Flex Space – Cheaper Alternative to Leasing Austin Office Space

Where to Find Cheap Office Space in Austin Tx

Negotiation Tips When Subleasing Commercial Real Estate

Office Buildings With Fitness Center In Downtown Austin

Downtown Austin Office Buildings With Parking Garages

How Long Does My Office Space Lease Term Have to Be?

How to Negotiate Free Rent in An Office Lease

Rent Escalations in Commercial Leases

Things to Look For When Touring Warehouse Space

Before beginning your search for warehouse space, it’s crucial that you know your current and future business needs when it comes to industrial space because not every warehouse property has the same features. For example, some have truck courts big enough to accommodate 18 wheelers, and some don’t. Some have dock high loading, and others only have grade level. It’s important that you pick the right property because renting the wrong one can cost you hundreds of thousands, so make sure to do a lot of due diligence (or have your agent do it for you) because you can’t only rely on what the landlord’s listing agent tells you.

Once you have a handle on your current and future business needs and have a rough idea of your ideal location, size, layout, and budget, then you are ready to start your warehouse property search and tour spaces to figure out which ones will work best. Because every industrial building is not created equal, you need to ask a lot of questions to find out the features of each and determine which ones will work best.

Questions To Ask About Industrial Properties

What is the property zoning?

You need to ensure the area and building is zoned for industrial use

What “Use” is the property approved for?

If the property was previously used for manufacturing and your use is warehousing, you will need to apply for a change of use permit with the city.

What building power is available?

If you’re in manufacturing, then you may need more electric power than the average company. For example, the equipment you use may need 3 phase power.

What is the building clear height?

Clear height is the warehouse ceiling height. The more you have, the higher you can stack

What are the warehouse loading options?

Does the space have dock high or grade level loading? If you ship and receiving using 18 wheeler, then you need dock high.

How big is the truck court?

You need to make sure the truck court is big enough for 18 wheelers to maneuver around.

Does the warehouse have a fire sprinkler system?

Some businesses are required to have fire sprinklers in the warehouse. Check with your insurance agent and/or the clients you work with.

Can I park delivery trucks or trailers overnight?

If you plan on leaving trailers or trucks on the premises overnight make sure you are allowed to.

Do you have any industrial yard space?

Some businesses need outside storage to store raw materials.

We have only scratched the tip of the iceberg here. As you can see, there is a lot of info you need to know about each industrial building so you can make sure to ensure they will meet your needs. When searching for warehouse space for rent and touring properties make sure you know your needs and what questions to ask property owners and landlord agents. If you are unsure or don’t have much experience, then consider hiring someone who is. If you need helping finding warehouse space for rent Austin Tx give us a call.

What is a Tenant Improvement Allowance?

When leasing commercial real estate properties such as office space, retail space, or warehouse space, landlords will typically offer incentives to get tenants to lease space in their building. One of those incentives is offering a tenant improvement allowance (aka TI Allowance or TIA) to build out the space custom to your needs. 

The tenant improvement allowance is the amount of money that landlords are willing to spend or give to a tenant to renovate an office space in the landlords office building. It’s typically offered as a total dollar amount or a dollar per square foot and negotiated up front.

The goal of the tenant should be to negotiate enough tenant improvement allowance to cover most (if not all) of the total construction costs.

For example say you like a space, however it would be even more perfect if you could have 2 more offices and a break area with plumbing.  During the negotiation process you would want to ask for an allowance (MONEY) to build out the space.  The amount is typically negotiated and contingent on your credit, length of lease term. rental rate, market you are in, etc…

How Do You Get It?

It’s handled differently depending on the type and size of commercial space you’re renting. 

Landlord Controlled

At lease signing you have to write a check for any construction costs that exceed what the TIA will cover. Then the landlord will pay the contractors and all other vendors directly for all construction costs.

 In most cases with smaller office space (less than 10,000 sf) if the landlord has a construction manager they will want to hire the contractors and oversee the process. This is because they know the building well, have experience with office space build-outs, and have relationships with a lot of different contractors which they can leverage to keep costs to a minimum. When a landlord manages the construction process it’s known as a “Turnkey Build-out”.

Having the landlord manage this saves you time however their interests may not line up with yours. They may not seek as many competitive bids or have any incentive to cut costs, and if you make changes after the architectural plans have been approved you will be charged change order fees.  Also, if the construction costs end up being less than the TIA you will not receive the difference. For example if the TIA was $25 sf and the construction costs ended up being $20 sf you will lose the $5 sf.

If the landlord insists on managing the construction process then make sure to request that you have the ability to be a part of the general contractor approval process and that you are given a detailed work letter that outlines the construction process from beginning to end.

Tenant Controlled

The time frame of payment of the TIA is determined during lease contract negotiations. It will either be paid out after the construction has been completed and landlord receives all the receipts, OR be paid in cash at lease signing. You could also negotiate to have it paid a progress payments as work is completed.

For larger spaces you or a project manager you hire would want to manage the construction process. This will give you more control over the costs, timing, and details of the project. In addition you have the power to select the contractor that you want.

What is the Average Tenant Improvement Allowance?

