Voice For Liberty

Tag: Capitalism

  • Pickens: It’s all about me, and MSNBC doesn’t notice

    Appearing on the MSNBC morning program Morning Joe, energy investor T. Boone Pickens let us know that despite his no-nonsense business-like approach to supporting what he believes to be in America’s best interests, it’s really all about him and what profits him. But program hosts Joe Scarborough and Mika Brzezinski didn’t catch that.

    Pickens appeared on the program to gain support for legislation he is seeking to pass through Congress. His bill is H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011, commonly referred to as the NAT GAS act. The bill would provide payments in the form of tax credits to encourage the use of natural gas as a transportation fuel.

    Host Scarborough said “It makes so much sense.” At the end of the segment, Brzezinski pleaded “Do us a favor. Please don’t give up.”

    Never once did either host bring up the facts that Daniel Indiviglio cites in his coverage for The Atlantic. Mike Barnicle was on the show but wasn’t helpful in this regard, either.

    The problem is this, according to Indiviglio: “At no point during the nine-minute interview on MSNBC did Pickens mention that he stands to make a significant financial gain if the bill he’s promoting succeeds and natural gas usage expands.”

    Pickens knows how to present his case in the best possible light, picking and choosing which fact to present, and which to stretch or ignore. He criticizes Koch Industries for its opposition to the bill. Koch has explained its opposition to subsidies for natural gas as a transportation fuel, just as it opposes all subsidies. In a statement on its Viewpoint website, Dr. Richard Fink, Executive Vice President of Koch Industries, explained the harm of government intervention, writing “Koch has consistently opposed subsidies that distort markets. We maintain that the marketplace, while not perfect, is the best mechanism for allocating resources to consumers. People deciding what fuels to purchase, instead of the government, is best for consumers and our country. Likewise, if natural gas vehicles are truly advantageous and economically efficient, then consumers will demand that they be developed without political mandates that exhaust more taxpayer dollars.”

    Pickens went on to criticize Koch for accepting subsides for ethanol production. Koch Industries, as a refiner of oil, blends ethanol with gasoline it produces in order to meet federal mandates on ethanol usage. Even though Koch opposes subsidies for ethanol, Koch accepts the subsidies. A company newsletter explains: “Once a law is enacted, we are not going to place our company and our employees at a competitive disadvantage by not participating in programs that are available to our competitors.”

    So the criticism of Koch by Pickens is unfounded. Now I wouldn’t really expect the program hosts to be aware of this, but they must have been aware that Pickens will profit, probably handsomely, if the NAT GAS act passes.

    In his coverage Indiviglio writes: “Essentially, Pickens criticizes Koch for preferring government subsidies to benefit Koch Industries. But is Pickens’ motivation for natural gas subsidies really any different?”

    It is different in an important way. Koch, as explained above, participates in a subsidy program that is available to all similarly situated companies. At the same time the company calls for its end for reasons of principle that the company and its owners have supported for many years. Pickens, on the other hand, wants to create a new program with new subsidies and new expansion of government intervention into free markets.

    Besides this, when you listen to Pickens, you realize it’s all about him and what he wants. “We have 250 million vehicles in America. So I’m going to take eight million heavy duty trucks — that’s it — and that will do it.” And then “I want a billion dollars a year for five years.”

    Large decisions about our country’s energy future shouldn’t be made by one person, or even by Congress and the president. We need to let the dynamic discovery process of markets harness and organize the tremendous diverse power of the human mind and reveal to us the best energy solutions.

  • Local chambers of commerce: tax machines in disguise

    The fact that the Overland Park Chamber of Commerce supports a tax increase reminded me of a piece in the Wall Street Journal by Stephen Moore that shows how very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that support free enterprise and genuine capitalism.

    We may soon have a test of this in Wichita, where business leaders are tossing about ideas for various forms of tax increases. Again, I distinguish between “business leaders” and “capitalists.”

    Fortunately, the Kansas Chamber of Commerce is generally unwavering in its support of pro-growth, limited government principles. But that’s not the case for most local chambers. Bernie Koch, a booster of local chambers and their big-government policies, recently wrote an op-ed in which he defended the high-tax corporate welfare state model for Kansas.

    Most people probably think that local chambers of commerce, since their membership is mostly business firms, support pro-growth policies that embrace limited government and free markets. But that’s not always the case. Here, in an excerpt from his article “Tax Chambers” Moore explains:

    The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government.

    …

    In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, “Rip-Off,” “state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.”

    …

    “I used to think that public employee unions like the NEA were the main enemy in the struggle for limited government, competition and private sector solutions,” says Mr. Caldera of the Independence Institute. “I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

    From Stephen Moore in the article “Tax Chambers” published in The Wall Street Journal February 10, 2007. The full article can be found at Liberalism’s Echo Chambers.

