The unfortunate news of the cancellation of a new aircraft program can be a learning opportunity for Wichita.
As Wichita seeks to grow its economy, the loss of a new aircraft program at one of the city’s major employers is unwelcome news. Now it is important that our leaders and officials seek to learn lessons from this loss. But first, we must acknowledge the loss. Wichita economic development officials are quick to trumpet successes, but so far there is no mention of this loss from the city or its economic development agencies.
The project received state, local and federal incentives. Lots of incentives. These incentives took the form of cash grants, forgiveness of taxes that would otherwise be due, and the ability to reroute its employee withholding taxes for the company’s exclusive benefit. So one lesson is that when local officials complain of the lack of money available for incentives, they are not being truthful.
A second lesson is the limited ability of incentives to overcome obstacles. In this case, the company said the incentives were necessary to make the project economically feasible. Incentives were awarded, but the project failed.
There are some important public policy issues that should be discussed:
Did the incentives induce Bombardier to take risks that it would not have taken had it been investing its own funds, or funds it had to raise from stockholders and debtholders?
Will the politicians that took credit for landing the Model 85 and its jobs now recognize the futility of their efforts?
Will the government agencies that took credit for creating jobs adjust their records?
Incentives like these are often justified using a benefit-cost ratio. This incident reminds us that these calculations are valid only if the investment works as planned. Will local governments recalculate the benefit-cost ratios based on the new information we now have?
Perhaps most important: Who has to pay the costs of these incentives? Part of the cost of this company’s investment, along with the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. This action — the award of incentives to an established company — is harmful to the Wichita economy for its strangling effect on entrepreneurship and young companies. As this company and others receive incentives and escape paying taxes, others have to pay.
There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. But as we see in the unfortunate news from Bombardier, this is not the case. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)
An interactive visualization of gross domestic product for metropolitan areas.
Gross domestic product is the sum of the value of all goods and services produced for a period of time. The Bureau of Economic Analysis makes this statistic available for metropolitan areas. GDP is not the only way to measure the economic health of a region, but it is one way. I’ve gathered the data and made it available in an interactive visualization.
Growth of GDP for Wichita and selected cities. Click for larger version.When using the visualization you may select total GDP, or GDP for private industry or government alone. You may select any number of metropolitan areas to appear on the chart. By clicking metro names in the legend, you can highlight or emphasize the series for one metro area. Use Ctrl+click to select more than one at a time.
Of note, recently James Chung delivered a lecture in Wichita. As part of the presentation, he mentioned three areas that he thought were doing things well: Cedar Rapids, Des Moines, and Omaha. A nearby illustration shows the visualization of the growth of GDP for these metro areas and Wichita. You can see that GDP for these areas have grown faster than has GDP for Wichita. (This visualization shows GDP change since the start of the chart, so that the growth of metro areas of different sizes can be compared.)
Growth of GDP for Wichita and selected cities. Click for larger version.Another illustration compares Wichita to several cities that were part of the Wichita Metro Chamber of Commerce’s city-to-city visits. While in some years the visit has been to cities like Austin that have grown rapidly, that is not always the case.
Click here to open the visualization in a new window.
Pension costs for the largest of Wichita’s two funds have been rising rapidly.
The City of Wichita has two major pension funds, one for police and fire employees, and another for “regular” employees. These are defined benefit pensions, meaning that retirees are guaranteed a specific dollar benefit based on items like length of service and salary. While employees contribute part of their salary to the funds, it is up to the city to make contributions in sufficient amount to ensure that promised benefits can be paid.
These costs have been rising even though the city has not increased promised benefits to retirees.
There are two charts for each fund. One shows employer contributions and covered employee payroll in dollars, using two different scales. Then, a chart shows the contributions as a percent of covered employee payroll.
The employees’ fund is larger than the police and fire fund, with covered payrolls of $71 million and $65 million respectively.
In this episode of WichitaLiberty.TV: Do Wichita’s many laws and regulations accomplish their goals? Then, are Wichita’s economic development policies likely to work? Episode 98, broadcast October 18, 2015. View below, or click here to view in high definition at YouTube.
In this paper, we begin with a critical overview of two of the most commonly used strategies to promote entrepreneurship: creating public venture funds and business incubators. We then explain that these strategies often neglect an essential principle: connectivity and learning by entrepreneurs. Next, we describe ways in which public venture funds and incubators can be reorganized based on the connectivity principle before concluding with several other recommendations for how cities and states can promote entrepreneurship and begin to see real results that transform economies and provide new opportunities to residents.
The Wichita city council issues a proclamation for a controversial medical issue.
Do you advocate for a condition that is not a “distinct, predictably identifiable disease with a reasonable pathophysiological mechanism,” favoring a method of treatment that is not “appropriate and effective,” and your method of treatment has been repudiated by The American Academy of Ophthalmology, American Academy of Pediatrics, American Association for Pediatric Ophthalmology and Strabismus and American Association of Certified Orthoptists because it has no scientific basis? 1
The Wichita ASR water project produced no water in September, despite many days when river flow was adequate.
