Reason Magazine - Topics > Corporate Welfare

Now Playing at Reason.tv: What We Saw at the Mortgage Bailout Demonstration

gillespie@reason.com (Nick Gillespie) — Tue, 22 Apr 2008 16:30:00 EDT

On April 16 in Washington, D.C., the Ad Hoc National Network to Stop Evictions & Foreclosures organized a demonstration outside a meeting of the Mortgage Bankers Associaton at the Washington Court Hotel.

reason.tv's Dan Hayes and Michael C. Moynihan checked out the demonstration and talked with some of the activists, who quickly changed the subject from home loans to Castro's Cuban paradise, the need to free Mumia Abu Jamal, forgiving student loans, the Rothschilds (!), Haitians eating a mixture of dirt and oil (!?!?), and much, much more. Approximately six minutes.

To view the video, click on the image below.

For the full song used in the intro and outro, go here.

Links! We Got Links!

jwalker@reason.com (Jesse Walker) — Fri, 04 Apr 2008 08:00:00 EDT

Stuff I've been meaning to blog:

* a leftist critique of the New Deal,

* an online chat with Al Qaeda,

* a psychiatric strange loop,

* and from 1986, the first important piece of Reagan revisionism.

Bonus politics-free, prog-free music link: Candi Staton sings Merle Haggard.

Rhymes With "Male Lout"

matt.welch@reason.com (Matt Welch) — Mon, 24 Mar 2008 09:25:00 EDT

Be very afraid of some of the "solutions" being proferred to the subprime-triggered credit crunch:

The Fed, the Bank of England and the European Central Bank are exploring the feasibility of using taxpayers' money to shore up the mortgage-backed securities market, the Financial Times reported on March 22 [...]
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

Ya think? Meanwhile, the Washington Post today asked each major presidential campaign their big ideas for Solving the Economy. Some excerpts:

Barack Obama's Austan Goolsbe:

Obama supports efforts to create a new FHA Housing Security Program to provide significant incentives and guarantees for lenders to buy out mortgages that exceed the value of homes and convert them into stable 30-year fixed-rate mortgages that homeowners can afford. This is a responsible plan designed to help responsible homeowners without rewarding borrowers or investors who helped create the problem by gambling recklessly or committing fraud, and it asks both sides to contribute to the solution.
Obama would couple this plan with a direct interest-rate subsidy for low- and middle-income borrowers patterned on the mortgage interest deduction now predominantly used by high-income itemizers, as well as with comprehensive credit counseling, additional aid for loan workouts and reform of the bankruptcy code.

John McCain's Douglas Holtz-Eakin:

McCain will not play election-year politics with the mortgage crisis. In evaluating any proposal, he will apply four principles: (1) No taxpayer dollars should bail out real estate speculators or financial market participants who failed to do due diligence in assessing credit risks. (2) Any financial assistance should be accompanied by reforms that ensure that we never face this problem again. (3) Too little equity -- small down payments by home buyers and too little capital at our financial institutions -- was a source of the housing and credit problem that must be reversed. (4) Where government assistance is merited, lenders and homeowners should make financial sacrifices to qualify.
The financial markets are suffering the after-effects of the bursting of a housing bubble. As with the technology bubble of the late 1990s, much of the difficulty has been created by speculators looking for quick profits and by investors and bankers who ignored basic rules of risk management in an attempt to cash in while times were good. John McCain will not dip into pockets on Main Street to reward these people with a bailout.

Hillary Clinton's Gene Sperling:

Clinton called on regulators to take preemptive action -- including a foreclosure timeout, strengthening the Federal Housing Administration's capacities to respond to a crisis and cracking down on predatory lending practices with plain-language disclosure requirements. She has since called for a plan to encourage the restructuring of viable mortgages through a voluntary agreement to freeze interest rates on subprime adjustable-rate mortgages and a 90-day foreclosure moratorium. She immediately supported the legislation introduced by Rep. Barney Frank and Sen. Chris Dodd seeking a more systemic effort to unlock and restructure mortgages, and she continues to consult experts over the most effective method for doing so. [...]
On Thursday, Clinton proposed a second stimulus package, focused on helping at-risk homeowners and communities. Across the nation, concentrated foreclosures and vacant buildings are leading to downward spirals; they threaten to bring crime and blight into once-viable neighborhoods. In early January, Clinton called for a $30 billion Emergency Housing Fund to give localities broad tools to head off this threat, including the latitude to buy and rent out or resell such vacant properties. Today, even Fed Chairman Ben Bernanke is calling for policies to confront the community harm traced to "clusters of foreclosures." If we can provide a $30 billion lifeline for Bear Stearns, can't we afford $30 billion to prevent Main Streets from turning into mean streets?

Discuss.

Some Businesses Are Inherently Public, Says Washington State Supreme Court

bdoherty@reason.com (Brian Doherty) — Thu, 21 Feb 2008 13:11:00 EST

Some bad news from the Institute for Justice, in a press release ~~that does not yet seem to be on their website~~ that you can read here in its entirety:

The Washington Supreme Court today dealt a blow to civil liberties. In Ventenbergs v. City of Seattle, a divided Court decided that the city of Seattle could violate local entrepreneur Joe Ventenbergs' constitutional right to earn an honest living by creating construction waste-hauling monopolies for two multi-national corporations, making it illegal for Joe to practice his profession.

“The Court got the law wrong today and Washingtonians will suffer as a result,” said William Maurer, executive director for the Institute for Justice Washington Chapter (IJ-WA), which represents Joe Ventenbergs. “The Court ruled that our constitutional rights are less important than protecting two enormous, out-of-state corporations from competition. The sole good news from this decision, however, is that it is so narrow that it affects only hard-working entrepreneurs in the waste-hauling business and not other entrepreneurs throughout the state, who will be able to continue to rely on the protections of our state constitution to combat the creation of government monopolies.”