The tenant improvement allowance you receive will depend on a number of factors such as the market, lease term, your credit, type of space, etc. In general if the space is brand new (aka in shell condition) Landlords might offer $25 to $40 sf. If the space is 2nd generation (has been leased occupied before) landlords may offer $20 or less. 

At the end of the day it’s important for the tenant to have a general idea of how much the construction will cost. During the negotiating process it would be a good idea to get at least 1 or 2 preliminary construction bids. You don’t want to accept a tenant improvement allowance of $15 only to find out that the total costs will be $25 sf.

If you are not able to negotiate enough tenant improvement allowance to cover the total costs then you could ask for additional tenant improvement allowance to be amortized.

How Do you Calculate the TI Allowance?

The tenant improvement allowance is typically given based on the rental square feet (RSF) of the commercial space. To calculate the Tenant improvement allowance simply multiply the RSF by the TI allowance you have negotiated.

For example if the square footage is 5,000 RSF and the tenant improvement allowance is $20 RSF. 5,000 x $20 = $100,000

What Does it Cover?

The tenant improvement allowance typically covers architectural, engineering and space planning fees as well as the total hard construction costs. In addition, if negotiated such allowance may be used at Tenant’s option for the cost of consultants, legal fees,
moving expenses, equipment, fixtures, furniture and/or signage.

Tenant Improvement Allowance Must Be Negotiated

Again the tenant improvement allowance is a negotiated amount that the landlord will spend to customize the space to your particular needs and is typically quoted in dollars per square feet.  They won’t always agree to pay for 100% of your ideal layout….especially if you are asking for hardwood floors, granite countertops, and other above standard finishes. Again landlords won’t just give you a tenant improvement allowance. You must know the market and negotiate well.

When evaluating spaces make sure to take note of your needs such as the ideal # of offices, break area, conference rooms, etc.  If you need a more customized layout make sure you ask for it before signing a commercial lease.  You want to compare how much allowance each landlord is willing to give.  Ideally you want them to pay for 100% of your build-out costs, however it all depends on your credit, length of lease term, the rental rate, and on whether it’s a tenant or landlord market.

Who Gets To Keep the Improvements?

The landlord is giving you a tenant allowance in return for your tenancy, and you may end up spending additional money out of your own pocket above and beyond the TIA however all the leasehold improvements will convey with the landlord. Tenant improvements-allowance.

Example of TIA in Commercial Lease Agreement

Construction Allowance.

Provided Tenant is not in default on the lease contract, Landlord agrees to give up to $300,680.00 (the “Construction Allowance”) to the cost of Landlord’s Work. Any costs of finishing Landlord’s Work above the Construction Allowance shall be Excess Costs (as defined below). Tenant shall pay Landlord a construction management fee equal to 4% of the cost of Landlord’s Work to compensate for its construction management services in connection with Landlord’s Work. Landlord shall deduct such fee from the Construction Allowance. The Construction Allowance is available for Tenant’s use from the date of this Lease through the last day of the twelfth (12th) full calendar month following the Commencement Date, after which Tenants right to same will expire and be of no further force and effect.

1.3 Additional Allowance. If the total construction costs exceed the Construction Allowance, Tenant may, before Landlord’s Work has been completed, ask that the Landlord increase the Construction Allowance by the amount of the excess, up to $60,420.00 (the actual amount of the increase being the “Additional Allowance”). If Tenant asks for the increase in the Construction Allowance, then Landlord shall raise the Construction Allowance by the amount of the Additional Allowance. Landlord shall prepare, and Landlord and Tenant shall promptly execute an amendment to the Lease increasing the Base Rent by the amount needed to amortize the Additional Allowance over the Lease Term at 9% per annum, with the increased payments starting with the first Base Rent payment due under this Lease.

Can You Renegotiate a Commercial Lease?

Renegotiating a commercial lease is possible if your business or the market changes and you are unsatisfied with your current situation. There are no guarantees that the landlord will agree to your requests however you will never know if you don’t ask.

Business climates and markets can change which at some time or another will require you to make some changes to what you are doing. You have many things to consider and one of those could be making changes to your commercial lease. You might be in a situation where you need to try and renegotiate a commercial lease with your landlord. For example:

• Business not doing well and having a hard time paying rent
• Need to expand however your existing building does not have anymore space available
• Lost a big client and need to reduce the size of your space
• Market conditions dictating better lease terms

It doesn’t matter if you are only in year 1 or 3 of a 5 year lease, contracts can be renegotiated, however knowing how to renegotiate a commercial lease is key to your success.

How to Renegotiate a Commercial Lease

1. Start the process sooner than later – The more time you have to the better. Commercial lease negotiates take longer than you think. 
2. Get some help – Consider hiring a commercial real estate attorney and commercial real estate agent to assist you. They know the laws and the current market conditions and will be able to consult you on your options.
3. Get educated – Get up to speed on market conditions and read your commercial lease contract thoroughly. It’s important that you understand how to interpret the lease. Your agent will be able to get you up to speed on the market.
4. Schedule a meeting with the landlord – When trying to renegotiate a commercial real estate lease it’s better to do it in person. If the landlord sees that you are sincere and being proactive you will have a better chance.
5. Be prepared to trade concessions – Landlords are not going to just give you everything you want. They will typically want something in return. For example if you want more tenant improvement allowance you may have to commit to more lease term. Or if you want to get out of your lease they may require you to pay some money upfront.
6. Communicate with the property manager – Just like with the landlord you want to have a personal relationship with them. They will have more incentive to work with you if they like you.

