior Trump official commented to the Washington Post how “the deal would be a “playbook” for future trade deals.” The article suggests that “Washington could pressure other allies to loosen their trade ties with Beijing.” These actions could somewhat diminish the economic advantage China currently has. 

On November 6th, 2018, the U.S. held their midterm elections to elect new members of Congress. The election resulted in a Democratic majority in the U.S. House of Representatives for the first time since 2011. Democrats are reluctant to pass the USMCA in its present form. Rep. Bill Pascrell (NJ-9), who is expected to chair the House Ways and Means Subcommittee, has stated that “the jury is still out as to whether this deal meets my standard for a better deal for American workers” in an interview with CNBC. Canada and Mexico, however, have explicitly stated that renegotiations will not occur.

USMCA has revitalized NAFTA in many elements, from tariffs to intellectual property and more. Although it’s impossible to understand the agreement’s full implications, indications show that possible adverse effects may occur in the auto industry and on the labor force. For America, President Trump entered these negotiations with hopes to improve the deal for the U.S. USMCA’s full impact is difficult to predict, but based on the actions taken in the auto industry, it may cause undesired results for Americans.

Works Cited

Image Source: https://www.farmfutures.com/trade/wait-celebrate-usmca

Cook, S. A., Carlin, J. P., Moss, B. P., & Cooper, R. (2018, October 11). Trump’s silent victory in USMCA. Retrieved November 25, 2018, from https://www.politico.com/newsletters/pro-canada-preview/2018/10/11/trumps-silent-victory-in-usmca-324371

Farmer, L. (2018, October 12). The Week in Public Finance. Retrieved November 25, 2018, from http://www.governing.com/week-in-finance/gov-finance-roundup-nafta-states.html

Geddes, J. (2018, November 07). What a Democrat-controlled House means for the new NAFTA deal. Retrieved November 25, 2018, from https://www.macleans.ca/politics/ottawa/what-a-democrat-controlled-house-means-for-the-new-nafta-deal/

Long, H. (2018, October 01). U.S., Canada and Mexico just reached a sweeping new NAFTA deal. Here’s what’s in it. Retrieved November 25, 2018, from https://www.washingtonpost.com/business/2018/10/01/us-canada-mexico-just-reached-sweeping-new-nafta-deal-heres-whats-it/?utm_term=.25cb4d235e4c

Lynch, D. J. (2018, October 01). Canada agrees to join trade accord with U.S. and Mexico, sending new NAFTA deal to Congress . Retrieved November 25, 2018, from https://www.washingtonpost.com/business/economy/us-and-canada-closing-in-on-a-new-nafta-deal-as-deadline-looms/2018/09/30/2ef72018-c50b-11e8-b1ed-1d2d65b86d0c_story.html?utm_term=.6ab2472c32bd

Shih, G. (2018, October 03). Trump’s new North American trade deal also aimed at bigger target: China . Retrieved November 25, 2018, from https://www.washingtonpost.com/world/asia_pacific/trumps-new-north-american-trade-deal-is-also-aimed-at-a-bigger-target-china/2018/10/03/5290686c-c705-11e8-9c0f-2ffaf6d422aa_story.html?utm_term=.f33adc12101e

 

 

Food Waste Economics

By: Christina Gayton

The hidden costs of lost calories

Every year, 40 million tons of food are thrown away in the U.S. alone. That’s the equivalent of 182 billion New York bagels, which is approximately enough to feed one billion people. Although day-to-day we may not think much of throwing away half an uneaten lunch, trashed food from Americans accounts for the largest percentage of landfill content- even more than plastic, paper, wood and glass. There are many externalities and costs attached to our food waste. To get a full picture of the economics of America’s trashed food, we need to first explore how and why food is wasted, then analyze the financial and external costs.

HOW FOOD IS WASTED

People waste food at four levels: producer, distributor, seller, and consumer. At these levels, three types of food get discarded: food gone bad, food we think is bad, and food we know is still consumable, but we don’t want.