In a decision released this morning, the Court stated that hauling construction waste is not a private enterprise and “is in the realm belonging to the State and delegated to local governments.” The court found specifically that the provision of waste hauling service is a “government service” and constitutional protections do not apply to government-provided services.

Justice Richard Sanders, joined by Chief Justice Gerry Alexander and Justice Jim Johnson, dissented, arguing that today’s decision “presents a textbook example of governmental corporate favoritism to advance the profits of the privileged few at the expense, and the extinction, of any potential competitors. It flies in the face of the state’s privileges and immunities clause which was adopted to combat this exact sort of unholy alliance between government and big business, which ultimately not only disserves the excluded businesses but also the public in general.”

IJ's page dedicated to the Ventenbergs case. with a timeline and many links.

The Impossible Dream of Energy Independence

bdoherty@reason.com (Brian Doherty) — Wed, 20 Feb 2008 15:00:00 EST

In his forthcoming book Gusher of Lies: The Dangerous Delusions of “Energy Independence” (PublicAffairs) Robert Bryce, managing editor of Energy Tribune and author of Pipe Dreams: Greed, Ego and the Death of Enron, grapples with what he detects as a growing belief, both among policy elites and the public, in “energy independence.”

That’s the notion that America should disengage from world energy markets and seek self-sufficiency in energy production. To Bryce, this is not only impossible, but dangerous to even attempt. As he writes in the book’s introduction, the quest for energy independence “means protectionism and isolationism, both of which are in opposition to America’s long-term interests.”

Some of the myths of energy independence Bryce takes aim at are summed up in this January Washington Post op-ed. They include the false belief that U.S. energy autarky can curb terrorism; that government investment in “alternative fuels” can end our use of foreign oil; that we can starve evil petro-regimes of money by refusing to buy their oil; and that less reliance on foreign energy sources can make our energy supply more secure.

Like any decision to isolate ourselves from the free international market, the search for energy independence would, Bryce demonstrates, lead us to waste our money and, yes, our energy doing things more expensively than they can be done by taking advantage of the international division of labor and flow of capital.

reason Senior Editor Brian Doherty, author of This is Burning Man and Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement (PublicAffairs), interviewed Bryce by phone last week.

reason: While “energy independence” has soared to fresh public prominence in this era of soaring gas prices and Mideast wars, it’s not a new idea, is it?

Robert Bryce: The first president to promote the idea was [Richard] Nixon in the wake of the oil embargo in 1973. In his State of the Union address in 1974, Nixon said that he was aiming for energy independence by the end of the decade. He hoped that by 1980 the U.S. would not be importing any oil. And every president since Nixon, in one way or another, has espoused a similar idea. But if you look back at the data, the U.S. was a net crude oil importer [as early as] 1913 and ever since we’ve been a net crude importer with a handful of years [as exceptions]. It’s remarkable how much the rhetoric about “energy independence” has had no connection with reality.

reason: What do its proponents think we can get out of energy independence?

Bryce: The main talking points for those who promote energy independence are, one, that if we were just more tech-savvy we can develop lots of new jobs, and that would be great—we can build windmills, solar panels, whatever nifty new whizbang tech is going to replace oil, and that will stimulate the economy.

Second, they love biofuels. We can just grow the fuels we need to replace imported oil and it will be great for farmers and the rural economy. Third, [energy independence proponents] conflate oil and terrorism. Those arguments really came to the fore since the 9/11 attacks. We buy imported oil, some of our suppliers are Islamic petro-states, some Islamic petro-states send some dollars to support radical Islam, therefore oil equals terrorism and “energy independence” is anti-terror.

The idea is that if we could isolate the oil-exporting countries that in theory support terror we’d cut off its lifeline. The connections of Saudi Arabia to the 9/11 terror attacks are real, I’m not denying that. But you cannot, given the complexity and enormous size and interconnectedness of the global crude oil market, separate one actor from another.

S. Fred Singer [of the Science and Environmental Policy Project] came up with the best analogy. He described the global oil market like a big bathtub. All the oil production is dumped into one bathtub and all consumers have straws sucking oil out. [For all economic purposes] it’s like we’re all sucking from the same common pool. To say you are not gonna buy Saudi oil, or Algerian oil—it’s crazy. For example, the U.S. hasn’t purchased a dime of Iranian oil—except for a small amount in the early ‘90s, but for the most part no Iranian oil since 1979. And that hasn’t stopped Iran from supporting Hezbollah.

reason: Can increased energy efficiency help us achieve the goal of “energy independence”?

Bryce: To answer that, you need to understand the “Jevons paradox.” In 1865 the economist William Stanley Jevons published a book, The Coal Question, which projected that Britain was on the precipice of disaster because it was running out of coal. Sound familiar? But it still hasn’t happened. Jevons’ discovery was that energy efficiency doesn’t decrease demand—it increases it.

We’re told that if we just push more efficient technologies like fluorescent light bulbs and drive Priuses that energy use will decline. It’s just not true. There’s a graphic in my book that shows the decline in the number of BTUs consumed per dollar of GDP [from 19,000 BTUs consumed per dollar of GDP in 1950, to a projected 9,000 BTUs in 2010], but energy consumption continued to grow.

Efficiency can be a great thing for its own sake. It can mean good things for the economy and for people, but it doesn’t mean we’ll use less energy overall. We’ll use more. And not just the U.S., but the Chinese, Vietnamese, Pakistanis.

One anecdote that illustrates the principle: I had a friend who bought a Prius tell me the other day how he used to take the train to New York to see the opera. But now they have a car that gets 40 miles per gallon, so they just drive. It becomes more efficient on a mile per gallon basis, but on a total BTUs consumed basis, no.

reason: How about domestic renewables as a solution to dependence on foreign oil?