If you have any questions or need help renegotiating a commercial lease in Austin Tx give us a call.

 

 

What is Rent Abatement in Commercial Leases & How To Get It?

Rent abatement in a commercial lease means that the tenant does NOT have to pay rent for a certain time period during one of the following scenarios:

1. During the initial tenant improvements,
2. As a concession in lieu of a reduced rental rate,
3. Or when the tenant is not able to occupy the space because major property repairs are needed.

Rent abatement is a negotiable item in a commercial lease that must not be overlooked. To ensure that you negotiate rent abatement effectively it’s important that you consult with a real estate attorney and your commercial real estate agent because once the terms are finalized the clauses will be outlined in the lease contract and set in stone. Whatever happens after that will all be handled according to how the language is set forth in the contract.

Rent Abatement During Initial Tenant Improvements

Sometimes when you lease commercial real estate (e.g. retail space) the space is either in shell condition (brand new) or is 2nd generation space that needs a lot reconfiguration and improvements. Depending on the size of space, existing condition, and if a construction permit is required it could take anywhere from a few weeks to 6-9 months for any improvements to be completed.

It would not make sense to pay rent during the construction period so it’s important that you negotiate to have rental payments not start until substantial completion of all the tenant improvements.

Rent Abatement as a Concession

When negotiating commercial leases you ask for all kinds of concessions such as tenant improvement allowance, lower rate, expansion options, etc. Rent abatement (aka Free Rent) is also something that you can negotiate for. Investors that own buildings can have different investment objectives. Some prefer to cash flow a property and more likely to offer a lower rate. Others maybe trying to sell or refinance the building and more likely to offer free rent instead of a lower rate. You see the rents the landlords collects on a commercial property dictate the market value. The lower the rates the lower the potential value. It’s important to understand the investment objective of each building owner. 

Anytime you can negotiate to get rent abatement in addition to a tenant improvement allowance and other concessions you will be better off in the long run.

What happens if you get abated rent and default on the lease?

Getting rent abatement can help you lower your overall monthly rent costs or help you pay for tenant improvements that are above and beyond what the landlord is willing to give an allowance for. However keep in mind in most cases if you default or don’t fulfill the entire lease term you will be required to pay back all or a portion of any free rent given. This is also known as a clawback provision. During negotiations if a landlord is going to demand a clawback in the event you default or break the lease try to negotiate to where you only pay for unamortized free rent. For example if you were given $12,000 in rent abatement and the lease term was 3 years it would be amortized over 36 months ($4,000 per year or $333 per month). If you broke the lease after the 12th month you would have to pay back the rent abatement for the remaining 24 months or $8,000……..which is the unamortized portion.

Rent abatement on the base rent and nnn or just the base rent?

Rent abatement is negotiable. If the landlord agrees to it they would rather just give you free base rent and you pay the operating expenses (taxes, insurance, maintenance). That way they are at least covering their operating costs.

As a tenant you would rather receive free gross rent (not pay base rent or the operating expenses). Do your best to negotiate this. In the end free base rent is better than nothing.

Rent Abatement Due to Commercial Space Being Untenantable

In most commercial leases there is a Casualty clause (like in the example below) that talks about rent abatement in the event the tenant is not able to occupy or access a space because of fire or other casualty. It could be a partial rent abatement or full abatement depending on the scope of damage and what portion of the space the tenant has access to.  Potential scenarios could be fire or flooding, natural disasters such as earthquakes, tornadoes, and hurricanes, or condemnation by the city or government.

Rationale Behind Rent Abatement

Commercial property owners typically have business liability insurance on their building. The insurance would cover any damages to the property in addition to the abatement of rent. Personal property of a tenant that is damaged would be covered by the tenant’s own insurance. It’s a good idea for the tenant to have business interruption insurance as well to cover any potential financial losses. Since both parties have insurance – the tenant on personal property and the landlord on the property – the abatement puts the lease contract between landlord and tenant on hold until the property can be occupied again.

How Long Does the Abatement of Rent Continue?

The abatement last from the date of the casualty until the date the landlord has substantially completed the repairs and restoration. Rather than just let tenants out of a commercial lease when a casualty occurs Landlords want the ability to try to cure the defects first within a certain time period (which is negotiated). The restoration could take weeks or months however at some point if the insurance company or contractors determine that the repairs will take longer than the negotiated time frame then the tenant or landlord could terminate the lease.

Tenants Must Negotiate to Not Let Rent Abatement Be Nullified

Tenants need to negotiate to require that no matter who caused the casualty the abatement provision will still exist. For example some landlords have language in the lease that says if the tenant or tenants employee causes the casualty then the abatement clause is nullified and the tenant must continue paying rent while repairs and restoration is being conducted.

Commercial rent is income for a landlord which is paid for by tenants. Part of the rent a tenant pays includes the building insurance coverage. If the abatement clause is nullified then the landlord is able to double dip by getting rent from the tenant and file the claim with their insurance company.

