In this episode of WichitaLiberty.TV: The Wichita City Council will hold a meeting regarding an industry that wants to tax itself, but really is taxing its customers. Also, the city may be skirting the law in holding the meeting. Then: The Kansas Legislature is considering special tax treatment for a certain class of business firms. What is the harm in doing this? Episode 35, broadcast March 16, 2014. View below, or click here to view at YouTube.
Tag: Cronyism
Special interests defend wind subsidies at taxpayer cost
The spurious arguments made in support of the wind production tax credit shows just how difficult it is to replace cronyism with economic freedom. From October, 2012. We often see criticism of politicians for sensing “which way the wind blows,” that is, shifting their policies to pander to the prevailing interests of important special interest groups. The associated negative connotation is that politicians do this without regard to whether these policies are wise and beneficial for everyone.
So when a Member of Congress takes a position that is literally going against the wind in the home district and state, we ought to take notice. Someone has some strong convictions.
This is the case with U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties.)
The issue is the production tax credit (PTC) paid to wind power companies. For each kilowatt-hour of electricity produced, the United States government pays 2.2 cents. Wind power advocates contend the PTC is necessary for wind to compete with other forms of electricity generation. Without the PTC, it is said that no new wind farms would be built.
The PTC is an important issue in Kansas not only because of the many wind farms located there, but also because of wind power equipment manufacturers that have located in Kansas. An example is Siemens. That company, lured by millions in local incentives, built a plant in Hutchinson. Employment was around 400. But now the PTC is set to expire on December 31, and it’s uncertain whether Congress will extend the program. As a result, Siemens has laid off employees. Soon only 152 will be at work in Hutchinson, and similar reductions in employment have happened at other Siemens wind power equipment plants.Rep. Pompeo is opposed to all tax credits for energy production, and has authored legislation to eliminate them. As the wind PTC is the largest energy tax credit program, Pompeo and others have written extensively of the market distortions and resultant economic harm caused by the PTC. A recent example is Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away, which appeared in the Wall Street Journal.
The special interests that benefit from the PTC are striking back. An example comes from Dave Kerr, who as former president of the Hutchinson/Reno County Chamber of Commerce played a role in luring Siemens to Hutchinson. Kerr’s recent op-ed in the Hutchinson News is notable not only for its several attempts to deflect attention away from the true nature of the PTC, but for its personal attacks on Pompeo.
There’s no doubt that the Hutchinson economy was dealt a setback with the announcement of layoffs at the Siemens plant that manufactures wind power equipment. Considered in a vacuum, these jobs were good for Hutchinson. But we shouldn’t make our nation’s policy in a vacuum, that is, bowing to the needs of special interest groups — sensing “which way the wind blows.” When considering everything and everyone, the PTC paid to producers of power generated from wind is a bad policy. We ought to respect Pompeo for taking a principled stand on this issue, instead of pandering to the folks back home.
Kerr is right about one claim made in his op-ed: The PTC for wind power is not quite like the Solyndra debacle. Solyndra received a loan from the Federal Financing Bank, part of the Treasury Department. Had Solyndra been successful as a company, it would likely have paid back the government loan. This is not to say that these loans are a good thing, but there was the possibility that the money would have been repaid.
But with the PTC, taxpayers spend with nothing to show in return except for expensive electricity. And spend taxpayers do.
Kerr, in an attempt to distinguish the PTC from wasteful government spending programs, writes the PTC is “actually an income tax credit.” The use of the adverb “actually” is supposed to alert readers that they’re about to be told the truth. But truth is not forthcoming from Kerr — there’s no difference. Tax credits are government spending. They have the same economic effect as “regular” government spending. To the company that receives them, they can be used — just like cash — to pay their tax bill. Or, the company can sell them to others for cash, although usually at a discounted value.
From government’s perspective, tax credits reduce revenue by the amount of credits issued. Instead of receiving tax payments in cash, government receives payments in the form of tax credits — which are slips of paper it created at no cost and which have no value to government. Created, by the way, outside the usual appropriations process. That’s the beauty of tax credits for big-government spenders: Once the program is created, money is spent without the burden of passing legislation.