  • Kansas jobs creation numbers in perspective

    This week the administration of Kansas Governor Sam Brownback announced job creation figures that, on the surface, sound like good news. But before we celebrate too much, we need to place the job numbers in context and look at the larger picture, specifically whether these economic development wins are good for the Kansas economy.

    The governor’s office announced that since January 10th, almost exactly one-half year ago, the Brownback administration is taking credit for creating 3,163 jobs. These jobs, according to the governor’s office, are in companies that are moving to Kansas or expanding their current operations. Some of the jobs, like those in the recently-announced Mars Chocolate plant to be built in Topeka, won’t start for perhaps two years.

    To place this number on an annual basis, extrapolating to a full year, we get 6,326 jobs created during the first year of Brownback’s term.

    That sound like a lot of jobs. But we need to place that number in context. To do so, I gathered some figures from the Bureau of Labor Statistics, in particular figures for the gross number of jobs created in the private sector. According to BLS, “Gross job gains are the sum of increases in employment from expansions at existing units and the addition of new jobs at opening units.” In other words, jobs created — just like the governor’s definition.

    Looking at the numbers, we find that for the years 2000 to 2009, the Kansas economy created gross jobs in the private sector at the average rate of 293,335 per year. Of course, jobs are lost, too. In Kansas, again for 2000 to 2009, there was a net loss of 61,394 jobs in the private sector. Not a good number.

    Each year, then, many jobs are created and lost, nearly 300,000 per year in Kansas. This illustrates the dynamic nature of the economy. Each year many jobs are created, and many are lost. Even in 2009 — a recession year — the Kansas economy created 232,717 jobs in the private sector. That same year 294,111 jobs were lost. But in most years, the number of jobs created is pretty close to the number of jobs lost.

    Kansas job gains and lossesKansas job gains and losses

    Now we have context. If we compare the 6,326 jobs (the extrapolated annual rate) the state created through its economic development efforts to the average number of private sector jobs created each year, we find that number to be 2.2 percent.

    If we use a recession year (2009) figure for private sector job creation, the state’s efforts amount to 2.7 percent of the jobs created by the private sector economy.

    These numbers, I would say, are small. About one of 40 jobs created in Kansas is created through the efforts of the state’s economic development machinery. This assumes that these jobs would not have been created without government intervention, and I think that’s something we can’t assume one hundred percent.

    These jobs that Brownback takes credit for come at great cost. In the case of Mars, the incentive package is reported to be worth $9 million, or $45,000 for each of the 200 people to be initially hired. I haven’t asked the Department of Commerce for a full rundown of the incentives offered, but in my experience the press releases and news stories based on them understate the full cost of the incentives.

    But in any case, the incentives used by the state’s economic development efforts have costs. Some require the direct expenditure of state funds.

    Some incentives require that the state spend money through the tax system in the form of tax credits. These expenditures made through the tax system have the same fiscal impact on the state’s budget as if the legislature appropriated funds and wrote a check for the amount of the tax credit.

    Other incentives require that the state give up a claim to tax revenue that it would otherwise collect. This means that other taxpayers must make up the difference, unless the state were to reduce spending.

    The cost of these incentives is born by the taxpayers of the state of Kansas. This cost is a negative drag on jobs that would have been created or retained in companies that don’t receive incentives. The Brownback administration knows this, although it doesn’t recognize this job loss when it trumpets its accomplishments in creating new jobs through targeted economic development incentives. One of the major initiatives of Brownback is to reduce Kansas taxes, particularly the personal and corporate income tax, in order to grow the Kansas economy. The governor — correctly — recognizes that low taxes are good for economic growth.

    The governor also needs to recognize that targeted economic development incentives have a cost. That cost is paid in the form of taxes that someone else pays. That cost leads to foregone economic activity, and that leads to lost jobs.

    While the state’s wins in job creation are easy to see — there are government employees paid to make sure we’re aware of them — the lost jobs, however, are spread throughout the state. These job losses don’t often take the form of a large — or even small — business closing or moving to another state, although sometimes it does.

    Instead, the job loss occurs in dribs and drabs across the state. A restaurant manager finds his store is not as busy as last month, so he lets a server go. A small retail outlet finds it can’t quite keep up with its overhead, so it shuts down. These events don’t often make news. The jobs lost are difficult to detect — nearly invisible — although the cumulative impact is very real.

    Instead of relying on traditional, targeted economic development efforts, Kansas needs to follow the advice of Dr. Art Hall. He recommends policies to encourage as much business experimentation as possible. These policies, basically, call for low taxes for all business firms. Then, it is through markets, not the government’s economic development officials, that successful and productive firms are identified.

