By Ken Monroe Chair, Family Business Assn. of CA and president, Holt of California
This op-ed originally appeared in the Orange County Register on July 5, 2019
You can’t watch TV or go online these days without hearing about more and more politicians who are calling for America to become a socialist nation. With California’s presidential primary just nine months away, these calls will become even louder in the months ahead.
As a family business owner and chairman of the Family Business Association of California, I’d argue that in many ways we already live in a socialist state. After all, a basic definition of socialism is that the state redistributes the wealth and controls the means of production. Through high taxes and ever-increasing regulations, California does both quite effectively.
But there are other ways the state redistributes wealth, and one of the most egregious is the Private Attorneys General Act, or PAGA.
PAGA was one of the last bills signed into law by Gov. Gray Davis before his historic recall in 2003 and was his parting gift to the state’s trial lawyers. It allows private attorneys to act as the state and use the 800 pages of labor laws on the books to sue employers over any and all violations, even for incredibly trivial issues. For example, if a company doesn’t list its full legal name on a paystub, it’s a violation. But no matter how trivial, the penalties for each labor code violation are the same: $100 for each employee per pay period for an initial violation, and $200 for each employee per pay period for each subsequent violation, along with other possible penalties. These violations can be stacked, with multiple penalties for each statutory wage violation and can quickly add up. I know, because my company, Holt of California, was sued over allowing our employees the flexibility to schedule lunches so they could eat with friends, even if that meant they worked more than five hours set without a meal break. Because the possible penalties and legal fees in PAGA lawsuits can easily total millions of dollars if a suit goes to trial, most employers settle the cases. While the employees usually get about 60% and the lawyers get about 35%, that means a few lawyers get large checks while the numerous employees end up with relatively little.
PAGA has created an unfair distribution of wealth and should be repealed, with the state once again given the power to enforce labor laws. Since trial lawyers are a major part of the state’s progressive governing coalition, this probably won’t happen any time soon.
But there are some reforms that could at least make PAGA truly focus on the needs of employees more than the trial lawyers’ desire for big paydays:
• First, give employers 90 days to cure underlying issues before a suit can continue. Faced with a similar deluge of lawsuits over construction defects a decade ago, the Legislature gave homebuilders an opportunity to make repairs before they could be sued, so there is a precedent. • Cap attorney’s fees so that in cases where significant violations occurred that the employees get more of the settlements. • And make some common-sense reforms in those 800 pages of labor laws. Give employees the right to take their lunch break when they want to and allow companies to include the name they do business as on paystubs. The state should focus on situations that really harm employees.
Successful economies need an ongoing economic engine to create wealth. Here in California, family businesses play a major role making California the fifth-largest economy in the world. But our state’s economic engine is being choked back by a whole host of state laws and regulations, so the Legislature should at least take some modest steps to strengthen our economy. PAGA reform would be a good place to start.
There is currently widespread frustration with the performance of the global economy. Traditional policy approaches are not delivering the economic results they have in the past. In the U.S., millennials are poorer, have lower incomes, marry less often, and have fewer children than the generations before them. In Europe, the rise of previously fringe parties is unmistakable as voters express their frustrations with the status quo at the ballot box. All this has led to the rise of Modern Monetary Theory (MMT), a set of ideas that reflect a significant and unfortunate break with previous orthodoxy.
During the late 1970s, a similar economic malaise gave rise to supply-side economics popularized by Arthur Laffer. It began with the age-old observation that taxes had important incentive effects and that, in conceivable circumstances, tax cuts could raise revenue. That said, from these two well-understood underpinnings, it grew into the ludicrous idea that tax cuts would always pay for themselves. In the 1980 presidential primaries, future President George H.W. Bush called this idea “voodoo economics” and in the following decades this doctrine did substantial damage to the U.S. economy and has largely short-circuited meaningful debate about taxes.
Now comes MMT, which, like supply-side economics, makes a good observation — that fiscal policy needs to be rethought in an era of low real interest rates — but then stretches it into a ludicrous claim that massive deficit spending on job guarantees can be financed by central banks without any burden on the economy. At a moment of deep economic and political frustration, some fringe wing of the out-of-power party is again offering the proverbial economic free lunch as a politically attractive way out of a fiscal bind. Regrettably, MMT is flawed at many levels.