Bryce: I’m not opposed to renewables. I have 3,000 watts of solar panels on the roof of my home. I understand the economics of renewables. But an incurable problem for both solar and wind is intermittency. The sun doesn’t shine at night. I like to have lights and TV at night. Unless we come up with some incredibly efficient method of storing large amounts of electricity, it’s not a viable source because we can’t store it.

It’s the same problem with wind. I consider wind the electric-sector equivalent of the ethanol hype. At a conference recently I asked a wind guy, “Without subsidies, how many projects now under way [regarding wind] would make economic sense?” He said maybe 30 percent.

reason: You sound skeptical about ethanol as well.

Bryce: The ethanol scam is the longest running robbery of taxpayers in American history. Some recent news reports, which I don’t discuss in the book, include a report showing [that] corn-based ethanol releases [more] greenhouse gases than fossil fuels. That’s just one indictment of the inefficiency of the whole process. It’s also fiscal insanity—providing 51 cent per gallon subsides for making fuel from what’s already the most subsidized crop.

In 2005 federal corn subsidies approached $9.4 billion, which is around the entire budget of the Department of Commerce, with 39,000 employees. It also takes orders of magnitude more water to make corn ethanol than [is used for] gasoline production. Given the problems in the West and Southwest with water, it’s insane to think we’re going to be able to produce sufficient ethanol to make a dent in gasoline use when the amount of water needed is so high.

reason: What about the promise of changes in foreign policy in the Mideast if we could wean ourselves off their oil?

Bryce: People like to think that if only we bought less oil we wouldn’t need to be in the Persian Gulf. It sounds appealing. The reality is the U.S. gets 11 percent [of its oil] from the Persian Gulf. From a strategic point of view it was a big mistake assuming militarism is better than markets. The key adjustment is to make markets trump militarism when it comes to the Persian Gulf. We’re not the most reliant [on Persian Gulf oil]—it’s the Japanese, the French, the rest of Europe, China. If we want to have stability in the Persian Gulf, it’s not just for the U.S. It’s good for the whole world, so the U.S. needs to understand that it shouldn’t be its burden alone.

reason: I thought what you had to say about Saudi Arabian energy independence was interesting.

Bryce: The Saudis in 2005 imported 83,000 barrels of gasoline per day. Here is a country with the single largest oil deposits on the planet and they are importing gasoline. Iran too is importing 40 percent of its gasoline, because it doesn’t have enough refining capacity. Iran has the second largest reserves of natural gas and is importing natural gas to northern Iran because its gas reserves are in the south. Do we need better examples of energy interdependence? If even Saudi Arabia and Iran are energy interdependent, why wouldn’t we be?

It isn’t like energy is the only vital thing we aren’t “independent” in. I have a chart in the book which shows, using data from the U.S. Geologic Survey, some mineral commodities. We import 100 percent of more than a dozen—fluorspar, yttrium, strontium, vanadium, arsenic among others. These are industrial commodities we need to power our economy—yttrium in televisions, microwaves, ceramics; strontium for nuclear fuel; manganese in steel and iron. These are things we have to have, and we import 100 percent of them.

The only energy source with zero carbon emissions in electric power is nuclear. And that’s another example of interdependence. We import 83 percent of our uranium. There are other countries like Kazakhstan with much larger reserves of uranium than the U.S. which can mine it more cheaply.

“Energy independence” would dictate that if we use nuclear power we must produce our own uranium to fire those reactors. Why would we wanna do that if someone else is a lower-cost producer? If we get to [obtain a resource] for less, why wouldn’t we do that? We do it with shoes, iPods, cell phones, watches, fresh flowers, you name it. We rely on global commercial markets for all kinds of things—what’s wrong with relying on it for uranium?

reason: What did you think of the recent energy bill in the context of your book’s concerns?

Bryce: If I could tell Congress one thing, I’d tell them to forget about doing anything for the energy business. They’ve done enough damage, don’t do any more. The bill is unfortunately named the “Energy Independence and Security Act of 2007.” It’s got 300 pages of blather about ethanol and biofuels that does nothing for energy independence or security. They mandate 36 billion gallons of biofuels for every year by 2022. It’s pure fantasy, the idea that we can hit that target.

Every presidential candidate has talked about energy independence and every one conflated oil and terrorism, except for Ron Paul. Paul as far as I can tell was the only presidential candidate who dared to say something to the effect of, when it comes to energy, we need to let the market work, that supply and demand and prices should make decisions about [how and from where we get energy].

reason: Do you think the current fears about “peak oil” feed into the craze for energy independence?

Bryce: Some time the world will reach a limit in the amount of oil [produced] per day and a decline will start. But the decline is likely to be shallow, not skiing down a steep decline. As we get closer [to peak oil], prices will rise, and as prices rise a pool [of oil] that’s previously unecononomical gets worth drilling.

I consider myself a liberal mugged by the laws of thermodynamics, but all [interest in my thesis] has so far come from the [free-market] right. The left doesn’t seem to care. They just hate fossil fuels. To me, I see we had huge government support for ethanol mandates, and how has that turned out? Modern leftists [who question the value of freer markets in energy] don’t seem to know, for example, the history of the Synfuel Corporation or how the prohibition on using natural gas for electricity worked, or how price controls made for gas lines. With all those government interventions, if the market had been allowed to work, the outcomes would have been a lot better.

An Act of Commissions

info@reason.com (Jeff Taylor) — Tue, 16 Oct 2007 15:00:00 EDT

Every so often Congress steps back from the monumental issues of war, peace, and radio talk show hosts to remind us that it is fundamentally about power. A case in point: Last week's bi-partisan passage by the House of the Regional Economic and Infrastructure Development Act of 2007.

