Some Spokane political leaders are considering rent control. Why they should reject it.

The Spokesman-Review reports that rent control is on the minds of some local leaders.

On Tuesday, new rent control regulations were passed in New York. Rent control has been illegal in Washington since 1981, but with the increasing issue of low vacancies and growing homelessness problem, not all local leaders think it should be kept out of the Spokane housing conversation.

“First, let me just say that fortunately Spokane is not New York or New York City,” Rep. Timm Ormsby, D-Spokane, said. “They’ve got challenges that I am thankful that we do not have.”

With that said, Spokane does have a housing issue, Ormsby said, and this is why he co-sponsored bills in the 2017-18 legislative session that would allow cities to make their own determinations about rent control.

Earlier this year, Oregon became the first state in the nation to adopt a statewide rent control law

The law caps annual rent increases to 7 percent plus inflation throughout the state, which amounts to a limit of just over 10 percent this year. Annual increases in the Consumer Price Index, a measure of inflation, for Western states has ranged from just under 1 percent to 3.6 percent over the past five years.

The rent increase restrictions exempt new construction for 15 years, and landlords may raise rent without any cap if renters leave of their own accord. Subsidized rent also is exempt.

The bill also requires most landlords to cite a cause, such as failure to pay rent or other lease violation, when evicting renters after the first year of tenancy.

At the time, we pointed out that California voters wisely rejected rent control and that legislative efforts here to repeal the ban on rent control died in committee. As the Washington Research Council has written, there are better ways to handle the problem. 

New voices calling for increased government intervention in many sectors of the economy have added the quick fix of rent control as their solution to the growing problem of housing affordability. But rent control is a Band-Aid, not a solution. If the affordability problem is to be solved the increase in demand must be met by an increase in supply. As rent controls would discourage the construction of new rental housing, they would make the affordability problem worse in the longer term.

Policymakers, taking heed to the vast majority of economists and the basic nature of market behavior, have resisted the call for rent controls. They would be wise to look to policies that would remove unnecessary regulatory impediments to an increase in the supply of housing, to counter balance the demand pressures driving up rents and property values.

Right. On this issue, the research is clear. Rent control solves nothing, though it does create new problems.

STEM concentration and job growth in metro Seattle among the nation’s strongest, but there are business climate concerns.

Geek Wire reports on Seattle’s vibrant innovation economy. 

The West Coast’stech hubs are leading the nation in the race to grow employment in science, technology, engineering and math (STEM) fields.

STEM jobs increased 8.2 percent in Los Angeles and 8.1 percent in Seattle from 2014 to 2018 — the fastest rates of any metropolitan areas in the U.S., according to commercial real estate firm CBRE. Overall, Seattle has added 19,090 new positions since 2014 and now counts 230,000 employees in STEM-related roles.

CBRE writes, 

Ingenuity and innovation inherent to Seattle’s economy has resulted in the metro area becoming one of the fastest growing regions in the nation. Innovation is directly related to the size and quality of the Science, Technology, Engineering and Mathematics (STEM) workforce. The Seattle region has the eighth largest STEM cluster in the U.S. with 230,000 people employed in such occupations.

That’s great, of course. The Seattle Times editorial board, though, cites some reason for concern, framing the discussion by citing one of the city’s innovative businesses.

The $15.7 billion sale of Tableau Software is the latest affirmation that Seattle is a tremendous place to innovate, build companies and start careers.

Preserving this business climate, so it continues to create jobs not just for programmers but throughout the regional economy, should be a top priority of Seattle voters in the upcoming City Council election.

The editorial traces some regional attributes and recent business and political decisions, concluding,

Seattle must remain a place where companies want to grow and believe they have unlimited potential to improve the world. Their success should be celebrated, not exploited by divisive politicos, and the people they attract should be appreciated for the knowledge, diversity and prosperity they give the region. Then more of these employers are likely to remain locally based and perhaps become the next Microsoft or Amazon.

Right. The region cannot take continued prosperity for granted.

Oops. State budget doesn’t balance over four years after all, according to new official outlook.

Washington has wisely adopted a number of statutory and constitutional requirements that improve budget sustainability. As the Washington Research Council wrote in January, the measures “work when followed.”

Washington’s four-year balanced budget requirement and constitutionally-protected rainy day fund promote state budget sustainability. The requirement that budgets balance over four years helps to limit the use of budget gimmicks and to prevent unsustainable bow wave spending. Reserves improve sustainability by providing a cushion for emergencies and limiting major program cuts during economic downturns. Because the rainy day fund is protected in the constitution, deposits are mandated, and withdrawals are limited.