    Portions of Dr. Hall’s advice was incorporated in Governor Brownback’s economic development plan. Specifically, page 10 of the plan contains this language: “Over the decades, Kansas has enacted a variety of tax policies intended to advance economic development. Many of them provide a meaningful economic incentive to make new investments and create new jobs. Almost all of the policies provide a meaningful incentive to a small number of worthy businesses to the exclusion of tens of thousands of other worthy businesses. The initiatives in this plan seek to end the exclusion. They begin the process of fulfilling the vision that every business matters; they seek to replace the old vision of ‘targeting’ with a new vision of ‘dynamism.’”

    It’s time that the governor and his administration apply this advice. That’s going to be hard to do. The crowing over the Mars deal — the very type of targeted economic development “win” that the plan criticizes — shows that politicians love to be seen as actively pursuing and creating jobs. A dynamic, free market-based job-creating economy requires that politicians and bureaucrats keep their hands off — something that goes against their very nature.

  • Regulation supports business, not capitalism and free markets

    There are many examples of how the conventional wisdom regarding regulation is wrong: Republicans and conservatives are in bed with government, seeking to unshackle business from the burden of government regulation. Democrats and liberals, on the other hand, are busy crafting regulations to protect the common man from the evils of big business. As it turns out, both Democrats and Republicans love creating regulations, and big business loves these regulations.

    For example, in 2005 Walmart came out in favor of raising the national minimum wage. The company’s CEO said that he was concerned for the plight of working families, and that he thought the minimum wage level of $5.15 per hour was too low. If Walmart — a company the political left loves to hate as much as any other — can be in favor of increased regulation of the workplace, can regulation be a good thing? Had Walmart discovered the joys of big government?

    The answer is yes. Walmart discovered a way of using government regulation as a competitive weapon. This is often the motivation for business support of regulation. In the case of Walmart, it was already paying its employees well over the current minimum wage. At the time, some sources thought that the minimum wage could be raised as much as 50 percent and not cause Walmart any additional cost — its employees already made that much.

    But its competitors didn’t pay wages that high. If the minimum wage rose very much, these competitors to Walmart would be forced to increase their wages. Their costs would rise. Their ability to compete with Walmart would be harmed.

    In short, Walmart supported government regulation as a way to impose higher costs on its competitors. It found a way to compete outside the marketplace. It abandoned principles of free markets and capitalism, and provided a lesson as to the difference between capitalism and business. Many, particularly liberals, make no distinction between business and capitalism. But we need to learn to recognize the difference if we are to have a thriving economy based on free-wheeling, competitive markets that foster innovation, or continue our decline into unproductive crony capitalism.

    In the following excerpt from his book The Big Ripoff: How Big Business and Big Government Steal Your Money, author Timothy P. Carney explains that big business is able to use regulation as a blunt and powerful tool against competitors, and also as a way to improve its image.

    How does regulation help big business?

    Excerpt from The Big Ripoff: How Big Business and Big Government Steal Your Money, by Timothy P. Carney

    If regulation is costly, why would big business favor it? Precisely because it is costly.

    Regulation adds to the basic cost of doing business, thus heightening barriers to entry and reducing the number of competitors. Thinning out the competition allows surviving firms to charge higher prices to customers and demand lower prices from suppliers. Overall regulation adds to overhead and is a net boon to those who can afford it — big business.

    Put another way, regulation can stultify the market. If you’re already at the top, stultification is better than the robust dynamism of the free market. And according to Nobel Laureate economist Milton Friedman:

    The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.

    There is an additional systemic reason why regulation will help big business. Congress passes the laws that order new regulations, and executive branch agencies actually construct the regulations. The politicians and government lawyers who write these rules rarely do so without input. Often the rule makers ask for advice and information from labor unions, consumer groups, environmental groups, and industry itself. Among industry the stakeholders (beltway parlance to describe affected parties) who have the most input are those who can hire the most effective and most connective lobbyists. You can guess this isn’t Mom and Pop.

    As a result, the details of the regulation are often carefully crafted to benefit, or at least not hurt, big business. If something does not hurt you, or hurts you a little while seriously hindering your competition, it is a boon, on balance.

    Another reason big business often cries “regulate me!” is the goodwill factor. If a politician or bureaucrat wants to play a role in some industry, and some executive says, “get lost,” he runs the risk of offending this powerful person. That’s bad diplomacy. Bureaucrats, by their nature, do not like to be told to mind their own business. Supporting the idea of regulation but lobbying for particular details is usually better politics.

  • Wichita and its political class

    The discussion at yesterday’s Wichita City Council meeting provided an opportunity for citizens to discover the difference in the thinking of the political class and those who value limited government and capitalism.