If we needed any more evidence that PTC payments are just like cash grants: As part of Obama’s ARRA stimulus bill, for tax years 2009 and 2010, there was in effect a temporary option to take the federal PTC as a cash grant. The paper PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States explains.
Astonishingly, the wind PTC is so valuable that wind power companies actually pay customers to take their electricity. It’s called “negative pricing,” as explained in Negative Electricity Prices and the Production Tax Credit:
As a matter of both economics and public policy, no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet, the federal Production Tax Credit (“PTC”) for wind generation is doing just that with increasing frequency in electricity markets across the United States. In some “wind-rich” regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the “negative price” payment, because they receive a $22/MWH federal production tax credit for every MWH generated.
In western Texas since 2008, wind power generators paid the electrical grid to take their electricity ten percent of the hours of each day.
Once we recognize that tax credits are the same as government spending, we can see the error in Kerr’s argument that if the PTC is ended, it is the same as “a tax increase on utilities, which, because they are regulated, will pass on to consumers.” Well, government passes along the cost of the PTC to taxpayers, illustrating that there really is no free lunch.
Kerr attacks Pompeo for failing to “crusade” against two subsidies that some oil companies receive: Intangible Drilling Costs and the Percentage Depletion Allowance. These programs are deductions, not credits. They do provide an economic benefit to the oil companies that can use them (“big oil” can’t use percentage depletion at all), but not to the extent that tax credits do.
Regarding these deductions, last year Pompeo introduced H. Res 267, titled “Expressing the sense of the House of Representatives that the United States should end all subsidies aimed at specific energy technologies or fuels.”
In the resolution, Pompeo recognized the difference between deductions and credits, the latter, as we’ve seen, being direct subsidies: “Whereas deductions and cost-recovery mechanisms available to all energy sectors are different than credits, loans and grants, and are therefore not taxpayer subsidies; [and] Whereas a deduction of costs and cost recovery with respect to timing is not a subsidy.”
Part of what the resolution calls for is to “begin tax simplification and reform by eliminating energy tax credits and deductions and reducing income tax rates.”
Kerr wants to deflect attention away from the cost and harm of the PTC. Haranguing Pompeo for failing to attack percentage depletion and IDC with the same fervor as tax credits is only an attempt to muddy the waters so we can’t see what’s happening right in front of us. It’s not, as Kerr alleges, “playing Clintonesque games of semantics with us.” As we’ve seen, Pompeo has called for the end of these two tax deductions.
If we want to criticize anyone for inconsistency, try this: Kerr criticizes Pompeo for ignoring the oil and gas deductions, “which creates a glut in natural gas that drives down the price to the lowest levels in a decade.” These low energy prices should be a blessing to our economy. Kerr, however, demands taxpayers pay to subsidize expensive wind power so that it can compete with inexpensive gas. In the end, the benefit of inexpensive gas is canceled. Who benefits from that, except for the wind power industry? The oil and gas targeted deductions also create market distortions, and therefore should be eliminated. But at least they work to reduce prices, not increase them.
By the way, Pompeo has been busy with legislation targeted at ending other harmful subsidies: H.R. 3090: EDA Elimination Act of 2011, H.R. 3994: Grant Return for Deficit Reduction Act, H.R. 3308: Energy Freedom and Economic Prosperity Act, and the above-mentioned resolution.
I did notice, however, that Pompeo hasn’t called for the end to the mohair subsidy. Will Kerr attack him for this oversight?
Finally, Kerr invokes the usual argument of government spenders: Cut the budget somewhere else. That’s what everyone says.
Creating entire industries that exist only by being propped up by government subsidy means that we all pay more to support special interest groups. A prosperous future is best built by relying on free enterprise and free markets in energy, not on programs motivated by the wants of politicians and special interests. Kerr’s attacks on Pompeo illustrate how difficult it is to replace cronyism with economic freedom.
WichitaLiberty.TV: Wichita’s missing water, beyond politics and special interests
In this episode of WichitaLiberty.TV: The people of Wichita have told officials that water is an important issue. What has the city done in this regard? Then, Wichita Mayor Brewer Carl says it’s time to put politics and special interests aside. Is our political leadership capable of this? Episode 34, broadcast March 9, 2014. View below, or click here to view at YouTube.
