Addressing Professor Schmeling’s Arguments on the Relation of State Aid and Gross Municipal Product

PROEM II:
Not wanting to allow a disagreement about what to call them get in the way of the ideas being presented, I’ve re-edited my original post to remove any direct association between Professor Schmeling and the assumptions that I believe necessarily underlie his argument that a community where x% of jobs are located is entitled to x% of state aid. All of the ideas from the original version stand unaltered.
PROEM:
Professor Thomas Schmeling would like it known that he disagrees with my reasoning that the three assumptions listed below are required for making the argument that a community where x% of jobs are located deserves x% of state aid.
Needless to say, I disagree with his disagreement.



Here’s the answer I promised commenter Thomas Schmeling in response to his recent statements like…
Providence provides a net 40,000+ high-paying jobs to residents of other cities…Whether the rule you prefer is “as you contribute, so shall you receive” or “from each according to his ability, to each according to his need”, or something in between, Providence deserves at least the proportion of state aid that it currently gets.
…and…
The top 10 towns getting the highest percentage of generated income back in overall state aid are, in order, Foster, Burrilville, Central Falls, Scituate, Exeter, Glocester, Barrington, N. Providence, Hopkinton and Tiverton. I’d say this is where the “subsidies” are going, if we want to talk that way.
The validity of the idea that state aid should be paid out to communities in amounts roughly proportional to their “gross municipal products” (with GMP defined strictly in terms of positions located in a community, regardless of where the person who fills that position comes from) or other such economic metrics rests on a set of dubious assumptions…
  • That government and government alone is the source of all economic activity,
  • That government is entitled to a fixed amount of revenue, no matter what services it provides, and
  • That whoever produces the most should receive the most in government services and payouts.
We’ll call these the aid-should-reflect-GMP-by-position assumptions.
Imagine someone working for a small plumbing company with an official address in Providence. The plumber travels around the Providence metro area, fixing problems for customers in Providence, but also for customers in North Providence, Johnston, Central Falls and Pawtucket. The aid-should-reflect-GMP-by-position assumptions hold that, because the company’s corporate address is in Providence, the government of Providence has claim on 100% of the economic activity generated by the plumber and his customers and that no one else does — not even the plumber himself (unless, maybe, he resides in Providence).
Coming out of college, 3 friends start a software company. They’ve paid for their own educations, 5 years-plus, to the master’s level. At the start, they literally operate out of a garage, maybe in East Providence or Cranston. They put three years of fourteen hour days into their company; eventually they have enough success to justify renting some office space, for the purposes of this example, in Providence. From the moment they sign their lease onward, the aid-should-reflect-GMP-by-position assumptions assign credit for 100% of the economic activity they generate to the government of Providence, the schooling and money and resources brought by the entrepreneurs (who may live in some other community) counting for nothing. It is the government of Providence that has provided the new jobs created, not the young entrepreneurs. Even more dubiously, the aid-should-reflect-GMP-by-position view assumes that if the 3 friends hadn’t built their company, the government of Providence would have found someone else at exactly the same time to use the rented space to create something of equal value.
A manufacturer who’s been around for 20+ years opens a subsidiary plant in Providence, investing some of its capital in the new plant and moving some of its managers and employees there. The aid-should-reflect-GMP-by-position assumptions say that the government of Providence deserves 100% of the credit for those new jobs in Providence; the company and its employees get 0% credit for their efforts. And so on, and so on…
The assumption that government is entitled to a certain percentage of all of the economic activity that occurs in its vicinity (or even more radically, that government is entitled to all of everybody’s income, but generously decides to let you keep some) eschews the traditional American view of limited government. In the limited government view, people who have worked hard to produce goods and services of value come together and pool a portion of the income they generate to achieve a few goals like building roads or public schools or staffing a fire department, items more rationally handled by the entire community than by individuals. Beginning from the conclusion that state aid should reflect a community’s position-based GMP reverses that chain of reasoning, asserting that government is entitled to take a certain percentage of all economic activity to do with it what it pleases, whether or not it uses those resources to benefit the people who are doing the paying and whether or not government is performing activities that could better be done through non-governmental means.
The flaw most fundamental in this view is the assertion that government is the dynamic economic force in society, while individuals are simple commodities to be managed. A community like Foster can only be labeled a drain on Rhode Island under the assumption that the thousands of residents from there contribute nothing unique to the Rhode Island economy. The positions those residents occupy may be important, but the people themselves aren’t; they are mere interchangeable cogs in an economic machine that can be immediately replaced with people from somewhere else if need be. That is an assumption of dubious accuracy — and the kind of assumption that has led governments throughout history into strange and disastrous decisions.
Finally, as to the third of the assumptions listed at the top of this post, that whoever produces the most should receive the most in government services and payouts, Professor Schmeling has not made clear exactly why he believes government should be assigned a place apart from the other institutions and the individuals in society, i.e. if the government that produces the most (however loosely “production” is defined) deserves to have the most spent on it, then why shouldn’t the non-government organizations or individuals who produce the most also have the most spent on them?