    At issue was Mid-Continent Instruments, Inc., which asked the city for a forgivable loan of $10,000. It received the same last week from Sedgwick County. According to city documents, the State of Kansas through its Department of Commerce is also contributing $503,055 in forgivable loans, sales tax exemptions, training grants, and tax credits.

    At the city council meeting Clinton Coen, a young man who ran for city council earlier this year, spoke against this measure, which he called corporate welfare.

    In response to Coen, Council Member James Clendenin (district 3, south and southeast Wichita) asked if we should ignore companies that want to do business here, or should we allow them to leave? Implicit in the question is that the threat dangled by Mid-Continent is real: that unless the city gives them $10,000, they will expand somewhere else. How citizens and council members feel about this issue largely depends on their perceived genuineness of this threat.

    When Coen recommended that the city cut spending, Clendenin said “I can guarantee you, from what I have seen, this city government has cut a tremendous amount of spending.” When pressed by Coen for examples of cuts, he demurred. Clendenin also said that the $10,000 is needed to show the city’s commitment to the company.

    Perhaps coming to the rescue of her younger and less experienced colleague, Council Member Janet Miller asked City Manager Bob Layton how much has been cut from the budget, and he replied “we’ve cut over $20 million in the general fund over three years.”

    In saying that, Layton is using the language and mind-set of bureaucrats and politicians. In this world, it’s a cut if spending does not rise as fast as planned or hoped for. As you can see from the accompanying chart, Wichita general fund spending has not been cut in recent years. It has risen in each of the last three years, and plans are for it to keep rising.

    Wichita general fund spending

    This illustrates a divide between the thinking of the political class and regular people. Blurring the distinction between plans and reality lets politicians and bureaucrats present a fiscally responsible image — they cut the budget, after all — and increase spending at the same time. It’s a message that misinforms citizens about the important facts.

    Miller also praised the return on investment the city receives for its spending on economic development, citing Wichita State University Center for Economic Development and Business Research and the cost-benefit calculations it performs. These calculations take the cost of providing the incentives and compare it to the returns the city and other governmental entities receive.

    What is rarely mentioned, and what I think most people would be surprised to learn, is that the “returns” used in these calculations is manifested in the form of increased tax revenue. It’s not like in the private sector, where business firms attempt to increase their sales and profits by providing a product or service that people willingly buy. No, the city increases its revenue (we can’t call it profit) by collecting more taxes.

    It’s another difference between the political class and everyone else: The political class craves tax revenue.

    Aside from this, the cost-benefit calculations for the city don’t include the entire cost. The cost doesn’t include the county’s contribution, the majority of which comes from residents of its largest city, which is Wichita. Then, there’s the half-million in subsidy from the state, with a large portion of that paid for by the people of Wichita.

    But even if you believe these calculations, there’s the problem of right-sizing the investment. If an investment of $10,000 has such glowing returns — last week Sedgwick County Commissioner Jim Skelton called the decision a “no-brainer” — why can’t we invest more? If we really believe this investment is good, we should wonder why the city council and county commission are so timid.

    Since the applicant company is located in his district, Council Member Pete Meitzner (district 2, east Wichita), praised the company and the state’s incentives, and made a motion to approve the forgivable loan. All council members except Michael O’Donnell (district 4, south and southwest Wichita) voted yes.

    Going forward

    While the political class praises these subsidies and the companies that apply for them, not many are willing to confront the reality of the system we’re creating. Some, like O’Donnell and Sedgwick County Commissioner Richard Ranzau, have recognized that when government is seen as eager to grant these subsidies, it prompts other companies to apply. The lure of a subsidy may cause them to arrange their business affairs so as to conform — or appear to conform — to the guidelines government has for its various subsidy programs. Companies may do this without regard to underlying economic wisdom.

    We also need to recognize that besides simple greed for public money, businesses have another reason to apply for these subsidies: If a publicly-traded company doesn’t seek them, its shareholders would wonder why the company didn’t exercise its fiduciary duty to do so. But this just perpetuates the system, and so increasing amounts of economic development fall under the direction of government programs.

    While most people see this rise in corporate welfare as harmful — I call it a moral hazard — the political class is pleased with this arrangement. As Meitzner said in making his motion, he was proud that Wichita “won out” over the other city Mid-Continent Instruments considered moving to.

    Another harmful effect of these actions is to create a reputation for having an uncompetitive business environment. Not only must businesses of all types pay for the cost of these subsidies, some face direct competition by a government-subsidized competitor. This is the situation Wichita-area hotels face as a result of the city granting millions in subsidy to a hotel developer to build a Fairfield Inn downtown.

    Even those not in direct competition face increased costs as they attempt to hire labor, buy supplies, and seek access to capital in competition with government-subsidized firms. Could this uneven competitive landscape be a factor that business firms consider in deciding where to locate and invest?