First, it promises that by printing money the government can finance deficits at zero cost. Not true! The government in fact pays interest on money it creates as it becomes reserves held by commercial banks and the Fed pays interest on reserves. Second, contrary to MMT, governments cannot simply print money to pay bills and avoid default. Looking back at developing nations that have employed MMT demonstrates that beyond a certain point printing money leads to hyperinflation. Third, MMT conveniently assumes an economy that does not trade with other nations. Regrettably, money printing will result in a collapsing exchange rate that will in turn boost inflation, raise long-term interest rates, encourage capital flight, and reduce real wages.
And it is not only in emerging markets where MMT has played out badly. France in the early to mid-1980s and West Germany in the late 1980s employed what now would be called MMT but both nations had to reverse course. Separately, the U.K. and Italy both had to be bailed out by the IMF in the mid-1970s because of an excessive reliance on inflationary finance. Supply-side economics was an unreasonable extension of valid ideas. To that end, few support a return to the very high marginal tax rates that prevailed before the tax reform of the 1980s. Similarly, in an era of very low inflation, and of real interest rates of close to zero, we can and should carefully reconsider our traditional views of federal borrowing; they need at a minimum a careful and thoughtful rethink. That said, when something sounds too good to be true — as was the case with supply-side economics and is the case with MMT — it’s important to make this clear to improve debate and hopefully prevent us from making another costly and unnecessary economic policy mistake.
More than 70 FBA Members and guests heard the latest information about developments at the Capitol at last week’s Family Business Day and Legislative Conference — including the hot-off-the-presses news that legislation to reinstate the estate tax in California is apparently on hold.
As reported in last week’s News Summary, FBA’s lobbying team of Dennis Albiani and Faith Borges told attendees that after FBA quickly assembled a coalition of some 30 business-oriented organizations to oppose SB 378, the Senate leadership decided to not refer the measure to a committee for a hearing.
While no bill is ever completely dead until the end of the two-year session, the leadership’s action means that the bill by San Francisco Democrat Scott Wiener will likely not advance this year. The bill would authorize voters to overturn a 1982 statewide vote and allow lawmakers to reimpose the death tax in California.
Albiani said the decision demonstrates FBA’s growing influence at the Capitol.
“After seven years, we’re starting to infiltrate the minds of the political folks here in California,” Albiani told attendees. “We’ve been asked to engage on several other bills and we do engage when appropriate.”
FBA continues to focus on several other top public policy priorities, including efforts to create a split roll that would reassess commercial properties every three years. Albiani called the proposal “probably the biggest threat for the next year” as lawmakers are pressured to enact legislation to create the split roll before an already-qualified ballot measure is voted on in 2020.
A strong lineup of speakers provided unique insights. Veteran political columnist Dan Walters outlined what Democratic “super-duper majorities” in both houses, combined with more-progressive Gov. Gavin Newsom, will mean for business interests.
On the one hand, Walters said having more Democrats in each house than the two-thirds majorities needed to enact tax increases allows party leaders to let some members vote against tax bills, increasing the chances such legislation will have enough votes to pass. But on the other hand, he noted that several new Democrats were elected in historically Republican districts and will have to vote their districts in order to be re-elected.
And while there is strong pressure from progressive elements to move California to the left, the costs will be daunting.
“We have 6 million kids in K-12 public education. To get California into the top tier of education spending would cost $5,000/year in per-pupil spending, or about $30 billion. For just that one priority, the state would have to increase income tax collections by one-third or double the sales tax,” Walters said.
And in a state where voters are willing to tax others — the rich and smokers, for example — they have shown a reluctance to tax themselves.
“The Legislature would have to be willing to significantly raise taxes on the middle class” to fund expansive increases in state spending. “They can’t get there without taxing a broad spectrum of California voters.”
Ned Wigglesworth, the CEO of Spectrum Campaigns — a firm specializing in ballot measure campaigns for the business community — said there is a significant chance the split roll measure will be on the ballot in 2020, but also said there’s a significant chance it will be defeated if voters can be educated that raising property taxes on businesses will likely be followed by efforts to raise them on homeowners as well.
And he warned business owners that they needed to be engaged, citing the fact that a single-payer healthcare bill passed out of the Senate during the past session before being held up by the Assembly speaker.
Bruce Scheidt (speaking) and Jon Coupal
Bruce Scheidt, senior partner with the Kronick Moskowitz law firm, an FBA Statewide Sponsor, discussed the perils of the Private Attorneys General Act (PAGA), which allows individuals to sue over Labor Code violations on behalf of the state.
Scheidt said the law was a gift to trial lawyers from former Gov. Gray Davis and that significant reform is all but impossible legislatively because of the clout the trial lawyers have over Democratic lawmakers and the fat the state receives 75 percent of any penalties agreed to in settlements. He said PAGA really stands for “pandering to attorneys’ greed and avarice.”