Proudly modeled on the Great Society-era Appalachian Regional Commission (ARC), the legislation aims to spend $1.25 billion between 2008 and 2012 to set up five regional commissions that would hand out money to state and local governments, Indian tribes, and nonprofit organizations "to promote economic and infrastructure development."

Uh-oh.

Those buzz words signal an open-ended commitment to eventually spend billions and billions of federal dollars in pursuit of elusive "economic development"—much like the ARC itself. Long a target of federal pork busters, ARC constantly finds new "needs" to be met. Lately, that has involved millions to subsidize broadband deployment within its 13-state purview. The Senate recently passed legislation which would take ARC's funding from about $95 million in 2007 to $109 million by 2011.

No wonder so many members want their own commissions. Also, with earmarks in federal appropriations receiving so much negative press recently, a network of ostensibly independent commissions could prove a great way to funnel cash back home.

These new commissions would be the Delta Regional Commission, the Northern Great Plains Regional Commission, the Southeast Crescent Regional Commission, the Southwest Border Regional Commission, and the Northern Border Regional Commission. In total, all or parts of 26 states would be eligible to receive funds from a new commission were the bill to become law.

The Southwest border region alone is massive. It includes all counties within 150 miles of the U.S.-Mexico border. That's 11 counties in New Mexico, 65 counties in Texas, 10 counties in Arizona, and 7 counties in California for a combined population of about 29 million. Figure a Peru or Iraq-sized populace with needs to be serviced.

The Congressional Budget Office relates that "at least 40 percent of the authorized funds would be used for grants to develop transportation, telecommunications, and other basic public infrastructure. Remaining funds would be used for other economic development activities, such as providing job training, improving public services, and promoting conservation, tourism, and development of renewable and alternative energy projects."

If that mission statement sounds like a lot of overlap with existing local, state, and federal entities, well, no one cares. All that the backers of bill care about are more photo ops with giant checks and more ribbon-cuttings.

Bill opponent Rep. Lee Terry (R-Neb.) noted during debate on the bill that the commissions would spend millions in administrative overhead doing what other organizations already do in his state. He was politely ignored.

In addition, Rep. Jim Jordan (R-Ohio) noted that the bill does not forbid commission funds from being spent on lobbying efforts. Anyone familiar with the economic development racket at the state and local level knows what that means: lobbyists and consultants will be hired and directed to cook up various deals involving public money flowing to private hands for work of dubious quality. Jordan's attempt to fix this oversight was slapped down on the House floor.

And for all the talk of the commissions being a response to "grassroots" efforts to target persistent problems, bill sponsor Rep. James Oberstar (D-Minn.) does not sound like he has a free-form, problem-solving process in mind.

"We need standard procedures. We need a voting structure," Oberstar said in arguing for his bill. "Commonality establishment of local economic development districts, a consistent method for distributing economic development funds, a uniform set of procedures that will apply to all of the commission, and, finally, with commonality then we can have uniform evaluation standards of the results of these commissions."

In short, the feds want to play the economic development/economic incentives game along with the states, regions, counties, and cities. Wonderful. Not only that, but it is perfectly reasonable to expect that in the near future that development dollars from the Northern Great Plains Regional Commission will compete with a plan funded by the Southeast Crescent Regional Commission for a corporate relocation of a firm located in the zone of the Northern Border Regional Commission, which will probably be offering its own incentive package for the firm to stay put.

This sort of thing routinely goes on at the state and local level now. The proposed federal commission framework would only make it worse. But what reveals the plan as a totally self-serving political construct is the way one proponent framed the supposed problem the commissions would fix.

"In short, Mr. Speaker, our mills are closing, our young people are leaving, and too many of our workers are looking for work," one Maine congressman lamented.

In other words people are voting with their feet and moving to where they can find jobs in the great and wonderful American labor market. With a Census coming up and reapportionment after that, those private choices are a mortal threat to certain members of Congress who might be re-districted out of their seats.

If trying to reverse that trend is not worth a few hundred million dollars a year, what is?

reason contributor Jeff Taylor writes from North Carolina.

Making Green Sausage

jwalker@reason.com (Jesse Walker) — Mon, 08 Oct 2007 09:34:00 EDT

The Baltimore Sun's Rona Kobell explains how Maryland's open space preservation program works in practice:

[David] Sutherland's push to secure state funding for the Kudner farm prompted an outcry when it became public over the summer, particularly because of the high price he demanded for a relatively small piece of the farm. But a closer look at the deal reveals problems beyond the price.

It shows how a well-connected deal-maker seized upon a fleeting state interest in building sports complexes to persuade the government to buy his property. He persuaded county commissioners that they could put such a complex on a couple of hundred acres of land that mostly cannot be developed. And when that plan fell apart, state officials went ahead and bought the parcel anyhow.

For the details, go here.

(Full disclosure: Rona's my wife. As long as I'm promoting her work, I should mention that she is now among the contributors to her paper's Bay & Environment blog, where she writes about the Chesapeake Bay. If you're interested in the region you should check out her posts.)

The Merchant and the Lawman Can Be Friends

jwalker@reason.com (Jesse Walker) — Mon, 17 Sep 2007 10:06:00 EDT

The New York Times discovers that industry often pushes for regulation rather than deregulation. The reporter recognizes that this in itself isn't news; the hook is that it is allegedly happening more now than before:

The practice of industry groups turning to regulators or legislators in Washington for a national standard or mandate is not new, of course. While businesses often oppose requirements by saying they are unnecessary as it is already in their interest to produce safe products, at other times they have asked for them to avoid a patchwork of state regulations, to ensure that competitors must meet the same standard or to provide legal protection....