    We can expect to see more government intervention in economic development and more corporate welfare. Former council member Sue Schlapp in April took a job with the Kansas Department of Commerce. Her job title is “senior constituent liaison,” which I think can be better described as “customer service agent for the corporate welfare state.” Her office is in Wichita city hall.

    Increasingly we see politicians and bureaucrats making decisions based on incorrect and misleading information, such as claiming that the city’s general fund budget has been cut when spending has increased. Sometimes they are fed incorrect information, as in the case of a presentation at Sedgwick County Commission that bordered on fraudulent.

    Sometimes, I think, officeholders just don’t care. It’s easiest to go along with the flow and not raise ripples. They participate in groundbreakings and get their photograph in the newspaper and on television that way. Which brings up an important question: why do none of our city’s mainstream media outlets report on these matters?

  • For Wichita, Save-A-Lot teaches a lesson

    The announcement that a Save-A-Lot grocery store will proceed — contrary to the claims of developers and city staff who rely on their information — should provide a lesson that yes, economic development in Wichita can and will happen without public assistance. Additionally, examination of the public hearing for this matter before the Wichita City Council last September should teach us to be very cautious in relying on the claims of people who have a huge economic stake in obtaining public assistance.

    At a city council public hearing on both the Community Improvement District and Tax Increment financing district last September, developer Rob Snyder sought public assistance in the form of a tax increment financing district (TIF) and a Community Improvement District (CID). Over a period of years, the two forms of subsidy were estimated to be worth $900,000 to the developer. The project’s total cost was presented as slightly over $2 million.

    (By the way, in its recent coverage of this matter, the Wichita Eagle has an incorrect recording of events. The Eagle reported, referring to the Wichita City Council and Sedgwick County Commission: “The boards ultimately rejected the financing, despite support from some officials.” Actually, the city council unanimously approved both the CID and TIF. Then, the county commission exercised its statutory prerogative to veto the formation of a TIF district. The commission has no authority to intervene in the formation of CIDs.)

    As part of his presentation to the council Allen Bell, Wichita’s Director of Urban Development explained that to be eligible for TIF, developers must demonstrate a “gap,” that is, an analytical finding that conventional financing is not sufficient for the project, and public assistance is required: “We’ve done that. We know, for example, from the developer’s perspective in terms of how much they will make in lease payments from the Save-A-Lot operator, how much that is, and how much debt that will support, and how much funds the developer can raise personally for this project. That has, in fact, left a gap, and these numbers that you’ve seen today reflect what that gap is.”

    Snyder told the council that without the public assistance, there will be no grocery store: “We have researched every possible way, how do we make this project work with the existing funding that’s available to us. … We might as well say if for some reason we can’t figure out how to get this funding to go through, there won’t be a shopping center over there.”

    Greg Ferris, a former city council member who lobbies local government on behalf of clients, was adamant in his insistence that the grocery store could not be built without public financing: “There will not be a building on that corner if this is not passed today. … That new building would not be built. I absolutely can tell you that because we have spent months … trying to figure out a way to finance a project in that area. A grocery store is not going to move into the Planeview area to service those people just like they didn’t move into the area at 13th and Grove until the city subsidized that with several hundred thousand dollars of city money. … What you’ve heard is misinformation. … This project just won’t happen and the people of Planeview will suffer.”

    Now, we see that the financing gap has been closed, and without government assistance. The claims that a grocery store can’t be built in that neighborhood without welfare for developers have been demonstrated to be false.

    Wichita Mayor Carl Brewer has referred to those who oppose government intervention like TIF and CID as “naysayers.” Here’s an example where free markets, capitalism, and economic freedom have overcome Wichita’s true naysayers: those who say it can’t happen without government intervention.

    A message from John Todd: “This Wednesday (June 8th) at 2:00 pm there will be a groundbreaking ceremony for the new Planeview Save-A-Lot grocery store located on the southeast corner of George Washington Boulevard and Pawnee. This project was initially proposed with $900,000 in CID and TIF public subsidies for the developer that were approved by the Wichita City Council last fall. When the Sedgwick County Commission rejected giving the county’s portion of the TIF generated real estate taxes to the developer and away from the public treasury, the project appeared to be dead. The Wichita Eagle recently reported that the Save-A-Lot grocery store owner has now decided to develop the project on his own with his own financing. Perhaps it is appropriate for those citizens who appreciate businesses who develop market-driven projects in Wichita and Sedgwick County on their own nickel to show their appreciation to the grocery store owner/developer by attending the groundbreaking ceremony and personally thanking him.”