He also warned that business owners can be held personally liable as well, urging FBA members to redouble efforts to comply with the 9,000+ provisions in the three-inch-thick Labor Code, such as making sure that paystubs contain the full legal name of the company, not any sort of abbreviated version.
He also said employers need to vigilantly enforce meal break laws, even if the employees don’t want to take breaks when the law requires them. He said one approach is to issue written warnings for a first violation and to suspend violators for a subsequent violation.
“For meal and rest violations, you need a zero-tolerance program,” he said.
Taxpayer advocate Jon Coupal, president of the Howard Jarvis Taxpayers Association, filled in at the last minute for Joel Fox, who was ill. He was optimistic that a split roll measure would be defeated if it appears on the ballot next year.
“The split roll polls at about 50%, but when voters hear it means amending Prop. 13 they say, ‘What!,'” he said. “Prop. 13 still polls incredibly well, and if we can wrap it in the flag of Prop. 13, we can drive down its numbers.”
Asm. Blanca Rubio
The day’s final speaker, Assembly Member Blanca Rubio, D-West Covina, told members that while she strongly supports Democratic social policies, she also understands that businesses need to be encouraged.
“People in my district depend on local businesses to survive,” she said of local job creators. “I love social programs, but I realize that if I don’t have a tax base, who’s going to pay for those programs?”
Attacked by a primary opponent as “Big Oil Blanca” for being supported by oil companies, she said she’s in a good position because having been opposed by party leaders and labor in her first campaign, she can represent her district and what’s good for California.
“My constituents want a roof over the heads, food to eat and good schools for their kids. We depend on business and our infrastructure to create good bedroom communities in the San Gabriel Valley,” she said.
While advocates of the Green New Deal (GND) suggest it will solve a multitude of problems by combating global warming and creating millions of well-paid jobs, the reality is that the GND is a profoundly expensive plan that takes leave of all economic principles. Within only its climate change portion, the GND ignores entirely the fact that CO2 emissions are a global — not local — problem; it fails to reduce carbon emissions most cost-effectively; and suggests nonsensical ways of paying for the program.
The biggest problem with the GND is that it targets only U.S. emissions, while extreme weather and rising sea levels come from global ones. Today, the U.S. contributes 15% of global carbon-dioxide emissions, China contributes 30%, and India 7%. Under existing policies and goals, in twenty years, the US share will fall to 12%, China’s will drop to 27% and India’s to14%. Thus, even if the GND reduces U.S. emissions to zero, we will benefit little unless other nations do the same. One way around this problem would be to invest in innovations that other nations can easily adopt. For example, pressing to invent low-cost solutions that reduce carbon emissions in manufacturing and agriculture and then sharing them globally, as Germany has done with solar panels, would make a huge global dent in CO2 emissions.
A second problem is that the GND only focuses on removing certain sources of carbon dioxide by trying to achieve 100% renewable energy in a decade. The cost to do this would top $4 trillion — well over a full year of tax revenue. This works out to $110/metric ton of carbon dioxide avoided. The cost of weatherizing every building in the US to “maximum energy efficiency” is projected to cost $400 billion or $285/metric ton. If this sounds expensive, it is! President Obama’s economists put the harm of a ton of CO2 at $50. In New England, you can pay a power producer $6 to reduce CO2 emissions by a ton, $15 in California, and $25 in the European Union, based on emission permit prices in these jurisdictions. What is needed is market mechanisms that incentivize carbon reduction at the lowest possible price regardless of the source.
Finally, defenders of the GND propose paying for this ill-advised plan by taxing the rich and having the Federal Reserve finance it. While the Fed could buy GND bonds, it can do so only if it helps it reach its own congressionally mandated goals. While the Fed would return any interest earned on its holdings of GND bonds to the Treasury, it would have to sell an offsetting amount of Treasury bonds in the first place — otherwise it would compromise its control of interest rates. What if the Fed just printed money and used those funds to buy GND bonds, as was the case with Quantitative Easing? If the economy were in a recession, rates would be low, but they would also be low if the bonds were sold to investors, so the savings would be slight. And if the Fed bought the bonds in a healthy economy, when rates are above zero, like they are currently, it would have to pay interest on the reserves it issues to banks, offsetting the income earned on the bonds as it does now.
