Notes for remarks delivered to the Wichita City Council, October 18, 2011. Johnson Controls asked the city for a forgivable loan.
Mayor, members of the council,
I can understand the city’s desire to help out homegrown companies that might be struggling to get a foothold in business. I don’t think it’s wise to do so, but I can understand how people might think it is.
But Johnson Controls doesn’t fall into this category.
In Wichita, the labor force is 191,760. Johnson’s 137,000 worldwide employees amount to 71 percent of this figure.
Johnson’s profit of $1,540,000,000 is 2.8 times the city’s all funds budget of $549,313,783, or 7.1 times the city’s general fund budget of $217,912,874
So this is not a small company, or a startup company, or a company that lacks for money, or a company that isn’t successful. Its stock has far outperformed leading market indexes over the past ten years.
The State of Kansas is contributing $1,168,000 through various programs. This is not in the form of loans that need to be repaid. It is in the form of grants, forgiveness from paying the taxes that most others have to pay, and by expenditures through the tax system.
I remind this council that the cost-benefit calculations performed by the Wichita State University Center for Economic Development and Business Research are not of the same type that a business makes, or that people make in their personal lives. There are not legitimate business investments that have a return of five-fold over any reasonable period of time, at least not without accepting huge risks.
Instead, the “benefit” that goes into this equation is in the form of future anticipated tax revenues. It simply recognizes that economic activity is good, and since government taxes based on economic activity, its tax revenues go up. This happens whether or not government claims responsibility for creating the economic activity.
The harm of programs like this is that when the city, county, and state make these programs available, companies will take advantage of them. Evidently companies find it’s easy to persuade this state and this council to grant them money.
At least easier than it is to raise equity, where you have to trade shares of ownership for money. Or in debt markets, where you have to pay interest and principal.
This behavior creates a self-fulfilling feedback loop. Company A sees what Companies B, C, D, E, F (and so on …) have received from the city, county, and state, and they want it too. Soon we may find ourselves in the situation where few companies will consider Wichita without some form of handout.
But the real harm that these programs do is the destruction of civil society. By that I mean a society that respects individuals and property rights, and where people trade harmoniously with others through markets. This includes companies attempting to raise investment capital, like the applicant company today.
Instead, we replace a civil society and market entrepreneurship with political entrepreneurship, and with all the negatives that accompany that.
If we in Wichita are looking to distinguish ourselves, let’s start today by rejecting crony capitalism as our economic development tool.
The forgivable loan measure passed 6 to 1, with Michael O’Donnell (district 4, south and southwest Wichita) voting against it.