Wichita seeks to add more tax to hotel bills
Wichita City Hall. The city of Wichita wants hotel guests to make a “marketing investment” in Wichita by paying a “City Tourism Fee.”
This Tuesday the Wichita City Council will hold a public hearing regarding the formation of a Tourism Business Improvement District (TBID).
The main characteristic of the proposed TBID is that it will add 2.75 percent tax to most hotel rooms sold in the City of Wichita. The funds would go to Go Wichita Convention and Visitors Bureau to be used to enhance that agency’s marketing efforts. The tax is estimated to raise $2.5 million per year.
What is the motivation of the city’s hotel operators to assent to this added tax on their product? City documents state: “Go Wichita estimates that the new marketing investment could result in a 6% rise in hotel occupancy and a growth of $12 million in hotel revenue.”
What the city calls a “marketing investment” will appear on hotel bills as the “City Tourism Fee,” according to city documents.
How to succeed in business by having others pay for your advertising
When most business firms want to increase their business through advertising, they pay for it themselves. They don’t tack on an additional “advertising fee” to customer’s bills.
But not so with Wichita hotels. Unlike most businesses, Wichita hotels propose to have someone else pay for their advertising.
On top of that, the city and the hotels don’t have the integrity to label the added tax to let customers know its true purpose. Instead, the tax will appear on customer bills as a “City Tourism Fee.” If hotel customers are angry at the fee, well, who is to blame? The hotel, which is merely collecting what city code says it must? Visitors to Wichita likely won’t know the real reason for the tax, which is to shift expenses to someone else through the mechanism of government.
Clever. I wonder if other industries will try something like this? Also: Will the Wichita hotels that currently engage in advertising reduce their spending on advertising, now that a government agency is in charge and taxpayers are footing the bill?
Who pays this tax
City leaders argue that taxes like hotel taxes are largely paid for by people from out of town. Whether that is a wise strategy is debatable. People and business firms notice these taxes. Wichita hotel owner Jim Korroch is an advocate of the new Wichita tax. But he told the Wichita Eagle recently “You know, I used to like to take my girls shopping at the Legends in Kansas City. I thought that was a great deal with the outlet malls, but for the first time I’ve looked at my receipts, and it isn’t. They charge almost 20 percent at the Legends with that district.” So he noticed — eventually — the high taxes charged.
Coming to Wichita for business. (Click for a larger version.) If the tourism fee is implemented, some hotels in Wichita that are located in community improvement districts (including one Korroch owns) will have taxes totaling 17.9 percent added to customer bills.
Here’s something else regarding the myth of shifting hotel taxes to people from out of town. Are there are any Wichita business firms that have employees who live in other cities, and those employees travel to Wichita on business and stay in hotels? Often these hotel bills are paid by the employee and then reimbursed by the Wichita company they work for. So as far as a hotel knows, and as far as any marketing analysis might show, someone from Fresno spends a few days in a Wichita hotel. This person might work for Cargill Beef’s Fresno facility and have traveled to Wichita to visit the headquarters of Cargill Meat Solutions. In the end, the hotel bill and taxes are paid by Cargill Meat Solutions, a Wichita company.
Do any Wichita business firms employ consultants who travel to Wichita and stay in hotels, and those hotels bills are part of the consultants’ billable expense? In the end, who pays those taxes? A Wichita business firm does.
So at the public hearing, I hope someone asks the question: How often are these taxes actually paid by Wichita companies? Does the city know the answer to this?
Further: Isn’t it a sham to call this tax a “City Tourism Fee” when hometown companies are paying hotel bills for their employees and consultants to come to Wichita for business?
More secret spending
It is the position of Go Wichita that the agency doesn’t have to conform to the Kansas Open Records Act. The City of Wichita backs this interpretation of the law. Thus, we will have more taxpayer funds spent in secret.
The bureaucrats profit
Writing in Public Choice — A Primer Eamonn Butler explains the motivations of bureaucrats:
In terms of what bureaucrats actually do pursue, Niskanen suggested that budget maximisation provided a fair measure. It is an approximation to the objective of profit in the market context. And it provides a simple proxy for all the other things that go with a large and growing budget — such as job security, promotion prospects, salary increases and so on.