Edit log from original:
In paragraph 1, “The validity of the ideas above rests on a set of dubious assumptions” changed to “The validity of the idea that state aid should be paid out to communities in amounts roughly proportional to their “gross municipal products” (with GMP defined strictly in terms of positions located in a community, regardless of where the person who fills that position comes from) or other such economic metrics rests on a set of dubious assumptions.”
In paragraph 1, “We’ll call these the aid-should-reflect-GMP-by-position assumptions” added as final sentence.
In paragraph 2, “The Schmeling assumptions hold that, because the company’s corporate address is in Providence…” to “The aid-should-reflect-GMP-by-position assumptions hold that, because the company’s corporate address is in Providence…”
In paragraph 3, “Even more dubiously, the Schmeling assumptions ask us to believe that if the 3 friends hadn’t built their company…” changed to ” Even more dubiously, the aid-should-reflect-GMP-by-position view assumes that if the 3 friends hadn’t built their company …”
In paragraph 3, “From the moment they sign their lease onward, Professor Schmeling’s assumptions assign credit for 100% of the economic activity they generate to the government of Providence” changed to “From the moment they sign their lease onward, the aid-should-reflect-GMP-by-position assumptions assign credit for 100% of the economic activity they generate to the government of Providence”.
In paragraph 4, “Professor Schmeling reverses the chain of reasoning, asserting that government is entitled to take a certain percentage of all economic activity to do with it what it pleases…” changed to “Beginning from the conclusion that state aid should reflect a community’s position-based GMP reverses that chain of reasoning, asserting that government is entitled to take a certain percentage of all economic activity to do with it what it pleases…”

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Mike Cappelli
Mike Cappelli
13 years ago

Andrew,
You are asking for a logical argument from a liberal. It ain’t gonna happen.
Liberals like Schmeling can’t see past their noses to view the idiocy of their arguments. It’s all too obvious his hypocrisy, as you point out, where it’s OK for a government to keep all, or most, of their alleged contribution, but not for an individual taxpayers. The Schmelings of the world say the rich aren’t paying enough, when the top 4% of income earners pay 50% of all income taxes.
Typical socialist nonsense. If these people don’t get it at their advanced age, they never will.