Sample Rent Abatement Clause in Commercial Lease

To see an example of a rent abatement clause in a commercial real estate lease or if you are looking for commercial space for rent in Austin Tx feel free to give us a call at 512-861-0525

 

Before Leasing Retail Space Try These Alternatives First

Leasing retail space is expensive so before rushing out to sign a commercial lease it’s important that you prove that your products will sell. This applies to anyone wanting to open a retail business including health spas, restaurants, hair salons or any store that sells merchandise. 

Do people want to buy your products at a price that you can profit from? If you don’t know you need to determine if their is an active market before doing anything.

Ways to Sell Products Without Leasing Retail Space

1. Flea Markets

Consider renting a booth at a local flea market. There are a great way to test the market with your products. You can rent on a daily or weekly basis. You can find flea markets that are outdoors, indoors, upscale, or downscale. Just ask a lot of questions about each one and what type of customers typically visit each. Then pick the one that more closely relates to your target audience

2. Sell Retail Products Online

Amazon is huge right now. Looking into selling on Amazon whether you ship or if you use FBA. You can also test the marketability of your products on Ebay and Craigslist.

3. Wholesale Products to Local Retailers

Talk to existing retail shops who sell products that could potentially compliment yours. Do your homework to determine which ones sell to your target customer. Try to make distribution deals with these existing retailers. This might require that you discount your products and potentially not make much or any profit however it will help you figure out which of your products will sell………..and…………..at what price.

4. Home & Office Product Parties

Talk to a bunch of women and find out what types of products similar to yours that that interest them. Then organize small parties or meetups for groups of women who are interested in buying your type of products. You could also invite a few other retailers. This would be a low pressure atmosphere.

5. Restaurant Retailing

Visit a few restaurants and ask them if they would let you model your accessories. You could go from table to table showing off your products. Offer to give the restaurants commissions on any sales generated.

Benefits of Selling Products Before Leasing Retail Space

If you are able to try selling your products at different venues you will gain a lot of valuable information about your target audience and how to position your product to sell the best. Below are a few benefits:

1. You find out which products will sell
2. You discover the best selling environment for each product
3. You determine the best price at which your products will sell
4. You learn how to sell your products. Which sales approach works best for the type of customer that you want to attract
5. You will generate cash to run your business
6. You will know what products to stock in your store and how to price and package them
7. You will know where products sell the best
8. Gives you the opportunity to fine tune your products.

By not leasing retail space and first testing your ideas and sales via person to person, home based parties, etc if gives you the opportunity to fine tune your products and marketing. Once you determine that your products will sell at a price that you can profit from then you are ready to find and lease retail space. If you need help finding Austin retail space for lease give us a call at (512) 861-0525

515 Congress Ave Austin Tx 78701 – Bank of America Center

The Bank of America Center is a class A office building located in the heart of downtown Austin at 515 Congress Ave Austin Tx 78701. If you want to be at the center of it all, and within walking distance of the Warehouse & 6th street entertainment districts, the Texas State Capital, Austin Convention Center, and Lady Bird Lake this is the perfect class A office building for you.

If you are interested in leasing downtown Austin office space and would like help finding the options that best suit your needs call (512) 861-0525.

Building Size – 263,058 SF

Building Height – 26 Floors

Typical Floor Plate – 14,000 SF

Parking – Building has a parking garage with 340 spaces. Parking ratio of 1 per 770 sf at $195 per space per month. 

Access – 7:00 a.m. – 7:00 p.m Monday thru Friday. 8:00 a.m. – 1:00 p.m. Saturday

Security – Landlord provides on-site 24 hour access control (both manned and card key), 7 days per week. Card key access is required after hours for entrance and exit doors, & the elevators.

Amenities – Bike storage room, Jimmy John’s Deli, Coffee bar, Cava Grill. Also a 4,300 sf for profit fitness center with showers and locker rooms in lower level of project.

Asking Base Rental Rate – $39 (as of 1/1/2019)

Estimated Operating Expenses – $23.31 (as of 1/1/2019)

For information about available space at 515 Congress Avenue or other class A office buildings in downtown Austin give us a call. We will help you find great space and negotiate the best deal possible.

Event Transcript: Refugee Policy in the 21st Century

In September 2018, the Niskanen Center hosted two panels exploring refugee policy in the 21st century featuring leaders from academia, government, think tanks, and refugee resettlement organizations. The first panel explored the strategic and national security case in favor of refugee resettlement, and the second examined how the U.S. can harness private sector support to improve refugee resettlement outcomes.

The event was co-sponsored by the National Immigration Forum, the International Refugee Assistance Project (IRAP), Human Rights First, and the United States Conference of Catholic Bishops.

C-SPAN coverage is available for the first panel and for the second panel; the transcript is also available for the first panel and second panel. The links below provide highlights from both panels.

Panel I: The Strategic Case for Refugee Resettlement 

• Idean Salehyan outlines the strategic case for refugee resettlement.
• Idean Salehyan contextualizes the security risks of refugees.
• Idean Salehyan explains the refugee resettlement procedure.
• Idean Salehyan speaks about the skills that refugees bring to America.
• Idean Salehyan explains the history of bipartisan support for refugees
• Linda Chavez explains how refugee resettlement is important to the idea of being an American.
• Linda Chavez discusses “I came to America as a refugee.”
• Linda Chavez compares American and European refugee integration.
• Linda Chavez explains how fears about assimilation are not new, but unwarranted.
• Scott Cooper explains how refugee resettlement furthers a valuable national narrative.
• Scott Cooper explains how refugee resettlement is crucial for maintaining regional stability and maintaining important alliances.