In their pursuit of these benefits, bureaucrats are just as much players in the political process as any other interest group — and they have no free-rider problem because their group is so well defined that they can easily keep the benefits of their lobbying to themselves. …
Bureaucrats can also rely on the political support of the interest groups that depend on the grants and programmes that they administer, and which would almost certainly like to see those budgets increased; and they can rely on the support of the commercial businesses that supply goods and services to the programmes that the agencies administer.
We see these characteristics revealing themselves: A government agency seeking to expand its budget and power, at the expense of taxpayers.
Corporate cronyism harms America
As the Wichita Business Journal features an interview with Charles Koch today, here’s a repeat of his article from September 2012 in which he address many of the same topics as covered in the WBJ interview.
“The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”
The editorial in today’s Wall Street Journal by Charles G. Koch, chairman of the board and CEO of Wichita-based Koch Industries contains many powerful arguments against the rise of cronyism. The argument above is just one of many.
In his article, Koch makes an important observation when he defines cronyism: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”
“Rent-seeking” was always a difficult term to use and understand. It had meaning mostly to economists. But “cronyism” — everyone knows what that means. It is a harsh word, offensive to many elected officials. But we need a harsh term to accurately describe the harm caused, as Koch writes: “This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”
The entire article is available at the Wall Street Journal. Koch has also contributed other articles on this topic, see Charles G. Koch: Why Koch Industries is speaking out and Charles Koch: The importance of economic freedom.
Charles G. Koch: Corporate Cronyism Harms America
When businesses feed at the federal trough, they threaten public support for business and free markets.
By Charles G. Koch
“We didn’t build this business — somebody else did.”
So reads a sign outside a small roadside craft store in Utah. The message is clearly tongue-in-cheek. But if it hung next to the corporate offices of some of our nation’s big financial institutions or auto makers, there would be no irony in the message at all.
It shouldn’t surprise us that the role of American business is increasingly vilified or viewed with skepticism. In a Rasmussen poll conducted this year, 68% of voters said they “believe government and big business work together against the rest of us.”
Businesses have failed to make the case that government policy — not business greed — has caused many of our current problems. To understand the dreadful condition of our economy, look no further than mandates such as the Fannie Mae and Freddie Mac “affordable housing” quotas, directives such as the Community Reinvestment Act, and the Federal Reserve’s artificial, below-market interest-rate policy.
Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.
With partisan rhetoric on the rise this election season, it’s important to remind ourselves of what the role of business in a free society really is — and even more important, what it is not.
Wichita Business Journal remodels, features Charles Koch interview
The Wichita Business Journal has, it its own words, “reinvented” itself, and starts its new life with features on Koch Industries and an extended interview with Charles Koch.To get started, the weekly newspaper has made its complete digital edition available to read at no charge. Click here for access.
The interview with Koch is wide-ranging, covering the business interests of Koch Industries and Koch’s political involvement, detailing his relationship with Americans for Prosperity. An example quote: “When you start attacking cronyism and people’s political interests, it gets nasty.”
In Wichita, citizens want more transparency in city government
In a videographed meeting that is part of a comprehensive planning process, Wichitans openly question the process, repeatedly asking for an end to cronyism and secrecy at city hall. As part of the Wichita-Sedgwick County Comprehensive Plan, the City of Wichita held a number of focus groups meetings. Their purpose, according to city documents, was to provide “information on the components of the Plan and provide input on a draft survey.”
(Some indication of the reverence given to the plan to city planners may be inferred by the city’s use of capitalization when referring to it.)
The community meetings were structured in a way reminiscent of the Delphi method, described in Wikipedia as “a structured communication technique, originally developed as a systematic, interactive forecasting method which relies on a panel of experts.” Others have a more skeptical view, believing that the Delphi technique leads citizens to believe they have participated in community democratic decision-making when in reality, that is not the goal of the process.
In October Americans for Prosperity-Kansas invited the city to hold a focus group meeting. Video from the meeting is below, or click here to view at YouTube.