But industry officials, consumer groups and regulatory experts all agree there has been a recent surge of requests for new regulations, and one reason they give is the Bush administration’s willingness to include provisions that would block consumer lawsuits in state and federal courts.

Caveat: Despite that phrase "all agree," the article actually quotes one expert -- OMB chief Susan Dudley -- who says she isn't sure business demands for regulation are rising.

Whether or not such requests are increasing, they're certainly common. For a recent example, see The Wall Street Journal's report on the food industry's enthusiasm for federal regulation of imports (via a "public-private partnership," of course) and more funding for the FDA. Most of the Journal piece is hidden behind a subscription wall, but you can read the rest at the liberal blog The Pump Handle, which welcomes these efforts to raise entry barriers, externalize costs, and fend off lawsuits as a sign that "responsible corporations recognize the need for public health and environmental regulation."

Not every lefty feels the same way. Here's Alexander Cockburn a few years ago:

The feds are red-taping small meat businesses into a nightmare labyrinth of "voluntary compliance" schedules and record-keeping, most of which are entirely unnecessary, and in some cases, entirely wrong-headed....

No surprises here. A lot of the history of food regulation in this country has turned out to be a way to finish off small, quality producers by demanding they invest in whatever big ticket items the USDA happens to be in love with at the time; said love objects usually turning out to be whatever the big food processors are using. That's the reason why it's hard to get decent sausages or hams....The big packers and processing plants get to participate directly in the writing of the laws that set the standard practices that the inspectors march out to enforce on all the little producers not part of the Meat Syndicate.

Amtrak Boom Just One More Sign the Terrorists Have Won

gillespie@reason.com (Nick Gillespie) — Mon, 10 Sep 2007 09:00:00 EDT

The 9/11 attacks and rising fuel prices are just two more ways to say that there's something magic about a train!

Amtrak is proud to report, in the Wash Times' motion-sickness-inducing, pun-inflected gloss, that it "is chugging toward its fifth-straight record year for ridership nationwide....The money-losing service...says it is riding higher, illustrated by the hundreds of thousands of additional riders flocking to expanded routes in Illinois and California."

How big is the jump in ridership? In the fiscal year that ended last September, 24.3 million rode the service, setting a record for the fourth consecutive year; the odds look good that this fiscal year will set a fifth straight record.

But hey, Casey Jones, you better watch your speed. Trouble ahead, trouble behind:

The service has never been out of the red since its start in 1971, meaning it must rely on government handouts year after year.

In trying to hash out the federal budget for next year, Congress is weighing how much U.S. taxpayers should underwrite the passenger service. Amtrak has requested $1.53 billion, nearly twice the amount the Bush administration wants to give it. In the past, President Bush has proposed giving the service nothing.

The House Appropriations Committee recently agreed to boost Amtrak's federal funding to $1.4 billion - a modest increase from the service's $1.3 billion in government help - while a Senate panel has endorsed spending $1.37 billion. But Mr. Bush has promised to veto any spending bills exceeding his budget requests, forcing Amtrak to slice service if the president makes good on his threat....

The service also continues to be nagged by travel delays, mostly tied to having to share the tracks with freight haulers that own the rails and charge Amtrak a modest fee....With freight traffic soaring in recent years, Amtrak's on-time performance slid to an average of 68 percent last year, its worst showing since the 1970s....

More here.

I don't know about the current numbers, but in 2002, reason's Mike Lynch calculated that Amtrak cost $3.37 for every $1 they took in from passengers (I know, I know, they'll make it up on volume). And that same year, I noted that 71 percent of Americans--real Americans, the kind who drive everywhere, god bless their souls--absolutely loved Amtrak, "the state-sponsored terrorist network that has extorted billions of dollars from taxpayers over its tortured 31 years of existence."

And back in 1997, reason foundation founder Bob Poole counseled "Kill Amtrak Now!", a title that was reportedly optioned by Russ Meyer. And in 2005, reason cartoonist Peter Bagge devoted four fun-filled pages to the self-evident truth that Amtrak Sucks.

More Amtrakania (and it's all ania) here.

Rolling Over Ethanol

bdoherty@reason.com (Brian Doherty) — Thu, 02 Aug 2007 17:33:00 EDT

Following late in the footsteps of some observations about ethanol made in November 2003, May 2006, and June 2007 by reason's own Ron Bailey, Jeff Goodell at Rolling Stone pisses in Archer Daniels Midland's ethanol bowl (though I'm not saying that Ron necessarily agrees with every element of Goodell's indictment). As Goodell sums it up:

Ethanol doesn't burn cleaner than gasoline, nor is it cheaper. Our current ethanol production represents only 3.5 percent of our gasoline consumption -- yet it consumes twenty percent of the entire U.S. corn crop, causing the price of corn to double in the last two years and raising the threat of hunger in the Third World. And the increasing acreage devoted to corn for ethanol means less land for other staple crops, giving farmers in South America an incentive to carve fields out of tropical forests that help to cool the planet and stave off global warming.
So why bother? Because the whole point of corn ethanol is not to solve America's energy crisis, but to generate one of the great political boondoggles of our time. Corn is already the most subsidized crop in America, raking in a total of $51 billion in federal handouts between 1995 and 2005 -- twice as much as wheat subsidies and four times as much as soybeans. Ethanol itself is propped up by hefty subsidies, including a fifty-one-cent-per-gallon tax allowance for refiners. And a study by the International Institute for Sustainable Development found that ethanol subsidies amount to as much as $1.38 per gallon -- about half of ethanol's wholesale market price.

Welfare for Agribusiness: A Quick Review

jwalker@reason.com (Jesse Walker) — Fri, 27 Jul 2007 08:27:00 EDT

Brian Riedl on farm subsidies:

[I]f subsidies were really designed to alleviate farmer poverty, then lawmakers could guarantee every full-time farmer an income of 185% of the federal poverty level ($38,203 for a family of four) for under $5 billion annually -- one-fifth the current cost of farm subsidies.