Thomas Schmeling
Thomas Schmeling
13 years ago

Andrew, Your post seriously and irresponsibly misrepresents what I was saying and attributes to me, in a very public way, views which I did not express and do not hold. I found it highly disturbing and disappointing to read. For the record, I reject all three of the “assumptions” attributed to me: 1 That government and government alone is the source of all economic activity I said no such thing, nor would I ever. Nor is this a reasonable inference from anything that I actually did say. You also go so far as to suggest my view is that “government is entitled to all of everybody’s income, but generously decides to let you keep some”. There is no basis whatsoever for attributing this view to me and I find it offensive that you so so. 2 That government is entitled to a fixed amount of revenue, no matter what services it provides, and Nor did I say this. The claim doesn’t even make sense to me. 3 That whoever produces the most should receive the most in government services and payouts. Nor did I say this. This one is particularly stunning, since my actual words, which you quoted, were ” Whether the rule you prefer is “as you contribute, so shall you receive” or “from each according to his ability, to each according to his need”, or something in between…..”. I explicitly left the criteria for judging “fairness” up to your choice. It is impossible to understand what I was saying without recognizing that it was said in response to the claims that Providence is getting “too much” state aid and that residents of other communities are “subsidizing” Providence. That argument is premised on the assumption that (if taxes are justified at all) place-of-residence alone is what should matter, and… Read more »

Andrew
13 years ago

Professor Schmeling: I am sorry if you are offended, but I have engaged in a perfectly legitimate line of political science inquiry. I submit that, without invoking all three assumptions listed in the main post, whether you subscribe to them individually or not, it is impossible to make a coherent argument that a community that de jure holds x% of the jobs in a state deserves x% of state aid. More specifically… 1. In an earlier thread involving the John Simmons pension controversy, you made it clear that did not consider wasteful spending in Providence to be a legitimate issue for other communities in Rhode Island to consider, as long as Providence was only spending its own money… I said: The residents of Providence…don’t have a right to demand that their spending on their luxury items be subsidized by taking money from other communities.You replied: The only way this could be relevant to this discussion is if in fact Providence is spending your money, i.e. that other communities are in fact subsidizing Providence. That, however, is precisely the point under debate. I disagree that they are. How does that position not depend on assumption #2? 2. In the same thread, you talked about how much revenue Providence generates… With regard to education, as I pointed out before, Providence jobs generate roughly 27% of the state’s income and gets roughly 27% of the total aid to local schools. I just did the same thing with the 2006 total state aid to cities and towns. Providence’s share is 27.8%. My conclusion remains that Providence consumes a share of state income tax that is not significantly greater than the share of revenue it generates. How is it wrong for me to point out that your 27% figures assume (assumption #1) that the City… Read more »

Frank
Frank
13 years ago

Excellent post Andrew. There is no logical, reasonable, well thought out argument why Providence should be subsidized by the rest of RIs communities. Thanks for uncovering some of the absurdities of the views held by people like the Schmelings of the world. Liberals rather make any sense if you can engage them in a discussion. I’m not surprised that he hasn’t been back to argue his points or lack thereof.

Thomas Schmeling
Thomas Schmeling
13 years ago

Frank,
First, though I realize it’s convenient to frame things in terms of simple categories, the present discussion has nothing whatsoever to do with “liberals” vs “conservatives”.
Second, while I disagree that there is no good argument why Providence should not be “subsidized (and have presented several previously so feel free to address them), the argument to which Andrew objects is that, in fact, Providence is not not being “subsidized” by the rest of the communities. So, your objection is misplaced.
Finally, as to your assertion that my lack of comment in the last 24 hours has some significance, it only means that I’ve been busy. Andrew’s post was made about 48 hours ago and I responded immediately. His comment in response was just about 24 hours ago. On the other hand, my comment, to which his post responded, was made January 31st, more than a month ago. Yet you are giving me a hard time for not responding quickly enough. That does not seems reasonable, does it? Try to be patient.