Dave Barber, who is Advanced Plans Manager at Wichita-Sedgwick County Metropolitan Area Planning Department, facilitated the meeting. Susan Estes of AFP was the meeting organizer and host. Mike Shatz is the videographer. His description of the meeting is “The City of Wichita is holding a series of meetings to gain input from the public on future spending plans. The meetings are based off a survey the city conducted, which, by all accounts, was full of loaded questions geared towards promoting the programs that city officials want to see. In this meeting, one of the first in the series, citizens openly question the process and repeatedly ask for an end to cronyism and secrecy at city hall.”
Wichita planning documents hold sobering numbers
Wichita/Sedgwick County Community Investment Plan logo. This week the City of Wichita held a workshop where the Community Investments Plan Steering Committee delivered a progress report to the city council. The documents hold information that ought to make Wichitans think, and think hard. The amounts of money involved are large, and portions represent deferred maintenance. That is, the city has not been taking care of the assets that taxpayers have paid for.
The time frame of this planning process is the period 2013 to 2035. Under the heading “Trends & Challenges” we find some troubling information. Wichita Mayor Carl Brewer hinted at the problem last year in his State of the City Address when he said the city would need to spend $2.1 billion over 30 years on maintenance and replacement of water and sewer systems. The city’s performance measure report also told us that our pavement condition index has been deteriorating, and is projected to continue to decline.
So if we’ve been paying attention, it should not have been a surprise to read this in the presentation: “Decades of under-investment in infrastructure maintenance … 38% of Wichita’s infrastructure is in ‘deficient/fair’ condition.”
The cost to remedy this lack of maintenance is substantial. The document says that on an annual basis, Wichita needs to spend $180 million on infrastructure depreciation/replacement costs. Currently the city spends $78 million on this, the presentation indicates.
The “cost to bring existing deficient infrastructure up to standards” is given as an additional $45 to $55 million per year.
This is a lot of money. To place these numbers in context, here are some figures that help illustrate Wichita city finances:
Property tax collected in 2013: $105 million
Budgeted 2014 expenditures for fire department: $44 million
Budgeted 2014 expenditures for police department: $79 millionIt’s thought that an additional one cent per dollar city sales tax would generate around $80 million per year.
The amounts by which the city is deficient in maintaining its assets is staggering, compared to other expenses the city has. The size of the deficiency overwhelms possible sources of new revenue. A one cent per dollar increase in sales tax would not cover the deficiencies in maintaining our current assets. Then, remember the things Wichita wants to increase spending on — a new library, economic development, expanded public transit, new convention center, economic development, and perhaps other things.
The report lists three scenarios for future growth: Maintaining current trends, constrained suburban growth, and suburban and infill growth mix. Whenever we see words like “constrained” we need to be cautious. We need to be on guard. The Wichita Eagle reported this: “In the city’s recently completed series of 102 public meetings, citizens were clear, City Manager Robert Layton said: Redevelop the core. We’ve had enough suburban growth for awhile.”
It’s unclear how closely the findings from the public meetings reflects actual citizen preference. Cynics believe that these meetings are run in a way that produces a predetermined outcome aligned with what city officials want to hear. At any rate, when you ask people about their preferences, but there is no corresponding commitment to act on their proclaimed preferences, we have to wonder how genuine and reliable the results are.
There is a very reliable way to find out what people really want, however. Just let them do it. If people want to live downtown on in an inner city neighborhood, fine. If they want suburban-style living, that’s fine too. Well, it should be fine. But reading between the lines of city documents you get the impression that city planners don’t think people should live in suburban-style settings.
Sometimes we don’t have to read between the lines. Sometimes the attitude of planners is explicit. In 2010 the city — actually the Wichita Downtown Development Corporation — employed Goody Clancy, a Boston-based planning firm, to help plan the revitalization of downtown Wichita. In the article Goody Clancy market findings presented to Wichita audience I reported on some of what the planners said. For example, David Dixon, the Goody Clancy principal for this project, told how that in the future, Wichitans will be able to “enjoy the kind of social and cultural richness” that is found only at the core. “Have dinner someplace, pass a cool shop, go to a great national music act at the arena, and then go to a bar, and if we’re lucky, stumble home.”