Instead, federal farm policies specifically bypass family farmers. Subsidies are paid per acre, so the largest (and most profitable) agribusinesses automatically receive the biggest checks. Consequently, commercial farmers -- who report an average annual income of $200,000 and a net worth of nearly $2 million -- collect the majority of farm subsidies. Fortune 500 companies, celebrity "hobby farmers" and even some members of Congress collect millions of dollars under this program.

These farm policies are more than merely ineffective -- they impose substantial harm. They cost Americans $25 billion in taxes and an additional $12 billion in higher food prices annually. Environmental damage results from farmers over-planting crops in order to maximize subsidies.

[Via Andrew Sullivan.]

Gasbags for Ethanol

jwalker@reason.com (Jesse Walker) — Wed, 13 Jun 2007 11:15:00 EDT

"There is no ethanol 'market,'" Jay Hancock writes in today's Baltimore Sun. "The ethanol business is driven by government planners, not freely acting buyers and sellers." Those subsidies, he adds, aren't likely to end anytime soon:

It's impossible to find a politician who opposes ethanol welfare. Republican presidential candidate John McCain, who once opposed increased ethanol production, thinks it's a great idea. Democratic candidate Hillary Rodham Clinton, another previous opponent, sees ethanol as a key part of her $50 billion "moon shot" program to cut U.S. addiction to oil from unstable countries.

President Bush signed the 2005 energy bill that requires the United States to consume 7.5 billion gallons of renewable fuel by 2012. Then he raised the bid, calling in his 2007 State of the Union speech to reduce the projected use of gasoline by 20 percent in the next decade, mainly with ethanol. (Ethanol makes up less than 5 percent of gas use now.)

And Congress looks like it will comply, requiring once undreamed-of ethanol consumption even as it maintains the industry's $2 billion annual tax-credit subsidy.

So who cares if existing plants and those under construction will produce 12 billion gallons of ethanol -- 60 percent more than we'll need even five years from now, under current law?...Who cares that making ethanol may consume as much energy (including fossil fuels) as it produces? Who cares if ethanol competition is dissuading oil companies from building new refineries -- a key reason gas costs more than $3 a gallon?

More ethanol fans: Rudy Giuliani, Mitt Romney, John Edwards, Barack Obama...pretty much all the frontrunners, with the possible exception of Fred Thompson. According to the DNC, Thompson "consistently voted against ethanol subsidies" while he was in the Senate. Naturally, the DNC thinks this is a bad thing, but as far as I'm concerned it's the first really positive fact I've heard about the man. Of course, he could always pull a McCain on the issue once he hits the campaign trail.

(The DNC also says that Thompson was one of just 13 senators who voted to establish a school voucher system, to be "paid for by eliminating certain subsidies for ethanol, oil, gas and sugar." I'm against federally funded vouchers, but set that aside -- if Thompson is willing to take on the sugar lobby, that's another point in his favor. A point outweighed by his die-hard support for the Iraq war, but a point nonetheless.)

Return of the Air Pirates

bdoherty@reason.com (Brian Doherty) — Mon, 21 May 2007 10:57:00 EDT

Small airports (many providing service mostly or exclusively to private planes) make out like bandits from federal fees attached to everyone's plane ticket prices. This Washington Times report quotes Reason Foundation director of trasportation studies (and former editor of reason) Robert Poole:

"They're making out like bandits," said Bob Poole....author of several studies on air transportation costs. "It's not only that airline passengers are paying more than their fair share, but they're being overtaxed to give private jets a free ride.

The full article has a detailed list of various small airports around the country and the full amount of subsidies they are receiving from the rest of us.

A collection of Poole's airport-related work for the Reason Foundation.

Blue-Chip Buddha

jwalker@reason.com (Jesse Walker) — Thu, 19 Apr 2007 10:56:00 EDT

Kongo Gumi, the world's oldest continuously operating family enterprise, has closed its doors after an astonishing 1,428 years in business. Libertarian caveat: Until the 19th century it was subsidized by the Japanese government.

Business Week notes the secrets of the firm's success:

How do you make a family business last for 14 centuries? Kongo Gumi's case suggests that it's a good idea to operate in a stable industry. Few industries could be less flighty than Buddhist temple construction.

Flexibility helps, too. During World War II the company "switched temporarily to crafting coffins." I suppose you might call that an indirect government subsidy.

The Folly of Southern Hospitality

info@reason.com (John F. Sugg) — Thu, 19 Apr 2007 06:17:00 EDT

In 2006 the Korean car maker Kia decided to build a $1.2 billion plant in West Point, Georgia. To land the project, the state offered a $420 million incentive package that included free land (bought from the previous owners at about 2.5 times the market value), tax-funded employee training, and a new $30 million Interstate interchange. Altogether, the subsidies amounted to roughly $168,000 for each of the 2,500 jobs at the plant.

Gov. Sonny Perdue, a Republican, says it was the incentives that brought those Kia jobs to town. Harvey Newman, an economist at Georgia State University's Andrew Young School of Public Policy, isn't convinced. "It was clear they would pick a Southern state because of labor costs," he notes. "Alabama had a trained force of autoworkers, so Kia located on the Georgia-Alabama border." In other words, Georgia taxpayers are paying Kia hundreds of millions of dollars to hire Alabama workers.

The story might sound outrageous. Actually, it's typical of Southern corporate hospitality:

* After Hurricane Katrina destroyed CSX train tracks along the Mississippi coast, the state's U.S. senators, Republicans Trent Lott and Thad Cochran, arranged the allocation of $200 million in federal money to rebuild the railway. Then CSX asked for another $750 million to move the tracks less than 10 miles north. Lott and Cochran attached that money to an emergency spending bill for military operations in Iraq and Afghanistan.