That four-year balanced budget requirement is key. And the 2019-2021 budget adopted this year doesn’t pass the test. Again, we’ll cite the WRC. In a blog post, Emily Makings writes,

The conference report for the operating budget was released to the public the day before the end of the legislative session. It was accompanied by an estimated outlook based on the conference agreement that indicated that the conference report balanced over four years—the unrestricted ending balance for funds subject to the outlook was estimated to be $102 million in 2021–23.

But in the fog of the last few days of session, some bills were enacted that were not included in the estimated outlook and some bills that were included were not enacted. Additionally, Gov. Inslee vetoed several provisions of the operating budget. Given all that, the official outlook estimates that the budget no longer balances over four years. Instead, it leaves an unrestricted ending balance of negative $58 million in 2021–23.

The “fog” was of lawmakers’ own making, of course. And, as Makings writes, the statute requires the legislature to pass a budget that balances over four years. There’s no requirement that the budget signed by the governor must satisfy the requirement. Here’s a link to the outlook, which was adopted by default because the forecast council lacked a quorum. 

AWB breaks down the impact of the major tax legislation adopted in the 2019 legislative session. Yes, it’s significant.

The Association of Washington Business looks at the 2019 Legislature’s major tax legislation. The AWB one-pager tells the story well.

AWB writes,

The impacts of the Legislature’s new taxes (as implemented in House Bill 2158) are wide-ranging…

“This was the biggest tax bill of the session, impacting the most taxpayers,” said Clay Hill, AWB government affairs director for tax and fiscal policy. “The one-pager shows that Main Street business bears the primary burden.”

The tax increase came on top of substantial revenue growth over the past few budget cycles. The Washington Research Council prepared this graph to show just how much tax revenues have grown. The graph includes all of the taxes adopted in 2019, not just the HB 2158 increases.

Main Street businesses will notice. 

“Top 30 Metropolitans” list includes Seattle-Tacoma-Bellevue (10), Wenatchee (16), and Mount Vernon-Anacortes (21).

Washington metros again show up among the nation’s most economically vibrant cities. A new report, Most Dynamic Metropolitans, includes three Washington cities among the nation’s top 30: Seattle-Tacoma-Bellevue (No. 10), Wenatchee (No. 16), and Mount Vernon-Anacortes (No. 21).  An impressive showing!

The report’s authors, Ross DeVol and Jonas Crews, describe their work in a New Geography post.

The study demonstrates that a knowledge-based economy spurs economic growth in metropolises across the United States. Metro areas with knowledge-based economies ranked higher than cities that have yet to make much-needed investments in technology, education, entrepreneurship and commercialization…

Each metropolitan area is ranked and reviewed on performance-based metrics, such as job growth, income gains, and the proportion of total jobs at young firms – a key measure of entrepreneurial performance. This is the first time that such research has been undertaken in this scope.

Each top 30 metro gets a two-page discussion. We’ll give you the first paragraphs of each Washington city.

Of the urban Puget Sound region, the report says,

The surge in economic growth in the Seattle-Tacoma-Bellevue, Washington metro area continues unabated as it is among the most innovative places in the world. Seattle is 10th overall and fourth within the large metro category in Most Dynamic Metropolitans. The University of Washington was named the most innovative public university in the world based upon its ability to “advance science, invent new technologies and help drive the global economy.”129 Seattle’s performance places it in the top-tier across the metrics in our analysis, but its best growth measure was fifth in average annual pay over the 2013-2017 timeframe. Seattle’s many attributes place it in a unique position: 11 Fortune 500 firms, top tech employers, a world-renowned public research university, an emerging biotech cluster, outstanding small-firm growth, a hub of international trade and a tourism cluster. Seattle’s biggest challenge in the future might be a vocal minority that dwells on the income and outcome disparities that are real, but chooses a narrative that exaggerates their severity.

Of No. 16 Wenatchee,

Wenatchee, Washington, and preceding Gainesville [GA] are two sides of the same coin. In a world where many of the strongest metropolitan economies are increasingly dependent on high-tech manufacturing and services, these two metropolitans are thriving on agriculture and food processing. While Gainesville has poultry, Wenatchee’s economy is centered on fruit.