Panel II: Community Involvement in Accepting Refugees

• Jennifer Bond outlines the general success of private resettlement in Canada.
• Jennifer Bond explains why communities need to lead the resettlement process.
• Jennifer Bond talks about the value of community sponsorship in expanding overall support for refugees.
• Chris Gersten explains how the refugee program is essential for American moral leadership.
• Chris Gersten recommends that governments partner with sponsorship groups.
• Chris Gersten defends the refugee program.
• Chris George outlines the growth of IRIS and community based sponsorship in Connecticut.
• Chris George explains why community based sponsorship delivers better results than traditional resettlement methods.
• Chris George highlights the growing interest of the American people in resettlement.

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from nicholemhearn digest https://niskanencenter.org/blog/event-transcript-refugee-policy-in-the-21st-century/

Niskanen Center Releases New Policy Vision Paper

Today we are excited to release a new paper that provides a detailed overview of the Niskanen Center’s distinctive policy vision. Entitled “The Center Can Hold: Public Policy for an Age of Extremes,” the paper was coauthored by Niskanen scholars Brink Lindsey, Steven Teles, Will Wilkinson, and Samuel Hammond. You can find it here. 

In the paper, we argue that American liberal democracy is currently experiencing a crisis of legitimacy. That crisis began with Donald Trump’s victory in the Republican primary and was underscored by his improbable elevation to the presidency: Neither of these events could have occurred in a healthy, stable, well-governed polity.

We contend that new governing approaches are needed to resolve the crisis:

There is only one sure way to quiet our populist distempers and restore faith in democratic institutions, and that is for those democratic institutions to deliver effective governance. The failures of governance are what got us into this mess; public confidence in government will return only when government demonstrates through successful problem-solving that such confidence is merited.

Success in this effort will require not just new policies, but a whole new way of thinking about policy. The center can hold, but first it must be fortified with new convictions. There are, to be sure, many reasons why our political system has failed to address the mounting problems and dissatisfactions of the 21st century. But one crucially important and widely neglected factor is that the two prevailing ideological lenses, on the left and right, have gaping blind spots that render the most promising path forward invisible.

On economic policy issues, the traditional axis of conflict is “pro-government” on the left and “pro-market” on the right. Overcoming our present malaise, however, will require bold moves in both directions simultaneously. We need both greater reliance on market competition and expanded, more robust, and better-crafted social insurance. We need more government activism to enhance opportunity, and less corrupt and more law-like governance. To clearly see these needs and how best to answer them, it is necessary to use a new ideological lens: one that sees government and market not as either-or antagonists, but as necessary complements.

Rejecting today’s ideological polarization over the size of government as a false dichotomy, our hybrid vision combines the best aspects of the “pro-market” right and the “pro-government” left:

Another way to put the same point is to say that we reject both market fundamentalism on the right and democratic fundamentalism on the left. In other words, we don’t believe that either a well-functioning market economy or a well-functioning representative democracy is self-creating, self-executing, or self-sustaining. Market fundamentalists are prone to arguing that all you need to get markets up and running is to get government out of the way—in other words, the less government, the better. Democratic fundamentalists make the mirror-image mistake, arguing that all you need to get democracy to work better is to grant government more powers—that is, to shift more and more decision-making from private actors to officials of a democratically elected government. We, by contrast, believe that the functioning of both markets and democracy depends on how they are structured: the right structures produce good results, while the wrong structures can cause disaster.

To restore flagging economic dynamism, we advocate far-reaching regulatory reforms to unwind distorted rules that favor privileged insiders at the expense of everyone else:

Regulatory capture is broadly defined as insider domination of the policymaking process resulting in regulation for the benefit of the industry rather than the public. This dynamic has led to badly distorted policies that throttle innovation and growth even as they redistribute income and wealth to a favored elite at the top of the socioeconomic scale. The result is massive misallocations of resources ranging from the financial sector to health care to where Americans live and work, and a corresponding diminution of economic dynamism and opportunity.

At the same time, however, we need to bolster programs of social insurance to address dislocations caused by creative destruction and maintain political support for robust market competition:

It’s worth reminding ourselves what is at stake in this discussion. In the face of inevitable shocks caused by creative destruction, political systems can be fundamentally destabilized in the absence of effective systems of social insurance. The contemporary rise in anti-market populism in the United States is a clear case in point….

Preparing for the next economic shock, be it from trade, a recession, or rapid technological change, calls for major enhancements to our unemployment and income security systems, up to and including a dedicated federal funding stream for subsidized employment programs.

Without strong income supports that put a floor beneath displaced workers and systems that smooth the transition to new employment, political actors and the public tend to turn against the process of creative destruction itself. Put differently, a lack of social protection begets protectionism, as the quite reasonable demand for economic security is instead translated into popular support for trade barriers, inflexible labor regulations, industry bailouts, and precautionary impediments to new technologies, all of which conspire to further undermine economic security over time through sclerosis and stagnation. This is why countries with some of the largest welfare states also have some of the most dynamic private-enterprise systems, and vice versa. By filling in for missing insurance markets, a robust welfare state works hand-in-hand with flexible market processes to produce broad-based prosperity.