This idea that only downtown people are socially and culturally rich is an elitist attitude that we ought to reject. By the way, when I presented to the Wichita City Council on this topic, I noted that no council members, except for possibly one, lived in neighborhoods that might be described as in “the core.”
Other speakers from Goody Clancy revealed a condescending attitude towards those who hold values different from this group of planners. One presenter said “Outside of Manhattan and Chicago, the traditional family household generally looks for a single family detached house with yard, where they think their kids might play, and they never do.”
This, again, is an elitist attitude. No, it’s worse than that. It’s condescending. It reveals that the professional planning class thinks that the ordinary people of Wichita can’t decide for themselves what they really want. Somehow, people are duped into buying homes that don’t really meet their needs, and they’re not smart enough to realize that. That is the attitude of the professional planning class. It’s an elitism that Wichitans ought to reject.
The planning process
The planners tells us that the process is based on data. “Data-driven” is a term they use. But when we look under the covers at the data, we realize that we need to be very skeptical of claims.
Returning to the Goody Clancy plan for downtown Wichita, the principal planner used Walk Score in a presentation delivered in Wichita. Walk Score is purported to represent a measure of walkability of a location in a city. Walkability is a key design element of the master plan Goody Clancy has developed for downtown Wichita.
Walk Score is not a project of Goody Clancy, as far as I know, and Dixon is not responsible for the accuracy or reliability of the Walk Score website. But he presented it and relied on it as an example of the data-driven approach that Goody Clancy takes.
Walk Score data for downtown Wichita, as presented by planning firm Goody Clancy. Click image for a larger version. The score for 525 E. Douglas, the block the Eaton Hotel and Wichita Downtown Development Corporation is located in and mentioned by Dixon as a walkable area, scored 91, which means it is a “walker’s paradise,” according to the Walk Score website.
But here’s where we can start to see just how bad the data used to develop these scores is. For a grocery store — an important component of walkability — the website indicates a grocery store just 0.19 miles away. It’s “Pepsi Bottling Group,” located on Broadway between Douglas and First Streets. Those familiar with the area know there is no grocery store there, only office buildings. The claim of a grocery store here is false.
There were other claimed amenities where the data is just as bad. But the chairman of the Wichita Downtown Development Corporation at that time said that Walk Score has been updated. I should no longer be concerned with the credibility of this data, he told me through a comment left on my website.
He was correct in one regard: Walk Score had been updated. For the same location the walk score was revised to 85%, which is considered “very walkable.” The “grocery store” is no longer the Pepsi Bottling Group. It’s now “Market Place,” whose address is given as 155 N. Market St # 220.
Someone strolling by that location would notice that address, 155 N. Market number 220, is the management office for an office building whose name is Market Place.
Still no grocery store. Nothing even resembling a grocery store.
I looked this week at the Walk Score website. It’s been updated and redesigned. Now for the same block in the heart of downtown Wichita the walk score is 74, which is “very walkable,” according to the site. In a narrative explanation, the site says this: “The closest grocery stores are Ray Sales Co, Market Place and The Hot Spot Detox Shop.”
Ray Sales Co., in the shadow of Intrust Bank Arena. I don’t know if you’ve been to Ray Sales, but it’s a tiny store with a very limited product selection. It’s not the type of place that will attract people to downtown Wichita. We know that because officials say a grocery store is one of downtown’s most pressing needs, despite the existence of Ray Sales.
Market Place is listed again as evidence of a grocery store in downtown Wichita. Remember, Market Place is the name of an office building located on Market Street. It’s not a grocery store.
The third location listed as a grocery store is a shop that sells kits to help people pass drug tests. It’s nothing like a grocery store.
Again, David Dixon and Goody Clancy did not create the Walk Score data. But they presented it to Wichitans as an example of the data-driven, market-oriented approach to planning that they use. Dixon cited Walk Score data as the basis for higher real estate values based on the walkability of the area and its surrounding amenities. But anyone who relies on the evidence Dixon and Goody Clancy presented would surely get burnt unless they investigated the area on their own.