When genuinely non-consumable food is thrown away, it is usually because of problems in packaging, storage and transportation at the production level, as well as consumers and sellers stocking more than needed. For the average U.S. household, approximately $2200 of food is tossed- roughly a fifth of the goods in every consumer’s shopping cart. Surprisingly, legitimately bad food is the smallest portion of food wasted. On average, 90% of tossed food can still be safely eaten.

The largest category of food trash is food we think is bad, but could actually still be consumed. This inclination comes down to aesthetics and expiration dates. First, aesthetically, producers and sellers are hesitant to deal with misshapen or bruised goods, even if they’re still edible. At the retail level, there is an emphasis on all individual products looking homogenous. So, when an item is considered distorted, such as a two-bodied pear, it won’t make the market shelves. Similarly, people often hesitate to consume food that looks slightly bruised or is past its sell-by date. However, bruises on produce, damaged boxes, and passed sell-by dates often only indicate a decrease in quality, not edibility. Nevertheless, the items are tossed.

Lastly, when we throw away food we know is still good, but we simply don’t want, it is often because the time, resources and money needed to donate the food or transport it to someone who would eat it outweigh the perceived benefits of doing so. For sellers in particular, companies like Walmart recognize that it is more cost-efficient to throw away the good than to spend money on a driver to transport the food to a homeless shelter. Furthermore, individually, why donate the blueberries you never ate if there’s a trashcan five feet from the fridge?

As we’ve noted, there’s a fair amount of food in landfills. Along with the sunk costs of purchasing said food, wasting it creates additional problems. These include resource expenditures, environmental externalities, and social costs.

RESOURCE COST

A substantial amount of money is wasted producing food that is never used. Additionally, one must consider the wasted labor, material resources, time and energy that go into food production. It’s nearly impossible to estimate the potential economic benefits from redirecting these resources, but the situation carries considerable gravity. The Food and Agriculture Organization of the United Nations (FAO) recently estimated annual losses of $1 trillion from resource costs.

ENVIRONMENTAL COSTS

In addition to squandered resources, there is the externality of environmental impact, both from resource overuse- like water scarcity and soil erosion- and from pollution. 95% of food waste goes to landfills, which produce methane, the leading culprit in climate change. The FAO estimates the environmental cost of food waste at $700 billion per year, which was calculated by quantifying carbon, land, and water costs and potential savings, along with the semi-quantifiable cost factor of biodiversity.

SOCIAL COSTS

The lost consumer surplus resulting from our food waste pushes up the price of food. This loss has a relatively greater impact on poorer individuals, as food costs account for a greater percentage of their income. Higher prices and lower quantities of food invariably cause nutritional deficiencies for lower-income people. This, in turn, may result in externalities like higher healthcare costs and lost productivity from individuals weakened by nutritional deficiency and food insecurity. This cost is estimated by the FAO to be approximately $900 billion per year. Adding this to resource and environmental costs, the FAO projects a combined annual cost of $2.6 trillion from America’s food waste.

POLICY

Several countries have implemented policies to combat food waste, such as France, where it is illegal for companies to throw away good food, and Italy, where wise food consumption results in tax breaks. In the U.S., at least ten cities and states have laws intended to curb food waste; for instance, some do so by limiting the amount of organic waste allowed in landfills, while others mandate composting and donating food.

The impact of food waste reduction policies is double-sided: on one hand, it creates savings from avoided unnecessary food purchases. On the other hand, reduced food demand and production leads to job loss, which was the case in Germany, where almost €30 billion was saved, but roughly 600,000 jobs were lost.

With these policies, even more externalities may arise. For instance, with a tax on food trash, consumers may buy less food to avoid waste, thus causing less production of food. This would then lead to higher food prices and less extra food available for donation.

Clearly, the costs surrounding food waste and policy to curb it are complex. Food waste has increased by 204% since 1960, but governments and businesses have been increasingly taking proactive measures to fight it, potentially resulting in a swarth of externalities we have yet to even recognize. Even so, after carefully analyzing the ways in which Americans waste food, as well as the ultimate costs and externalities, we can hopefully begin to illuminate the best possible solutions to this problem.