Our policy vision represents a sharp break from the prevailing orthodoxies of left and right, and is therefore hard to pin down with a handy, reductive label. Although we make the case for bold reforms, we believe the essential spirit of our project is one of moderation:

The goal of the moderate is not to achieve perfection according to a single, unbending standard, but to strike a rough and workable balance among a variety of valid yet competing and perhaps unreconcilable objectives. In these disordered times, restoring balance will require major policy changes, and we do not shrink from the challenge. Yet our goal is not to make the world conform to some abstract, rationalistic schema. Rather, it is to work successfully and effectively within the world as it actually is, with all its messiness and confusion.

In the spirit of moderation, we have attempted to learn from and incorporate what is best in competing ideological traditions. We hope that the new synthesis we offer can help move our divided society toward the best version of itself and away from the toxic tribalism that afflicts us today.

Read our entire policy vision here.

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from nicholemhearn digest https://niskanencenter.org/blog/niskanen-center-releases-new-policy-vision-paper/

COMMENTS SUBMITTED TO DHS ON PUBLIC CHARGE

On October 10, 2018, the Department of Homeland Security (DHS) issued a notice in the Federal Register (83 Fed. Reg. 51114) proposing to prescribe how it determines whether an alien is inadmissible to the United States under section 212(a)(4) of the Immigration and Nationality Act (INA) because he or she is likely at any time to become a public charge and requested comments on or by December 10, 2018.

The ultimate totality of the circumstances determination must be designed to keep the rate of false positives less than half the total rate of positives, but does not have to be designed so as to minimize the rate of false negatives. This will decidedly impact how strong different kinds of evidence are for inference about the likelihood of any given alien becoming a public charge, as well as the appropriate levels for various thresholds.

To ensure consistency, objectivity, and more accurate determinations that are consistent with the criteria established in the INA, DHS should provide guidance on how a totality of the circumstances likelihood determination should be reached using evidence-based methods, namely using a base rate as a prior probability which can be updated based on the evidence about a given alien. Starting from the “inside view” of the evidence about a given alien rather than the “outside view” of base rates about the reference class of all aliens would likely lead DHS to significantly more false positive determinations.

DHS should estimate a base rates—both before the rule takes effect and again after a sufficiently long interval to account for disenrollment—for the proportion of aliens non-exempt from public charge inadmissibility who would be considered public charges. This base rate should then be considered the prior probability that an alien is likely to become a public charge. DHS should also estimate average levels of receipts, durations, and other kinds of evidence in the totality of the circumstances so that officials may compare any given alien’s evidence to average levels and make appropriate updates in the right direction.

Full comment available here.

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Video: Ed Dolan Debates Job Guarantees at Brookings

Last Thursday, Niskanen Center senior fellow Ed Dolan debated the feasibility of a federal job guarantee on a panel for the Brookings Institution’s Hamilton Project, titled “Identifying Key Considerations for Shaping Effective Employment Support Proposals.” A time-stamped link to the discussion is available here (59:40).

Ed, who wrote on the topic of job guarantees and employment supports for the Niskanen Center here, brought his usual charm and clarity to the discussion, highlighting the lack of intellectual rigor among many proponents of job guarantees, and the need for thinking through employment support policies in the context of a broader understanding of the labor market.

 

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Our Lost Vocabulary of Social Insurance

Social insurance programs are at the center of American politics. In fiscal terms, Medicare and the Social Security Administration’s programs for retirement, disability, worker’s compensation, and worker’s life insurance amount to roughly 41 percent of the federal budget. This fiscal centrality, however, does not rest on anything like a broader, public understanding of what makes social insurance social — and thus why such programs are so important in American political life. On the contrary, over the years our vocabulary of social insurance has become increasingly replaced with a vocabulary of welfare and redistribution, creating a fundamentally misleading impression about most of what the federal government does.

In the mid-1930s, when the retirement and survivors insurance programs had their legislative start, university-educated Americans had every reason to be clear about what distinguished social insurance from its commercial counterpart. Indeed, most undergraduate programs in the social sciences took up social insurance’s rationale and history. But note the data measuring the historical use of the expression in three of America’s most important daily newspapers. The changes recorded are startling. By the end of the 20th century, the category of social insurance had seemingly lost its place in the vocabulary of American politics.

This is particularly unsettling because of the enormous importance of social insurance programs in American history. The Great Depression, which wiped out the savings of most American families, caused multiple bank failures, and saw an unemployment rate of some 25 percent, prompted demands for substantially increased government protection against economic disaster. “Welfare” was the term used for programs that made poverty status the precondition for financial aid, and President Roosevelt acknowledged that immediate aid to poor families was required. But his case for increasing the footprint of American social policy was based on the principles of social insurance, not merely poor-relief narrowly construed.

By the 1970s, social insurance programs had become major components of the federal government, but also the targets of ideological and budgetary attack. Social Security retirement, Medicare, disability, and unemployment insurance were increasingly labeled as simply “entitlements,” and charged with contributing to out of control spending via unaffordable benefits. This allowed critics to advocate for a much smaller social policy commitment, urging a less costly “safety net” for the deserving among America’s poor citizens. The semantic bait-and-switch can be seen with Google’s Ngram viewer, which tracks word frequencies across the American English corpus.