Keep in mind that the presentation of this Walk Score data was made after Goody Clancy staff had spent considerable time in Wichita. That someone there could not immediately recognize how utterly bogus the data is: That should give us cause for concern that the entire planning process is based on similarly shoddy data and analysis.
Constraining growth
Returning to the city’s presentation: How does the city “constrain” suburban growth? By taking away the freedom for people to live where they want. Why would the city want do that? City leaders say that suburban development is expensive. It’s not sustainable. Suburban living depends on the personal automobile. And remember the attitude of the professional planners Wichita Downtown Development Corporation hired: People can’t be trusted to know what they really want for themselves.
Special taxes paid on a residential home. If it really is more expensive to develop new suburban areas, the city should simply charge what it costs. To some extent this already happens. Anyone who builds a new home in a new area will pay for the residential street and other infrastructure through special taxes. If the city feels it needs to charge for building arterial streets to serve new suburban areas, it should do so. But the city should realize that people spending their own money to buy or rent a residence — this is the best indication of their true preferences. What people say in focus groups or on paper survey forms is nowhere near as reliable.
Community input
The survey that Wichita used has its own problems. Here’s an example of a question respondents were asked to agree or disagree with: “Local government, the school district, community organizations and the business community should work together to create an investment climate that is attractive to business.”
The meaning of an attractive investment climate means different things to different people. Some people want an investment climate where property rights are respected, where government refrains from meddling in the economy and transferring one person’s property to another. An environment free from cronyism, in other words. But the Wichita way is, unfortunately, cronyism, where government takes an active role in managing economic development. We in Wichita never know when our local government will take from us to give to politically-favored cronies, or when city hall will set up and subsidize a competitor to your business.
Wichita flights compared to the nation. Sometimes the questions are misleading. A question relating to the subsidy program at the Wichita airport read “I’m willing to pay increased taxes or fees to support investment … that uses public dollars to reduce the cost and increase the number of commercial flights at Mid-Continent Airport.”
This is an example of a question which has a false premise. Since the subsidy programs have been in place, the number of flights from the Wichita airport has declined, not increased as the question would lead readers to believe. See Wichita flight options decrease, despite subsidies and Wichita airfare subsidy: The negative effects.
Leadership of city fathers
On these and other issues, the Wichita Eagle quoted mayor Brewer: “We’ve put them off for too long. We didn’t want the challenges. We didn’t want the tax bills. But now, to maintain our quality of life, we’ve got to catch up.”
It’s almost as if the mayor is speaking as a bystander. But he’s been mayor for nearly seven years, and was on the city council before that time. During that time, he and other city leaders have boasted of not increasing property taxes. While the property tax rate has been stable, property tax revenue has increased due to development of new property and rising assessment values. In spite of this, the city has a huge backlog of deferred maintenance. The way to interpret this is that the city has really been engaging in deficit spending under Brewer’s leadership. We didn’t spend what was needed to maintain our assets, and now the mayor tells us we need to increase spending to make up for this.
The economist Milton Friedman told us that it’s more important to look at government spending rather than the level of taxation. That’s because spending must eventually be paid for, either through current taxes or future taxation. The federal government generate deficits and can pay for spending through creating inflation. Fortunately, cities and states can’t do that.
But, as we’ve seen, cities like Wichita can incur costs without paying for them. This is a form of deficit spending. By deferring maintenance of our infrastructure, the city has pushed spending to future years. The report released this week gives an idea of the magnitude of this deferred spending: It’s huge.
This form of deficit spending is “off the books” and doesn’t appear in city financial statements. But it’s real, as the mayor now admits. The threat to our freedom to live where we want is real, too. We must be watchful and diligent.
Viewing the seen and unseen
The lesson of the book “Economics in One Lesson” by Henry Hazlitt is this: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”(The Ludwig von Mises Institute has published an edition of this book which is available at no cost at its website; click here. Amanda BillyRock has illustrated most of the chapters in video. Click here for the playlist.)
Looking beyond what we see at first glance, that’s important. And considering everyone, not just some small group, is important too. You may be familiar with the term “special interest group.” A local example might be the Wichita Area Builders Association, which represents homebuilders. The purpose of groups like this — and I’m sorry to have to single out this group — is to represent their members, and them alone. So last year the Builders Association was able to persuade the Wichita City Council to pass a program that rebates Wichita property taxes on new homes for a few years. This makes it easier to sell these new homes. Homes which are built, of course, by members of the Wichita Area Builders Association.