Works Cited:

Image Source: https://www.express.co.uk/news/uk/702674/British-households-waste-amount-food-every-year

10 Shocking Food Waste Statistics. (2017, April 20). Retrieved from http://www.theswagusa.com/2017/04/20/10-shocking-food-waste-statistics/

Ferdman, R. A. (2014, September 23). Americans throw out more food than plastic, paper, metal, and glass. Retrieved from https://www.washingtonpost.com/news/wonk/wp/2014/09/23/americans-throw-out-more-food-than-plastic-paper-metal-or-glass/?noredirect=on&utm_term=.d4e78660514c

Food Wastage Footprint. (n.d.). Retrieved from http://www.fao.org/nr/sustainability/food-loss-and-waste/en/

Frandsen, J. (2017, May 16). Here’s how states are working to curb food waste. Retrieved from https://www.pbs.org/newshour/nation/heres-states-working-curb-food-waste

Geise, H. (n.d.). Food Waste Blog | Spoiler Alert. Retrieved from http://blog.spoileralert.com/food-waste-bans

The Economic Impact of Reducing Food Waste in Germany, Poland and Spain. (2018). Retrieved from http://ec.europa.eu/environment/integration/research/newsalert/pdf/economic_impact_reducing_food_waste_germany_poland_spain_508na2_en.pdf

 

 

Everything You Need to Know About Sales Tax Nexus

By: David Behrens

The decision of Wayfair v. South Dakota seems to have opened the door for states to collect sales tax on internet purchases. But is it really that simple?

On June 21, 2018, a Wall Street Journal news alert flashed up on my phone: “Supreme Court Rules States Can Collect Sales Tax on Web Purchases.” This alert was the decision of Wayfair v. South Dakota, a case that was brought to court in 2016.

My initial reaction was one of dull exasperation: great, more taxes– and on e-commerce at that. Stock prices for Amazon and other online retailers dipped, reflecting pessimism about how consumers would respond to these changes.

The WSJ headline, though unintentionally so, was severely misleading, something I only realized after researching the case pretty intensively. It implies– falsely– that web purchases weren’t taxed before Wayfair. In reality, the Wayfair case drew a crucial line in settling hopelessly complex conflicts over various sales tax regimes in the U.S.

The central point of contention in Wayfair and the nationwide sales tax battle is the determination of nexus. Nexus is the relationship between a business and a state which constitutes the business’s responsibility to collect and remit the state’s sales tax.

Before Wayfair, businesses had nexus in a state if and only if they had a physical presence in the state. However, South Dakota made laws, called economic nexus laws, saying that out-of-state online retailers had nexus in South Dakota if they met certain conditions. For example, businesses only have nexus in South Dakota if they make $100,000 or 200 distinct sales to South Dakotan consumers in a year. The state also provides a compliance software to help businesses collect and remit the appropriate taxes; businesses who use the software are immune from accounting errors. South Dakota’s victory in the Wayfair case confirmed their ability to enforce their pre-existing laws. 

If you, like me, are generally not enthusiastic about taxes, then South Dakota probably sounds like the bad guy in this scenario. However, further research brings us back to a longstanding axiom of state fiscal policy: New York and Massachusetts were already doing something much worse.

In 2008, New York began enforcing a system of “click-through nexus laws,” which I’ll illustrate with the following example. A consumer visits NYReferrals.com (located in New York). They follow a referral link to buy something from NYReferrals.com’s affiliate, MEGoods.com (located in Maine). New York’s laws say that the New York website is a physical object which gives MEGoods.com nexus in New York; MEGoods has to collect and remit New York’s sales tax (Avalara 2016).

The “cookie nexus” system pioneered in Massachusetts is arguably even worse. Say a consumer in Massachusetts buys something from MEGoods.com, and the website leaves “cookies,” cached files, or other software on the consumer’s computer. Massachusetts considers those virtual entities physical items, meaning they can assign nexus to MEGoods.com (Blocker 2017).