Yet the principles and judgments incorporated in the concept of social insurance remain central to the major policy debates of our time, most dramatically in the debates over health care reform and the affordability of Social Security retirement benefits. They are relevant to the backlash against the Affordable Care Act and to the debate, rekindled recently, between the advocates of “Medicare for All” and advocates of Medicaid expansion as the next step toward universal health coverage. More generally, they are crucial to addressing the broader conservative critique of government’s role in American social policy.

So, What is Social about Social Insurance?

Social insurance, like commercial insurance, is about protection against financial risk. It is “insurance” in the sense that people contribute to a fund to protect themselves against unpredictable financial risks. These include outliving one’s savings in old age, the early death of a breadwinner, the onset of a disability that makes work difficult if not impossible, the high costs of acute illness, involuntary unemployment, and work-related injury. Yet unlike with commercial insurance, contributions are not prices in a market and thus do not depend on the contributor’s risk profile (unless commercial regulations say otherwise, in essence creating “social” insurance through the backdoor). Instead of a contract between an enrollee and an insurer, social insurance is a system of shared protection among the insured, most comparable to mutual insurance in the commercial realm, with contributions made in proportion to one’s market income. In social insurance, the “insurer”—whether a government agency or a corporate body with a joint labor-management board—is the agent of the contributing enrollees. And unlike commercial insurance, the social insurance “contract” mandates participation by law, since otherwise adverse selection would cause its unraveling.

Social insurance spreads the costs of coverage according to a different logic than that of commercial insurers. The same risk in commercial insurance carries the same premium price. The greater the risk, the higher the price of coverage. Social insurance, by contrast, operates on the premise that contributions are calculated according to one’s income and benefits according to one’s needs. But the central political feature of social insurance is that the contributors are also beneficiaries. This is not the case with social assistance programs with means-tested eligibility standards. As important as such programs are for those who experience poverty, taxpayers do not in general identify with welfare beneficiaries.

How much difference does it make that most contemporary reporting on social insurance programs, and much social science scholarship, ignores their conceptual underpinning and distinctive operational features? Should popular voices in American social policy be criticized for using proper names to describe programs without explaining their distinctiveness from means-tested welfare programs? I would not be writing this essay if I did not believe, as one of three co-authors, that the title of our 2014 book — Social Insurance: America’s Neglected Heritage and Contested Future — identified an important problem.

“Entitlement”-talk

Words make a difference to all thinking about public policy, but this is especially the case where conflicts are over fundamental values. Consider, for example, the common use of “safety net” as a collective description of programs as diverse as Medicare and Medicaid, old age Social Security, food stamps, disability insurance, and homeless shelters. This expression collapses the distinction between means-tested welfare and social insurance programs into a metaphor suggesting that recipients have to “fall” into poverty to warrant help. This is the opposite of social insurance, which represents a platform on which one can stand before economic risks arise. The term “safety net” is even more ambiguous, particularly when modified by terms like high or low, porous or tightly knit, threadbare or generous, or applied in situations when one’s financial resources are largely “spent.”

The use of public finance terms like “income transfers” further blurs the differences between cash benefits that one receives only after income and asset tests are applied and insurance payments that kick in without such tests. Then there is the term “entitlement,” which was meant to refer to the nondiscretionary nature of the spending, but now connotes an adolescent sense of entitlement among the beneficiaries. Neither term helps us understand the robust public approval of our major social insurance programs, and indeed, are often employed by opponents of social insurance in order to obfuscate an otherwise popular concept.

The negative connotation of “entitlements” is especially misleading. When one legitimately claims some social insurance benefit, the implication is that there is a corresponding duty to provide that benefit. That is the basis of the common sentiment among recipients of retirement income Social Security that they have earned their pensions. That widely shared sentiment largely explains the political fear that any substantial reduction in those benefits is a “third rail.” Few if any critics of the program criticize the appropriateness — or desirability — of OASI, the old age retirement and survivors insurance programs, on its own terms. Instead, they concentrate on claims that the programs are unaffordable. As a result, a large proportion of the public fears for their future despite the obvious political vulnerability of such critiques.

Understood as a technical budgetary category, entitlements in American fiscal policy are simply those programs whose benefits and beneficiaries cannot be adjusted without statutory changes. Administrations cannot simply reduce a program’s benefits or change its eligibility rules on their own. That entails constraints on administrative flexibility, reflecting the idea of stable governmental commitment to social insurance protections over long periods.

Using the entitlement category in two senses is confusing and in that respect harmful. What citizens believe about the appropriateness of a program is a distinct concept from the budgetary rules about changing its provisions. Both are important, but when was the last time you, the reader, saw this distinction explained when the entitlement term was used? Instead, “entitlement” is used like a four-letter word in diatribes about the supposedly troubled future of social insurance programs.