  • In Wichita, corporate welfare not needed, after all

    Last fall the City of Wichita awarded two forms of economic development subsidy to a proposed Save-A-Lot grocery store to be built in the Planeview neighborhood. The developer of the store was able to persuade Wichita economic development officials and city council members that the store could not be built without public assistance. But now a different developer is going ahead with the project — without any of the subsidies Wichita approved, raising questions as to whether the city’s original offer of public assistance was genuine economic development, or just another instance of corporate welfare.

    The subsidies approved were in the form of a tax increment financing district (TIF) and a Community Improvement District (CID). Over a period of years, the two forms of subsidy were estimated to be worth $900,000 to the developer.

    Kansas law allows affected counties and school districts to veto the formation of a TIF district. The Sedgwick County Commission did just that, and the developer said he would not proceed with the project.

    But now, according to Wichita Eagle reporting, a different developer is proceeding with the project, and without subsidy, according to the article. While TIF is not available, it seems the authorizing ordinance for the CID is still in effect, and could be used by the new developer, if desired.

    Economic development, or corporate welfare?

    That the Planeview Save-A-Lot grocery store is able to proceed, and in a larger and more expensive form than originally proposed, tells us that the arguments of its supporters — that economic development assistance was absolutely required — were not true. Actually, these arguments might have been true in the mind of Rob Snyder, the original developer. Developers who seek public subsidy have a powerful incentive to make the case to local governments that their projects need financial assistance. In this case, Snyder was able to convince Wichita city staff that there was indeed a “gap,” according to city documents, of “approximately $950,000 on a total project cost of over $2,000,000.” In other words, the purported “gap” was nearly half the total project cost.

    But in the hands of a different developer, that gap has evaporated, and the project is able to stand on its own without public assistance.

    We need to realize that the “gap” analysis performed by the City of Wichita is not thorough. There’s an imbalance of power in the relationship between city officials and developers. As mentioned above, developers have powerful financial motives to present their projects in a way that makes them eligible for public assistance. Government officials want these projects to happen. Economic activity is good for everyone, after all. So the motives of local economic development officials and elected representatives to turn over a lot of rocks — examining deals too closely — is weak. As a result, we’ve seen examples where outsiders brought information to the City of Wichita that would not have been considered otherwise.

    In one instance a former Wichita City Council member was unhappy that the Wichita Eagle uncovered negative information about a potential recipient of Wichita public assistance.

    Wichita officials and council members need to take a look at their economic development programs and decide whether the city is willing to — and wants to — distinguish between real and valid economic development programs and corporate welfare. In the case of Wichita’s public assistance offer to Rob Snyder’s Save-A-Lot grocery store, recent developments confirm what a few people suspected at the time — it was corporate welfare, plain and simple.

  • Kansas and Wichita quick takes: Friday May 27, 2011

    Valuing teachers. Writing in Education Next, Eric A. Hanushek explains the importance of academic achievement of schoolchildren, the low achievement of American schools relative to the world, and the huge impact this poor performance has on our economic future. It’s very important, he writes: “From studying the historical relationship, we can estimate that closing just half of the performance gap with Finland, one of the top international performers in terms of student achievement, could add more than $50 trillion to our gross domestic product between 2010 and 2090. By way of comparison, the drop in economic output over the course of the last recession is believed to be less than $3 trillion. Thus the achievement gap between the U.S. and the world’s top-performing countries can be said to be causing the equivalent of a permanent recession.” … Teacher effectiveness is one factor that is under control of schools, and is more important than many other factors also under control of schools: “The quality of the teachers in our schools is paramount: no other measured aspect of schools is nearly as important in determining student achievement. The initiatives we have emphasized in policy discussions — class-size reduction, curriculum revamping, reorganization of school schedule, investment in technology — all fall far short of the impact that good teachers can have in the classroom. Moreover, many of these interventions can be very costly.” … Reforms: “better recruitment so that ineffective or poor teachers do not make it into our schools.” We can also work to improve poor teachers, but Hanushek says this is often not effective, as “there is no substantial evidence that certification, in-service training, master’s degrees, or mentoring programs systematically make a difference in whether teachers are in fact effective at driving student achievement.” … There is also the possibility of a “clearer evaluation and retention strategy for teachers.” This means better evaluation systems to identify the best and worst teachers, but Hanushek calls current evaluation systems dysfunctional. Currently, salaries are based on longevity and earned credentials, which he warns are “factors that are at best weakly related to productivity.” … Of note: it is the teachers unions which support the current failing system, and which block any attempt at meaningful reform. In Kansas this year, tinkering with the teacher tenure formula is all that has been accomplished this year regarding school reform. This is in a state that ranks very low among the states in policies relating to teacher effectiveness, according to the National Council on Teacher Quality.