Thomas Schmeling
Thomas Schmeling
13 years ago

Andrew, It’s still not clear to me that this is going anywhere, but since you made the effort to respond… First, please feel free to skip the honorifics. Since this topic is not part of my professional expertise, my degrees and my day job are as irrelevent as yours are. I certainly have never invoked them. This is long, and I’m going to be repeating myself from earlier comments, but those comments were fragmented and I want to lay the whole thing out as clearly as possible. In general, my argument all along has been this: “It is unreasonable for people to say, as some here and others elsewhere have, that Providence, even though it provides 40,000 jobs for citizens of the rest of the state, under no circumstances including considerations of need, deserves the state aid it gets, because that money in some sense “belongs to” the community of residence of the taxpayers, and should only be used to pay for the education of children in their own communities”. [Note that I am not interested in addressing arguments that money “belongs to” the worker and not the government. Either government has a legitimate claim on earnings or it does not. You are free to argue this as you see fit, but this entire discussion assumes that government (at some level) does have such a claim. The typical objection to aid to Providence is not that taxes are bad, but that communities should be treated separately and one community should not benefit from taxes on residents of another community.] I also have argued, and continue to do so, that it is unreasonable, and even hypocritical, for residents of communities that benefit from the 40,000 jobs and $2 billion in income that Providence provides their residents, to turn around and say,… Read more »

Thomas Schmeling
Thomas Schmeling
13 years ago

There are several typos in the above. The worst is when the italics stop before the end of the quotation of Andrew’s statement regarding Simmons.
The last paragraph should read:
Let me put it this way, however. The “taxes and benefits should depend on place of residence” argument gives “100% credit” to the town of residence , regardless of where their income-producing activity of the resident takes place. I don’t think that’s any more justified than the alternative.

Frank
Frank
13 years ago

Thomas, You bring up an interesting point. Who does an employee’s income tax “belong to”? In the fairest sense I would say that after the state has taken it’s share of income tax revenues to cover costs related to items that are necessarily utilized for the benefit of all Rhode Islanders, the rest would be divided in some equitable fashion based on something, but what? Under our current system, right or wrong, these monies come back to RI residents predominantly in the form of state aid to education to the various towns. So the system as it currently stands mandates that each town is the relevant unit to which a level of value and need is prescribed and to which a payout is then made. Since school costs are the driving force behind the “needs” of all of the individual towns, wouldn’t the most relevant way to share the monies coming back to communities have to be based on where the employee lives? That’s where the need, the potential school children, come from – residences. Businesses don’t put kids into the school system. Providence’s “economic engine” doesn’t cost a dime in public school costs. So how can Providence make a legitimate claim on a disproportionate amount of the monies that come back to the towns when it comes back in the form of aid to education? No matter how you care to paint this issue the bottom line is that the bulk of the monies the state returns to the communities comes back in the form of state aid to education. Aid to education covers about 30% of the per pupil costs in most of the suburban/rural communities while in Providence it pays for 70% of the per pupil costs. Providence’s large tax base, including all those businesses, only have… Read more »

Thomas Schmeling
Thomas Schmeling
13 years ago

Frank, First, I appreciate the thoughtful tone of this comment. Thank you. Frank said: I would say that after the state has taken it’s share of income tax revenues to cover costs related to items that are necessarily utilized for the benefit of all Rhode Islanders… OK, but I would first note that state dollars don’t always benefit all Rhode Islanders equally and we can’t expect them to. For instance, highway dollars benefit those who drive more than those who do not, though they benefit all by making it possible to deliver goods and services. Cleaning the Bay benefits shoreline residents and boaters more than others, etc. Second, and more importantly, I would make the claim, and have done so here before, that quality education is actually one of those things that does benefit all Rhode Islanders. Poorly-educated bank-tellers, cops, teachers, DMV workers voters, etc., harm you and me even if we don’t have a child in school, and it makes no difference whether that person is educated in Providence or Lincoln and, in this tiny state, it frequently makes no difference where they live. Frank says Since school costs are the driving force behind the “needs” of all of the individual towns, wouldn’t the most relevant way to share the monies coming back to communities have to be based on where the employee lives? That’s where the need, the potential school children, come from – residences. I agree that education funding should be based on where the children live. That’s why I think that the “equitable fashion of distribution” you are looking for requires that state money should be distributed according to that need, not some other criteria. That means we should look at the students actually are, and that may or may not be where the taxpayers live.… Read more »

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