The justification for the gifts to CSX was "economic development," plus the weak argument that moving the tracks a few miles would protect them from another hurricane. Critics, such as Sen. Tom Coburn (R-Okla.), charge that Cochran and Lott were carrying water for the developers and casino operators who now can build along the coastal land where the tracks originally ran.

*In 2005 the multibillionaire France family, which owns NASCAR, decided its sport needed a hall of fame museum. So it went through the motions of pitting Atlanta against Charlotte for the privilege of hosting the attraction. NASCAR probably had already decided on Charlotte; the city lives and breathes stock car racing, and most of the drivers are based in North Carolina. But the bidding war drove up the public subsidies. Atlanta offered about $102 million; Charlotte anted up $123 million.
The museum will provide only about 100 jobs, most of them low paying. Business development officials in both cities claimed that the prestige of gaining the NASCAR museum, plus the promise of expanded tourism, were worth forcing taxpayers to foot the bill.

*Also in 2005, Dell opened a new computer plant in North Carolina after getting $267 million in subsidies from the state. The company pitted three counties against each other for the right to host the facility, pocketing another $37 million in the process. The total subsidies are three times what the company will spend to build its plant.

Jurisdictions across the nation offer such inducements, which include tax abatement, land acquisition, construction subsidies, training subsidies, and outright cash grants. Nationally, relocation incentives total about $50 billion a year, according to the WHR Group, SIRVA, and other relocation consultants. (Such consultants often collect as much as 30 percent of the grants they negotiate for the businesses.)

But there's one part of the country that's especially quick to throw taxpayers' money at businesses in the hope of creating jobs and raising tax revenue. For the last 70 years, the idea that businesses need special inducements to locate themselves in the South has become ingrained in the region's public policy. The general theme in Southern politics is to be "pro-business," which politicians interpret to mean pro-subsidy. Taxpayers are increasingly left out of the calculations as many states move to shield economic development decisions from the public. Atlanta, for example, went to extraordinary lengths in its NASCAR initiative, essentially making private entities the custodians of public documents that detailed the public largesse being offered. Officials cite the competitiveness of luring businesses as the justification for secrecy.

The inducements used to be relatively minor and often invisible, such as forgiving corporate income and property taxes. Now they can total hundreds of millions of dollars. "Each new deal sets a new standard," says J. Mac Holladay, an economic development consultant in Atlanta. "If Alabama has given a car maker $200 million, the next car maker will want $400 million, and will get it."

It's hard to get a precise total of the dollars involved, but almost every major business relocation in the South is accompanied by a cornucopia of publicly funded grants, despite ample evidence that the subsidies have little impact on corporate site selection. Other regions of the nation, especially ones experiencing protracted economic downturns, are increasingly emulating the South. The politicians involved rarely consider broader tax and regulatory changes that would make their states more attractive to all businesses, outside and homegrown.

"Historically, the South has always led in offering incentives," Holladay says. "Other regions—particularly the Midwest, which is suffering through recession—are becoming more aggressive. I'm talking about Michigan, Ohio, and Pennsylvania. But the most aggressive states are still in the South, along with border states such as Kentucky." The South also offers the most inventive subsidies, he adds. "In Alabama, South Carolina, and Kentucky," he says, "officials are now calculating what a new business would pay in unemployment taxes and giving that to companies as a cash bonus. That shifts the burden to other employers in the state."

Look Away, Dixieland
The National Association of Economic Development Agencies compiles and analyzes information on relocation incentives. Its president, Miles Friedman, says it's difficult to make broad state-to-state comparisons due to the variety of incentives and the different types of organizations involved. Nonetheless, he says, "it's accurate to conclude that the South has the widest array of incentives and Southern states are the most experienced and aggressive in offering them. In dollar terms, the South leads."

Public bankrolling of private companies has been an American staple for more than 200 years. In 1791, Wayne State University political scientist Peter Eisinger notes in his 1988 book The Rise of the Entrepreneurial State, New Jersey granted tax exemptions, the power to condemn property, and control over water resources to a private business founded by future president, James Madison. The clout of the company's founder set a powerful precedent for political intervention in the market.

Efforts to lure Northern factories southward began in the aftermath of the Civil War. Henry Grady, editor of The Atlanta Constitution in the 1880s, championed a scheme known as the New South. The general idea was to industrialize and diversify the former Confederacy's economy; in practice, this meant offering Northern-owned companies cheap Southern labor in exchange
for tolerating Dixie's white supremacist policies.

Meanwhile, the government artificially lowered labor costs by offering convicts as workers: Blacks would be incarcerated on minor offenses, then leased to corporations such as U.S. Steel. A 2001 report by The Wall Street Journal concluded that around 100,000 blacks were forced into convict labor during a 60-year period ending in 1928. There are no estimates on how much money companies saved by leasing convicts from the state, but Alabama alone received payments from companies leasing convicts totaling $285 million (in current dollars) during the first two decades of the 20th century.

As the convict lease system was gradually abolished, other forms of public largesse came to the fore. In 1936, for example, Mississippi passed the nation's first incentive legislation, the Industrial Act, to "balance agriculture with industry." Under that law, a state panel selected companies for various come-ons, including cash grants, favorable tax treatment, and industrial revenue bonds—bonds paid off using tax revenue and other income derived from the projects they are sold to induce.