In summary, the GND suffers from several serious flaws. It imposes huge upfront costs on our economy, yet only slightly reduces the negative impacts of domestic carbon-dioxide emissions. In addition, it substantially overpays for the CO2 reductions it accomplishes by needlessly prioritizing certain CO2 emissions over others. Lastly, having the Fed buy GND bonds essentially works only in a recession, otherwise necessary offsetting maneuvers largely, if not completely, negate the interest savings.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.
At a time when more and more progressives are seeking to reinstate higher estate tax levels — and significantly raise taxes for many family business owners — FBA is proud to be one of more than 150 associations and trade groups that are backing legislation to fully repeal the 40 percent estate tax.
On February 20. the Family Business Coalition, of which FBA is a member, sent a letter to Sen. John Thune, R-S.D., and Rep. Jason Smith R-Mo., who have introduced the Death Tax Repeal Act.
The letter points out that repealing the death tax would spur job creation and grow the economy — and is supported by two-thirds of the American people. The letter also notes that the tax is unfair and contributes just a small portion to federal revenues.
“The negative effects of the estate tax make permanent repeal the only solution for family businesses and farms. Your legislation will help America’s family businesses create jobs, expand operations, and grow the economy. We thank you for your leadership on this important issue,” the letter concludes. You can read the entire letter here.
The effort to fully repeal the death tax comes at a time when Democratic presidential hopefuls are calling for huge tax increases on many family business owners. Sen Bernie Sanders, I-Vermont, has called for increasing rates to as much as 77 percent and applying the tax to estates of just $3.5 million, down from more than $11 million in current law. Rates he is proposing haven’t been seen since the 1970s.
Meanwhile, Sen. Elizabeth Warren, D-Mass., has proposed an unprecedented “wealth tax” and Rep. Alexandria Ocasio-Cortez, D-N.Y., has called for raising the top marginal income tax rate to 70 percent.
Many family businesses are relatively cash-poor but have significant land and equipment assets, making it difficult to pay high estate taxes without selling the company.
While the most recent jobs report showed the unemployment rate at 4.0% — the lowest rate in almost 50 years — it also showed annual wage gains running at just 3.2%. While that is the best rate of growth in over a decade, late in the last business cycle, wage gains were over 4%, and at the height of the dot.com bubble, wage gains were over 5% a year. Shouldn’t the current tight job market result in faster wage growth as employers compete for increasingly scarce workers? The answer is “not really,” and it’s for several reasons.
The single most important reason for slow wage growth is weak labor productivity growth, or the increase in output per worker per hour. As firms pay workers more, they try to keep their profit margins up by squeezing out inefficiencies, and thus pay for the higher wages out of increased worker productivity. Back in the 1990s, labor productivity growth averaged about 3% per year. In the run-up to the housing bust, it was well over 2%. By contrast, today’s productivity growth is about 1%! As a result, employers are not so eager to raise wages as they tend to reduce profits.
Another major reason is demographics. Twenty years ago, the baby boomers were all in their prime working years. Today, close to 11,000 per day retire and are being replaced by millennials. The problem is that since millennials are just starting their careers, they earn considerably less than the retiring boomers. More importantly, the number of millennials entering the labor force numbers about 14,000 a day, exceeding by about 3,000 a day — or 90,000 a month — the number of retiring boomers. While older generations have always retired as younger generations have entered the labor force, never have the two groups been of almost equal size. After accounting for this, wage growth is currently closer to 4%.
The final significant reason for slow wage growth is a lack of inflation. In the late 1990s, inflation, as measured by the CPI, was 3.5% per year, and was roughly 4% per year during the housing boom. Since 2010, however, inflation has been remarkably tame and has hovered right around 2%. As a result, employers have not had to increase pay that much to keep up with inflation. If, for example, employers aim to increase real pay by 1% per year during the housing boom, that would have meant pay raises of 5%; today, 3% will do.
There are, of course, many other reasons why wage growth is weak. They include a decline in the strength of unions, the increased prevalence of non-compete clauses in employment contracts, and global supply chains — all of which reduce the bargaining power of workers. There has also been a steep decline in the number of new firms, in part due to the rise of super-firms like Google, Amazon and Facebook, which generally buy out any potential competitors, also reducing employer options. Last, but certainly not least, comes the dramatic rise in state licensing requirements which make it much more difficult for employees to work in other states, even if good jobs in the same field are available.
While wage growth is not as strong today as it has been in prior recoveries, there are many reasons why. Hopefully, labor productivity will improve going forward, as that is something that employers and employees both benefit from. In addition, it would be great to see states reduce or eliminate licensing requirements where possible. And, where that is not possible, encouraging reciprocity across state lines would be a great improvement.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.