    Job recovery is slow. USA Today: “Nearly two years after the economic recovery officially began, job creation continues to stagger at the slowest post-recession rate since the Great Depression. The nation has 5% fewer jobs today — a loss of 7 million — than it did when the recession began in December 2007. That is by far the worst performance of job generation following any of the dozen recessions since the 1930s. In the past, the economy recovered lost jobs 13 months on average after a recession. If this were a typical recovery, nearly 10 million more people would be working today than when the recession officially ended in June 2009.”

    Obamacare waivers. Michael Barone: “If Obamacare is so great, why do so many people want to get out from under it?” Barone cites the high concentration of waivers granted to labor unions, which are a big source of political support for Obama. Then there’s the recent revelation of the large number of waivers to companies in Nancy Pelosi’s district. This is harmful, writes Barone: “One basic principle of the rule of law is that laws apply to everybody. If the sign says ‘No Parking,’ you’re not supposed to park there even if you’re a pal of the alderman. Another principle of the rule of law is that government can’t make up new rules to help its cronies and hurt its adversaries except through due process, such as getting a legislature to pass a new law. The Obamacare waiver process appears to violate that first rule. Two other recent Obama administration actions appear to violate the second.”

    Tax increment financing. From Randal O’Toole: “Tax-increment financing (TIF) costs taxpayers around $10 billion per year and is growing as fast as 10 percent per year, according to a new report, Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing published by the Cato Institute. Though originally created to help renew “blighted” neighborhoods, TIF today is used primarily as an economic development tool for areas that are often far from blighted. The report argues that TIF does not actually generate economic development. At best, it moves development that would have taken place somewhere else in a community to the TIF district. That means it generates no net tax revenues, so the TIF district effectively takes taxes from schools and other tax entities. At worst, TIF actually slows economic development, both by putting a larger burden on taxpayers and by discouraging other developers from making investments unless they are also supported by TIF.” … Tax increment financing — TIF districts — are expected to be a major source of revenue for the revitalization of downtown Wichita — and the accompanying social engineering directed from Wichita city hall. Wichita has also shown itself to be totally incapable of turning away from crony capitalism.

    Assumptions about capitalism. Burton W. Folsom in The Myth of the Robber Barons: “This shallow conclusion dovetails with another set of assumptions: First, that the free market, with its economic uncertainty, competitive stress, and constant potential for failure, needs the steadying hand of government regulation; second, that businessmen tend to be unscrupulous, reflecting the classic cliché image of the ‘robber baron,’ eager to seize any opportunity to steal from the public; and third, that because government can mobilize a wide array of forces across the political and business landscape, government programs therefore can move the economy more effectively than can the varied and often conflicting efforts of private enterprise. But the closer we look at public-sector economic initiatives, the more difficult it becomes to defend government as a wellspring of progress. Indeed, an honest examination of our economic history — going back long before the twentieth century — reveals that, more often than not, when government programs and individual enterprise have gone head to head, the private sector has achieved more progress at less cost with greater benefit to consumers and the economy at large.” … Folsom goes on to give examples from the history of steamships, railroads, and the steel and oil industries that show how our true economic history has been distorted. Concluding, he writes: “Time and again, experience has shown that while private enterprise, carried on in an environment of open competition, delivers the best products and services at the best price, government intervention stifles initiative, subsidizes inefficiency, and raises costs. But if we have difficulty learning from history, it is often because our true economic history is largely hidden from us. We would be hard pressed to find anything about Vanderbilt’s success or Collins’s government-backed failure in the steamship business by examining the conventional history textbooks or taking a history course at most colleges or universities. The information simply isn’t included.” … Folsom’s book on this topic is The Myth of the Robber Barons: A New Look at the Rise of Big Business in America.

  • Pickens criticism illustrates divide between free markets and intervention

    Last week’s criticism by energy investor T. Boone Pickens of U.S. Representative Mike Pompeo, a Wichita Republican serving his first term, continues to illustrate the difference between those who believe in economic freedom and free markets, and those — like Pickens — who invest in politicians, bureaucrats, and the hope of a government subsidy.

    Pickens is pushing H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011, or NAT GAS act. The bill provides a variety of subsidies, implemented through tax credits, to producers and users of natural gas. The goal is to promote the use of natural gas as the fuel the nation uses for transportation.

    In his op-ed in the Wichita Eagle, Pickens was critical of Pompeo for his stance in favor of free markets and in opposition to subsidies. His criticism, however, was inconsistent and contradictory. Further, Pompeo’s position on this issue is clear, as part of a resolution he introduced reads: eliminate existing energy subsidies.