“Solvency”-talk

Still another source of linguistic confusion is what I will call solvency talk. When policy discussion turns to the fiscal projections of social insurance programs, critics and defenders alike turn to the trust fund. If the old-age retirement actuaries forecast a revenue projection of X in 25 years and the projected outlays of Y equal more than X, the “trust fund” is, according to this logic, in trouble. It will no longer have enough to meet its “bills” at that date. And if that shortfall were to continue, the necessary result would, in this framing, be insolvency, even though few policy experts seriously doubt the sustainability of programs like Social Security given fairly modest reforms, nor the political catastrophe of allowing the trust fund to run dry. In this sense, solvency talk is a lot like the threat of government shutdown created by the Federal debt ceiling — a crisis manufactured from the intransigence of elements on both sides of the aisle rather than anything fundamental.

Reflect for a moment about budget forecasts of Department of Defense outlays. Nobody writes about the military department going “broke” or becoming “insolvent” no matter how fast the growth in the budget. Indeed, no sensible analyst would make 20, 30, or 40-year forecasts for defense expenditures. Some analysts, in discussions of the future of Social Security make conditional forecasts long into the future. These are said to be useful exercises, reminding the public that commitments now have long-term effects. But the very preoccupation with solvency generates unnecessary anxiety. Since DOD does not have a “trust fund” budgetary categorization, its future outlays are presumed to be ones over which future governments have some control.

The same legal control is available to the Social Security Administration and the Congress. The confusion is even worse in programs that combined different funding mechanisms. For instance, funding for Part A of Medicare comes from the social health insurance trust fund (HI) while Part B is funded from general revenues and beneficiary premiums; it cannot go broke, but it can be reduced. That prompts solvency talk about Medicare’s future without clarification of how the program differs in two of its component parts.

The background of most solvency questions is the widely reported growth of the future retiree population. The Census Bureau projects that the over-65 population will soon make up 20 percent of the population. Such projections, unaccompanied by estimates of what increases in funding social insurance programs will require, prompt concern. Dire predictions of “insolvency” or cuts in retirement benefits get reported in the media without much scrutiny. As a public speaker, I face such questions regularly. I urge my questioners to dwell for a moment on how a growing proportion of senior citizens can be politically compatible with large reductions in future Social Security benefits. Put another way, how could the “sacred cow” of Social Security — in the language of its critics — face such a fate under conditions that, if anything, only cement its political sanctity?

There is another irony here that warrants discussion. The original use of trust fund language in social insurance had more to do with trust than with funds. President Roosevelt rightly felt in the 1930s that the contributory ethos of social insurance would come to be central to its secure political status. A population believing that each contributing worker had earned their social insurance benefit would not tolerate substantial budgetary cutbacks. The idea of a trust fund, then, was to emphasize the special status of a program whose benefits would be decades after a contributor’s payments. Its design is to enforce time-consistency, and its language is meant to highlight reliability. Yet sadly this language has since been turned upside down, bringing needless fear of “running out” of funds and thus uncertainty about the future. Roosevelt’s protective rhetoric backfired as the original understandings of social insurance weakened, even while the popularity of the programs remained substantial.

Social Insurance, Our Neglected Heritage

There are at least two plausible criticisms of this essay’s argument about the importance of relearning the appeal of social insurance principles. One is that the world has changed dramatically since the birth of social insurance in the late 19th century, let alone since the 1934-35 Committee on Economic Security provided a blueprint for expanding social insurance in American public life. The other is that changes in long-standing European social insurance programs show that major adjustments in the American programs are required as well.

The claim that the world has changed does not necessarily mean that the economic risks against which social insurance programs offer protection have been fundamentally altered. Consider every one of the risks noted in this essay — outliving one’s savings, involuntary unemployment, medical costs, and disability. Not one has disappeared, and social insurance programs for each have been implemented in wealthy democracies. I doubt, in other words, whether social insurance is in any conceptual trouble.

But that does not mean social insurance programs don’t need to adapt to contemporary circumstances. The spread of contract employment has been particularly challenging for European countries where social insurance is a function of trade unions and other sector-level organizations. It is equally obvious in the US that employer-provided health insurance puts a damper on labor market flexibility. Reduced employment in regular jobs with health coverage will demand the search for other sources of provision. These and other realities of our changing economy will only bring to the fore the central claim of this essay: Social insurance programs dominate American social policy but what that means for our politics is too little understood or explained. And that criticism extends not only to harried reporters but to a significant amount of the public policy community, as well.

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Theodore (Ted) Marmor is a Niskanen Center adjunct fellow and Professor Emeritus at The Yale School of Management.

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Does Anyone Speak for the Poor in Congress?

Studies: “Poor Representation” and “Putting Inequality in Context”
Interviews: Kris Miler, University of Maryland; Christopher Ellis, Bucknell University

The rich have more tools to influence politics and policy than the rest of Americans, but what about the poorest citizens? In an age of increasing economic inequality, who, if anyone, represents their views and their interests in Congress? Kris Miler finds that Members of Congress in high poverty districts are not the champions of the poor. Instead, Democratic women and minorities from urban districts tend to introduce bills about poverty but have trouble getting them passed, leaving the poor without effective representation even in times of rising poverty. Christopher Ellis finds that Members of Congress are usually more responsive to the opinions of the rich than the poor in their districts, but moderates and Democrats in competitive districts with unions do represent the opinions of the poor. Low-income constituents are only sometimes visible and have a hard time holding their representatives accountable.

Transcript

Check back on 12.6.18 for the full transcript of this episode.

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