A handful of other states have used click-through and cookie nexus laws for several years now. These laws use absurd definitions of physical presence to abuse the legal precedent overturned by Wayfair. The Supreme Court had this aspect in mind when they deemed the physical presence rule unsound.

Because this case involves state fiscal policy, there are a lot of moving parts, but there are some pathways to simplification. There is a coalition of 22 states in the Streamlined Sales and Use Tax Agreement (SSUTA). These states have worked together since 1999 to make their own economic nexus laws, which are similar to the ones in South Dakota. Some of these states automatically gained the ability to enforce those laws following the Wayfair decision; other states can do so as soon as they pass enabling legislation.

States such as New York and Massachusetts will hopefully abandon their subversive tax laws in favor of more transparent economic nexus regimes. Other states without any remote seller laws on the books have a clear guideline for which ones to make now that they can. The 5 states without any sales taxes don’t have to do anything, though some of them aren’t thrilled with the way that Wayfair may affect in-state businesses. For instance, New Hampshire Governor Chris Sununu has stated that he will pursue legislative action to prevent other states from forcing New Hampshire’s businesses to collect sales taxes.

Congress may also act on this issue; a week after the Wayfair decision, senators introduced an act to prevent states from forcing out-of-state businesses to collect and remit sales tax. This act also gives a specific definition of physical presence which cannot be subverted by click-through and cookie nexus laws.

The Wayfair decision’s aftermath should make us more cautious about how we instinctively process information. As someone who is passionate about fiscal policy and economics in general, even I fell for the Wall Street Journal’s misleading headline at first. Unfortunately, most consumers did too.

It’s very concerning that Amazon’s stock price fell as a result of Wayfair. Amazon has been collecting and remitting state sales taxes for years, largely because it has physical presence (warehouses, etc.) in virtually every state. Wayfair levels the playing field for small and medium-sized retailers who didn’t previously have nexus in other states. By all means, Amazon’s stock price should have gone up following the decision. Unfortunately, investors were tricked into believing simplistic mischaracterizations of the Wayfair case– or at the very least, they predicted that consumers would be tricked this way.

Personally, the Wayfair decision leaves me cautiously optimistic. No matter what happens, it’s likely that abusive physical presence claims from tax-happy states will no longer obscure the tax code. Economic nexus laws are a solid step toward transparency, and they won’t ruin online shopping as you may have been led to believe.

Works Cited:

Image Source: https://c.o0bg.com/rf/image_960w/Boston/2011-2020/2018/06/21/BostonGlobe.com/Business/Images/59a7b1d0d3e24257b005fd85b6d916f7-59a7b1d0d3e24257b005fd85b6d916f7-0.jpg

Bishop-Henchman, J. (2018, September 05). What Does Wayfair Really Mean for States, Businesses, and Consumers? Retrieved from https://taxfoundation.org/what-does-the-wayfair-decision-really-mean-for-states-businesses-and-consumers/

Blocker, R. (2017, August 10). Sales Tax Slice: ‘Cookie’ Nexus Returns. Retrieved from https://www.bna.com/sales-tax-slice-b73014462999/

A Guide to Click Through Nexus – Avalara. (n.d.). Retrieved from https://www.avalara.com/us/en/blog/2016/06/a-guide-to-click-through-sales-tax-nexus-for-small-businesses.html

J. (2018, June 28). S.3180 – 115th Congress (2017-2018): Stop Taxing Our Potential Act of 2018. Retrieved from https://www.congress.gov/bill/115th-congress/senate-bill/3180

News Release. (n.d.). Retrieved from https://www.governor.nh.gov/news-media/press-2018/20180628-sales-tax.htm

Nexus Chart – Remote Seller Nexus Chart. (n.d.). Retrieved from https://www.salestaxinstitute.com/resources/remote-seller-nexus-chart

Office, U. G. (2017, December 18). Sales Taxes: States Could Gain Revenue from Expanded Authority, but Businesses Are Likely to Experience Compliance Costs. Retrieved from https://www.gao.gov/products/GAO-18-114