Did the city council consider the long term effects of this policy, such as the effect on tax revenue in future years? Did the council consider the “Cash for Clunkers” effect, in which incentive programs induce people to buy now, only to depress sales in later years after the program ends? The answer is either a) No, the council did not consider these effects, or b) The council decided to ignore these effects.
Then, what about the effect on other groups besides the builders? Did the council consider that by offering savings when buying these select new homes, it likely reduced the appeal and value of all other homes across the city? Did the council consider that these new homes will require services like police and fire protection, but since they don’t contribute property tax, other taxpayers have to pay to provide these services?
And what about setting another precedent, that when business is not doing well, a special interest group appeals to government for special favors?
This is an example of the city council considering only the immediate effects of a policy, and also the effects on only a single group — the self-interested homebuilders. Things like this happen all the time.
Remember how Hazllitt said these groups will argue “plausibly and persistently?” That happened. As an example, Wichita State University economists prepared an analysis showing that this rebate program benefited the city. Did that analysis consider the long-term effects or only the immediate effects of the policy? Did that analysis consider the effects on all groups? I’m afraid that if we could look under the hood of these models, we’d find that they suffer from the problems Hazlitt warns about.
And the president of the Builders Association argued persuasively before the council. That’s an example of when Hazlitt wrote about a special interest group: “It will hire the best buyable minds to devote their whole time to presenting its case.”
Hazlitt told us what we need to do in these cases, writing: “In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups.”
Special interest groups expend lot of effort to get government to look at the seen and skip the unseen. That’s a reference to the famous parable of the broken window from chapter two of “Economics in One Lesson.” Ahe child who threw a rock through the window of the bakery. The crowd that gathered around the broken window: Someone suggested that the damage is actually a good thing, because the windowmaker now has work to do and earns money. And the windowmaker in turn will spend his new income somewhere else, and so forth. Economic development professionals who make arguments for subsidies to business call this the multiplier effect. It creates what they call indirect impacts.A few years ago in an effort to drum up taxpayer subsidies for arts, a national organization — a special interest group — made this argument:
A theater company purchases a gallon of paint from the local hardware store for $20, generating the direct economic impact of the expenditure. The hardware store then uses a portion of the aforementioned $20 to pay the sales clerk’s salary; the sales clerk respends some of the money for groceries; the grocery store uses some of the money to pay its cashier; the cashier then spends some for the utility bill; and so on. The subsequent rounds of spending are the indirect economic impacts.
Thus, the initial expenditure by the theater company was followed by four additional rounds of spending (by the hardware store, sales clerk, grocery store, and the cashier). The effect of the theater company’s initial expenditure is the direct economic impact. The subsequent rounds of spending are all of the indirect impacts. The total impact is the sum of the direct and indirect impacts.
That is the same argument made to excuse the destruction of the broken window in the bakery. Doesn’t this sound plausible? But Hazlitt, echoing Bastiat before him, notes this: The baker was going to buy a suit of clothes, and buying that suit would set off its own chain of economic activity.
But now he must spend that money on fixing the broken window. The new window is what is seen. The unbought suit of clothes is more difficult to see. It is the unseen.
If the window was not broken, the baker has a functional window and a new suit of clothes. After the window is broken, however, all the baker has is a replacement window. No new suit of clothes is purchased.
As Hazlitt summarized: “The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new ’employment’ has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.”
In the case I cited above, it’s easy to see the benefit granted to the homebuilders. But the economic activity that does not take place because of the diversion of resources to the homebuilders? Where is that? It is unseen.
When the theater company spends $20 of taxpayer-provided money to buy paint: Where did that $20 come from? Isn’t it possible that a homeowner might have bought the same gallon of paint, but now is not able to because he must pay taxes to support the theater company? It’s easy to see the theater production with its taxpayer-funded painted set. It’s not easy to see the house that sits unpainted for a year to pay for the theater company’s paint. That is the seen and unseen.