An important part of Wichita’s water supply infrastructure is the Aquifer Storage and Recovery program, or ASR. This is a program whereby water is taken from the Little Arkansas River, treated, and injected in the Equus Beds aquifer. That water is then available in the future as is other Equus Beds water.
With a cost so far of $247 million, the city believes that ASR is a proven technology that will provide water and drought protection for many years. Last year the city recommended that voters approve $250 million for its expansion, to be paid for by a sales tax. Voters rejected the tax.
September 2015 production
Flow of the Little Arkansas River at Valley Center. The ASR project is able to draw from the river when the flow is above 30 cfs at this measurement station.In September 2015, the ASR project recharged no water. The ASR project is able to draw from the Little Arkansas River when the flow is above 30 cfs. As can be seen in the chart of the flow of the river, the flow was above this level for many days. There were 18 days in September when there was adequate river flow for ASR to operate, counting only those days when the flow was above 30 cfs for the entire day.
The city has not provided an explanation as to why the project is recharging so little water.
ASR project background and production
According to city documents, the original capacity of the ASR phase II project to process water and pump it into the ground (the “recharge” process) was given as “Expected volume: 30 MGD for 120 days.” That translates to 3,600,000,000 (3.6 billion or 3,600 million) gallons per year. ASR phase II was completed in 2011.
At a city council workshop in April 2014, Director of Public Works and Utilities Alan King briefed the council on the history of ASR, mentioning the original belief that ASR would recharge 11,000 acre feet of water per year. But he gave a new estimate for production, telling the council that “What we’re finding is, we’re thinking we’re going to actually get 5,800 acre feet. Somewhere close to half of the original estimates.” The new estimate translates to 1,889,935,800 (1.9 billion) gallons per year.
Gallons of Water Recharged Through Recharge Basins and Wells during Wichita ASR Phase II, cumulative since July 2013.Based on experience, the city has produced a revised estimate of ASR production capability. What has been the actual experience of ASR? The U.S. Geological Survey has ASR figures available here. I’ve gathered the data and performed an analysis. (Click charts for larger versions.)
I’ve produced a chart of the cumulative production of the Wichita ASR project compared with the original projections and the lower revised projections. The lines for projections rise smoothly, although it is expected that actual production is not smooth. The second phase of ASR was completed sometime in 2011, but no water was produced and recharged that year. So I started this chart with January 2012.
Gallons of Water Recharged Through Recharge Basins and Wells during Wichita ASR phase II, monthly.2013 was a drought year, so to present ASR in the best possible light, I’ve prepared a chart starting in July 2013. That was when it started raining heavily, and data from USGS shows that the flow in the Little Arkansas River was much greater. Still, the ASR project is not keeping up with projections, even after goals were lowered.
On the chart of monthly production, the horizontal line represents the revised annual production projection expressed as a constant amount each month. This even rate of production is not likely, as river flow varies. In the three years that ASR phase II has been in production, that monthly target been exceeded in three months.
Two nearby charts give an idea of the efficiency of operation of the ASR project. (Click charts for larger versions.) For each month, I counted how many days had a river flow above 30 cfs at every measurement for the day. (The flow is measured several dozen times a day.) If a day had all measurements above 30 cfs, I counted that as a day of adequate river flow. I then calculated the number of days of work actually accomplished using the water produced each month, the number of days of adequate river flow for the month, and the ASR design capacity.
As can be seen in the charts, the ASR project is operating far below its design goal. So far the city has not been able to provide an explanation as to why this project is not meeting its goals.
At one time the city was proud enough of the ASR project that it maintained an informative website at wichitawaterproject.org. That site no longer exists.
The sharing economy provides for the decentralization and privatization of regulation, but the City of Wichita clings to the old ways.
Letter in Wichita Eagle, excerptIn May the Wichita Eagle printed a letter from a Wichitan describing his recent cab ride from the airport: “I got in the cab to go home, and that turned out to be the most offensive encounter of my trip. The driver was dressed perfectly for slopping hogs. The cab plainly stank. There were spills, trash, crumbs, scuzzy windows, sticky door panels. Ugh.”
Not having been in a taxicab in Wichita for some years, I was surprised to learn of this person’s experience. There is a law, after all. Section 3.84.140 of the Wichita municipal code provides that “Any vehicle used as a taxicab shall be kept clean, of good appearance … ” Section 3.84.320 mandates that no taxicab driver shall “Fail to maintain their personal appearance by being neat and clean in dress and person.” Also, no driver shall “Fail to keep clothing in good repair, free of rips, tears and stains” or “Operate any taxicab which is not in a clean and/or sanitary condition.”
These laws were implemented in 2012 as a result of former mayor Carl Brewer’s frustration with the complaints he received regarding Wichita taxicabs. The instinct of politicians and bureaucrats is that if there’s a problem, a new or tougher law can provide the solution. The regulations mentioned above are part of the city’s solution, as are mandatory customer service training classes.
But as we learn from May of this year, these regulations aren’t working, according to at least one person whose judgment the Wichita Eagle trusted enough to print.