    There was another target of Pickens’ criticism. He didn’t mention the company by name, but there were several thinly-veiled references to Wichita-based Koch Industries. Charles Koch and his brother David Koch have emerged as prominent defenders of economic freedom and the freedom and prosperity it generates. Charles Koch, in particular, has been outspoken in his criticism of the type of subsidies that Pickens seeks. Koch’s op-ed, also in the Wichita Eagle and on Koch Industries website at Advancing economic freedom, was pointed in its criticism of corporate welfare: “Our government made a point of reforming its welfare policies for individuals but not for corporations. … Unfair programs that favor certain companies — such as the current well-intentioned but misguided suggestion that the natural-gas industry should receive enormous new subsidies — don’t just happen. They are promoted, in large part, by those seeking to profit politically, rather than by competing in a market where consumers vote with their wallets.”

    In a statement on the company’s Viewpoint website, Dr. Richard Fink, Executive Vice President of Koch Industries, continued to explain the harm of government intervention, saying “Koch has consistently opposed subsidies that distort markets. We maintain that the marketplace, while not perfect, is the best mechanism for allocating resources to consumers. People deciding what fuels to purchase, instead of the government, is best for consumers and our country. Likewise, if natural gas vehicles are truly advantageous and economically efficient, then consumers will demand that they be developed without political mandates that exhaust more taxpayer dollars.”

    Fink continues, “We do not question T. Boone Pickens’ intentions or integrity in this debate. We recognize his experience in the energy markets and take him at his word that he thinks this is a good idea. However, we believe history has demonstrated over and over that these subsidies end up undermining the long term prosperity of the country. For these principled reasons, we oppose this bill to give tax incentives to buyers and makers of natural gas-powered vehicles and related infrastructure. We also consistently oppose subsidies for all other fuels whether or not we benefit from them.”

    Pickens would probably object to the use of the term “subsidy,” as the legislation he pushes grants “credits,” a term that sounds fairly benign. Timothy P. Carney, writing in the Washington Examiner, provides an explanation of the difference: “Pickens draws two dividing lines in the piece: tax credit vs. grant, and permanent versus temporary. A temporary subsidy is certainly better than an indefinite or permanent one. The tax credit question is trickier. Many free-market champions support every tax break ever proposed (Ron Paul, for instance). Other free market types (like me, probably) think that tax credits act as subsidies which distort the market, and ultimately lead to tax hikes on others. One of the bad things about tax credits is that they reward businesses for following political signals rather than market signals, but they do it in a way that allow the beneficiaries, like Pickens, to act as if they’re not on the public dole. Sure, a tax credit (most of the time) isn’t a handout, but the favored product (like ethanol or natural gas) only succeeds because its competition is taxed at high rates. So tax credits are the socially acceptable form of corporate welfare.” (emphasis added)

    While Carney usually gets things just right, I’ll disagree with him that the question of tax credits is tricky: They have the same economic effect as a grant or subsidy. They engineer the behavior the government wants. But Carney is right about the confusing appearance of tax credits, allowing them to be “the socially acceptable form of corporate welfare.” Unless we really think about it, that is.

    In any discussion of Pickens and natural gas, we must recognize that he is an investor in gas and another energy technology related to gas: wind power. In 2008 Pickens ordered 667 wind turbines worth $2 billion from General Electric with plans to build a large wind power plant in Texas. Wind power is highly dependent on government subsidy, with supporters claiming the industry will be devastated unless Congress continues to renew the subsidies.

    At one time Pickens wanted to use wind power to generate electricity, and the natural gas saved would be used to power transportation. But there’s another relationship between wind power and gas, and it stems from the unreliability and variability of wind power. It’s difficult to quickly adjust the output of most power plants. But natural gas turbine plants are an exception. Kansas recently saw one of its major electric utilities complete a new natural gas power plant. The need for the plant was at least partly created by its investment in wind: A document produced by Westar titled The Greenhouse Gas Challenge noted the “Construction of the 665 MW natural gas-fired Emporia Energy Center, providing the ability to efficiently follow the variability of wind generation.” In another document announcing a request for a rate increase it stated “Our Emporia Energy Center is excellent for following the variability of wind production.”

    At the time of these investments by Pickens and Westar, the price of natural gas was high. Now it is low — so low, and the prospects for future low prices certain enough that Pickens has abandoned his wind farm projects. Even with all the subsidy granted to wind power, it’s cheaper to generate electricity with gas.

    (Pickens has been left with many wind turbines he can’t use. According to the Wall Street Journal: “He’s hoping to foist them on ratepayers in Canada, because that country has mandates that require consumers to buy more expensive renewable electricity.” In other words, relying on some other country’s government intervention to relieve him of his mistake.)

    So we see Pickens moving from one government-subsidized industry — wind power — to another: the subsidized market for natural gas-powered vehicles he hopes to create. The distinction between political entrepreneurs and market entrepreneurs couldn’t be clearer.