The Wenatchee metro was not a standout in any single category, but it performed well in all of them. The metro’s lowest ranking among short-term economic growth measures was 43rd, and its lowest among medium-term growth measures was 75th. Wenatchee’s young firm employment ratio was more than 1.5 standard deviations above the national metro average, impressive for an economy so dependent on the mature agriculture industry.

Of No. 21 Mount Vernon-Anacortes,

The Mount Vernon-Anacortes, Washington metro (MVA) lies on fertile soil along the Puget Sound, and borders the also-successful Seattle-Tacoma-Bellevue and Wenatchee metros. Like similarly sized Wenatchee, MVA has a strong agricultural base anchored in non-traditional crops. Yet, due to its access to the Pacific Ocean, MVA also has some unique economic capabilities ranging from shipbuilding to aquaculture to refinement of shipped-in oil.

While MVA performed well in each metric, including the 12th-best medium-term GDP growth among all metros, it was a particular standout in wage growth. MVA was eighth overall in medium-term average annual pay growth, and seventh overall in short-term growth. This performance may have been partially influenced by a $1.53 jump in Washington’s minimum wage from 2016 to 2017,274 but the jump certainly does not explain all of the growth. Lesser wage growth performances in other Washington metros serve as evidence.

There’s a lot of good information and discussion. In the New Geography post, one of the authors sums up policy implications:

“The data show that a knowledge-based economy is key to unlocking economic potential in metropolitan areas across the United States,” said Ross DeVol, the lead researcher and a Walton Fellow. “Cities making investments in a knowledge-based economy have performed better economically than those that have not.”

“Technology sectors are under-represented, and too little emphasis is placed on supporting entrepreneurs in Heartland metropolitan areas,” DeVol continued. “Investors must be willing to support early-stage firms, and more universities need to embrace commercialization as a critical part of their mission and educational attainment, particularly in science, technology, engineering and mathematics (STEM) for economic progress in the Heartland and throughout the nation.”

Makes sense. We recommend spending some time with the Most Dynamic Metropolitans.

Catching up with Seattle’s quixotic pursuit of a prohibited local income tax.

When last we tuned in, the state Supreme Court had declined direct review of the City of Seattle’s controversial municipal income tax. That was back in January. The next stop, then, would be the Court of Appeals. The January story in the Seattle Times laid out the agenda. 

…City Attorney Pete Holmes said the city wouldn’t be giving up.

“While we felt the state Supreme Court was the most appropriate forum to address the constitutional issues we hope to resolve in this case, we’re happy to first take our arguments to the Court of Appeals,” Holmes said.

“Whatever the outcome at the appellate court, either side will have the opportunity to petition our state Supreme Court for appeal.”

The Court of Appeals heard the arguments last week. From the reports we’ve read, the city is likely to be bucking the tide again. SCC Insight, written and managed by Kevin Schofield., has a detailed breakdown of the hearing in a post headlined SEATTLE HAS A ROUGH DAY IN COURT DEFENDING ITS INCOME TAX.. It’s worth reading for the play-by-play and clear discussion of the legal principles involved. A couple of summary takeaways:

While some of the statutory questions are debatable, the judges left little doubt that if they were to find for the city on all of the statutory issues and reach the constitutional one, they would need to apply stare decisis and rule against the city on that basis. Probably the strongest argument the city has is that the law prohibiting a net-income tax violates the single-subject rule (and even that is far from a slam-dunk; the trial court judge didn’t buy it). But even if the judges rule in the city’s favor on that issue, they are still likely to lose on the issue of whether the city has explicit authority from the state to impose an income tax on individuals’ income. So the chances of the appeals court reaching the constitutional issues remains low…

It’s unclear how quickly the Appeals Court will rule on this case. If it ignores the priciple of constitutional avoidance, it could turn it around quickly and, as Judge Verellen suggested, write a short opinion citing stare decisis and the binding Supreme Court precedent. On the other hand, if it decides to plow through all the statutory issues, it could be months. There are no timetables for Appeals Court decisions. And no matter how it rules, the losing side will appeal it back to the state Supreme Court, so don’t expect a final resolution until 2020.

In Crosscut, David Kroman covers the hearing:

The case hinges on two questions: Would the tax be legal under laws previously set by the state Legislature, and would the tax be legal under the state’s constitution? For decades, the answer to both questions has widely been accepted as “no,” but the city, in a Hail Mary effort, is hoping to change that.

Doing so will require something of an uphill battle.