At the time, the city’s actions in creating tougher regulations had a whiff of plausibility. But right about the time that Wichita implemented new regulations the market for personal rides started to change. That change was the increasing popularity, availability, and refinement of Uber and other similar services. Uber started operations in Wichita in 2014.
What is different about Uber from regular taxicabs? For one, drivers are rated each time they serve a passenger. (Passengers are rated too, by the drivers.)
Which form of regulation do you suppose is most effective? Regulation by government, or regulation by consumers? The letter in the Eagle tells of the failure of government regulation. But no one except that passenger likely knows how bad was the experience of riding in that cab. (Well, that passenger and the driver’s others passengers, probably. A cab doesn’t get that grungy in just a day.)
But a bad Uber trip contributes to a driver’s public reputation. (Bad passengers also develop a reputation that drivers can see.) It’s a powerful system of regulation of each and every time service is provided.
Further evidence of the failure of laws and regulations — or the city’s application and enforcement of them — is that the letter writer begged the city to pass laws that are already on the books: “Wichita, please enact standards for dress, cleanliness and vehicle condition to protect our reputation. Don’t let the impression of the nation’s best airport be sullied by taxicabs.”
Decentralize and privatize
Jeffrey TuckerLast week the author Jeffrey Tuckerappeared on WichitaLiberty.TV. As we talked about Uber and other services in the sharing economy, I mentioned that this is the decentralization of regulation. Tucker repeated the idea, calling it the privatization of regulation. Both terms apply.
But Wichita’s 2012 taxicab regulations are still the law. As the Wichita Eagle reports, drivers are being trained by bureaucrats. Cabs are still dirty and drivers slovenly. It seems to me that the Wichita regulations are contrary to how Uber operates, leaving the company operating in the shadows, vulnerable to a clampdown at any time. That is something the city needs to change.
While success in growing a company is welcome in Wichita, there are broader issues that affect the rest of the metropolitan area.
Tweet from Wichita city officialsThis week the Wichita City Council extended a property tax abatement for a manufacturing company in Wichita. The tax abatement was granted under the city’s Industrial Revenue Bonds program. Under this program no city money is lent to the company. The sole reason for the bonds is the accompanying property tax exemption, and in some cases, a sales tax exemption.
City documents from 2008 estimate the company will avoid paying $239,051 in property taxes for the first year. Savings for subsequent years are probably similar. This week’s action by the city council extends this benefit for another five years.
While the city’s economic development staff cheers the company’s success, important questions are not addressed. Perhaps the most important question is this: Was this tax abatement necessary for this expansion to proceed? City documents are silent on this question. At the 2008 council meeting the necessity of the tax abatement was not mentioned or discussed.
Why were the bonds necessary? The company did not lack access to credit, as city documents state the company purchased the bonds itself. The company either had cash, or access to credit.
Was it a question of feasibility? Some economic development programs require that the applicant demonstrate the necessity of an incentive. Often the city presents a “gap” analysis that purportedly shows a gap between available financing and what is necessary to make the project feasible. Something like this.
But no such claim was made for this matter.
Perhaps this proposed expansion just barely missed being economically feasible, and if the company could avoid paying the same property taxes that most everyone else pays, the project would be feasible.
But this argument was not advanced. If it had been, then we would be stuck with the question of why are Wichita industrial property taxes so high that investments like this are not feasible?
The city presents a benefit-cost ratio showing that by giving up some property taxes, it gains even more tax revenue from other sources. But a positive benefit-cost ratio is not remarkable. Economic activity generally spawns more economic activity, which government then taxes. The question is: Did the city, county, school district, and state need to give up tax revenue in order to make this investment possible? (That’s right. The action by the city affected three other jurisdictions.)
No one made that argument.
Part of the cost of this company’s investment, along with the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify which firms will be successful. So we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. The action the Wichita city council took this week works against entrepreneurial firms. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)
The problem with this action
A major reason why this action is harmful to the Wichita economy is its strangling effect on entrepreneurship and young companies. As this company and others escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture.
There’s plenty of evidence that entrepreneurship, in particular young business firms, are the key to economic growth. But Wichita’s economic development policies, as evidenced by this action, are definitely stacked against the entrepreneur. As Wichita props up its established industries, it makes it more difficult for young firms to thrive. Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Wichita economy.
These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form. Young entrepreneurial companies are particularly vulnerable.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”
(For a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view, see Research on economic development incentives. A sample finding is “General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).”)
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates for everyone is an example of such a policy. Abating taxes for specific companies through programs like the Wichita city council used this week is an example of precisely the wrong policy.
In explaining the importance of dynamism, Hall wrote: “Generally speaking, dynamism represents persistent, annual change in about one-third of Kansas jobs. Job creation may be a key goal of economic development policy but job creation is a residual economic outcome of business dynamism. The policy challenge centers on promoting dynamism by establishing a business environment that induces business birth and expansion without bias related to the size or type of business.”
We need to move away from economic development based on this active investor approach, especially the policies that prop up our established companies to the detriment of dynamism. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.