An understatement.

In Thursday’s hearing, Judge James Verellan questioned why the Court of Appeals should even listen to arguments when only the Supreme Court can overrule its own precedent.

Kroman writes that the city continues to claim the income tax isn’t an income tax. (Really.)

Lawrence and Claire Torney, an attorney for the Economic Opportunity Institute, made several arguments in favor of the tax. First, that the income tax was not really an income tax — and was in fact closer to the sorts of taxes imposed on businesses or in local improvement districts, where taxes are imposed in exchange for some specific benefit.

The plaintiffs appear to have the stronger argument.

Rob McKenna, attorney for the plaintiffs, said any argument that the tax was something other than an income tax was false, as evidenced by the language of the 2017 law and the accompanying campaign, which explicitly referred to it as an “income tax.” Additionally, he argued that state law was not conflicted: When the 1984 law was passed, he said, legislators were clear they were banning cities like Seattle from imposing an income tax.

Jason Mercier with the Washington Policy Center posts his notes from the hearing. The final comment:

Hard to judge based on oral arguments but I sensed the judges were very skeptical of Seattle’s arguments and feel bound by prior state Supreme Court rulings prohibiting a graduated income tax

We’ll see. Maybe soon. Maybe later. 

Why budget restraint matters: Predictions of Q2 slowdown show growth well below Q1 pace; heightened recession anxiety.

Friday we commented on the weaker-than-anticipated employment and wage figures for May.  Calculated Risk has pulled together forecasts of Q2 GDP growth from Merrill Lynch, the New York Fed, and Atlanta Fed. The conclusion:

These early estimates suggest real GDP growth will be in the 1% to 2% range annualized in Q2.

That’s well below the 3.2 percent growth in Q1. And Menzie Chinn at Econbrowser reviews some projections and writes,

Different forward looking models show increasing likelihood of a recession.

During the legislative session, we warned of unsustainable budgets proposed by the governor, House and Senate. We wrote that three-quarters of business economists expect a recession by end of 2021; nearly half see it beginning next year .

And we continue to be concerned that the adopted budget with an 18.3 percent expenditure growth built on volatile taxes will be at risk in a downturn. The latest news heightens our concerns.

Slower than anticipated job and wage growth in today’s monthly employment report.

After yesterday’s post on positive economic news (productivity, economic activity, employment), we were expecting better from today’s employment release from the Bureau of Labor Statistics. 

Total nonfarm payroll employment edged up in May (+75,000), and the unemployment rate remained at 3.6 percent, the U.S. Bureau of Labor Statistics reported today.

As Calculated Risk reports, that number falls far below expectations. (We weren’t the only ones expecting better.)

The headline jobs number at 75 thousand for May was well below consensus expectations of 180 thousand, and the previous two months were revised down 75 thousand, combined. The unemployment rate was unchanged at 3.6%. Overall this was a weak report.

Still, CR adds,

In May, the year-over-year employment change was 2.350 million jobs. That is decent year-over-year growth.

The BLS wage numbers also disappointed.

In May, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents to $27.83. Over the year, average hourly earnings have increased by 3.1 percent. Average hourly earnings ofprivate-sector production and nonsupervisory employees increased by 7 cents to $23.38 in May.

Again, the comment from CR:

Wage growth has generally been trending up, but has weakened recently.

The Associated Press reports the recent data heightens concerns about the weakening expansion and actions the Fed may take to stimulate growth.

The tepid job growth, along with rising pressures on the economy, makes it more likely that the Federal Reserve will cut rates in the coming months. Bond yields fell after the jobs data was released, signaling investor expectations for lower Fed rates….

The economy is showing signs of sluggishness just as the current expansion has reached its 10th anniversary. Next month, it will become the longest period of uninterrupted growth on records dating to 1854. Yet consumers have turned cautious about spending, and companies are scaling back their investment in high-cost machinery and equipment.

The economy expanded at a healthy 3.1% annual rate in the January-March quarter, but the Federal Reserve Bank of Atlanta estimates that annual growth will slump to just 1.5% in the April-June quarter.

While predictions of a slowdown have been offered repeatedly in the last 24 months only to be defied by strong economic growth, eventually the expansion will end. Which is why we’ve been concerned about successive double-digit state budget increases of doubtful sustainability. The Washington Research Council has just reported that, with vetoes, this year’s adopted budget for 2019-2021 amounts to an 18.4 percent spending increase.