One business that benefited from such subsidies was the Real Silk Hosiery factory, which opened in Durant, Mississippi, in the late 1930s. Real Silk rented its factory from a state agency for $5 a year, enjoyed tax incentives, and had public agencies train its employees and even build their homes. The Durant plant was shuttered in the mid-'50s. Like many other Southern industrial facilities abandoned by owners seeking better deals elsewhere, it closed before the industrial revenue bonds were paid off. Writing in Time in 1998, reporters Donald Bartlett and James Steele noted that Mississippi "was the poorest state in the nation when its corporate-welfare program began in 1936.…62 years and hundreds upon hundreds of millions of dollars in economic incentives later, it remains dead last in per capita income."

Keeping Up With Alabama
The subsidies continued long after that period of Southern history was over. Consider three deals finalized in 1995, all of them in North Carolina. This End Up, a furniture manufacturer, accepted $230,000 and other incentives from the state for a new plant near Fayetteville that would employ 200 people; then it closed a Raleigh plant that employed 150. Quaker Oats received $98,000 for a new 98-worker plant near Asheville; then it closed another North Carolina operation where 70 people worked. Seffi Industries took $300,000 and promised to create 300 new jobs. It not only failed to open a new plant or hire a single new person but a few months later went out of business altogether.
Trendy businesses—particularly technology firms—have the greatest leverage in demanding government subsidies. In February, for example, biofuel manufacturer Range Fuels, based on little more than its word that it could deliver a economically competitive product, was offered $6 million in state cash, a 97-acre tract in central Georgia, and a set of tax abatements. At best, the company will employ 70 people.

Other beneficiaries of business welfare include low-tech factories in the mid-South; call centers in the Tampa Bay area; auto manufacturers in Alabama, Tennessee, South Carolina, and Georgia; and biotech firms in Florida and North Carolina. Publicly financed sports stadiums are common across the nation, and the South is no exception. Tampa built Raymond James Stadium for the Buccaneers a decade ago as part of a deal that will divert $1 billion in taxpayer money to team owner Malcolm Glazer over 30 years. Glazer, in a style common to team owners, threatened to move the football team if he didn't get a new stadium. To win voter approval for a bond issue to finance the project, city officials attached it to a referendum providing money to alleviate crowding in the city's schools. The stadium was built long before most of the new schools.

This flood of public incentives is decried by development experts, who point out that such subsidies are seldom a good investment. "There's almost never any evidence that [taxpayer-funded incentives] work" at producing benefits for the general public, says Newman, the Georgia State economist. "We know that incentives aren't usually the deciding factor. So the jobs would be created in any event. And incentives are basically unfair, favoring some companies over others."
"Incentives are expected by companies in today's business climate," says Jim Clinton, executive director of the Southern Growth Policy Board, a think tank in North Carolina. "But are incentives the reason a company will pick one state or city over another? Usually not, although they can be a factor in breaking a tie."

A recent decision by the Swiss pharmaceutical company Novartis illustrates the point. In 2006, when Novartis announced plans to build a $600 million flu vaccine plant in the South, Georgia was quick to offer a package that included $61 million in benefits. But Novartis picked an area in North Carolina's Research Triangle, even though that state offered only $44 million. "North Carolina has a technically experienced work force," says Mike Cassidy, executive director of the Georgia Research Alliance at
Georgia Tech. "We don't have that here, and that's a sad fact."

Decades ago, North Carolina began investing in education to train high-tech and biotech workers. That, along with an economic environment favorable to start-ups—ample venture capital and the expertise of several other technology companies—lured companies such as GlaxoSmithKline, plus a host of entrepreneurial start-ups. Ultimately, financial incentives proved far less important than the state's general milieu of expertise.

"Companies don't rank incentives very high," says Mike LaFaive of the Mackinac Center for Public Policy, a pro-market think tank in Michigan. "But they're definitely willing to accept the gifts states give." Based on information from relocation consultants and company officials, the Mackinac Center concludes that most businesses pick a locale based on such factors as access to suppliers, transportation facilities, work force training, prevailing wages, and the availability and price of office or industrial space.

For further evidence, consider a deal announced on February 27. The state of Mississippi agreed to pony up $296 million in incentives so Toyota would locate a new factory near Tupelo. The largesse had grown as Arkansas and Tennessee made rival bids.
But despite the enormous incentive package, Toyota North America President Jim Press shrugged off its importance. "It wasn't a competition for incentive packages and the size of the packages," he told the Associated Press. "That really wasn't a factor in our decision." Much more important, he said, were the work force, training, infrastructure, and transportation access.

Holladay, who has headed state economic development agencies in Georgia, Mississippi, and South Carolina, remembers a conversation with Zell Miller, then governor of Georgia, at a National Governors Conference in the '90s. "The topic of subsidies came up," he recalls. "Zell asked me, 'Is there any way to end this foolishness?' I answered, 'The only way I know is to not elect any more governors.' "

Learning to Multiply
Holladay's point is that politics, not economics, drives these subsidies. He's not alone in that assessment. "These programs give the appearance of creating jobs," says LaFaive. "But that's never been proven. The only real difference is that without the subsidies, governors and mayors wouldn't have ribbon-cutting ceremonies to attend."

The Mackinac Center's research finds little or no connection between subsidies and job creation. In a study it conducted from 1998 to 2002, seven companies that received a total of $120 million in grants from the Michigan Economic Development Commission promised to create 775 jobs, a goal that was later reduced to 458. When the job creation project was complete, the companies claimed they had exceeded the revised goal by 177 jobs. But when the Michigan auditor general's office examined the companies' actual reports, it turned out the enterprises had actually lost 222 local jobs.

Of course, proponents of public incentives don't just point to the workers the businesses they attract will have to hire. They argue that there is an economic "multiplier" effect, by which spending at a factory or entertainment venue indirectly generates spending on other goods and services.

Imagine a local economy of $100 million in 2000. A new business relocates to the area that year and directly spends $10 million. Economic development boosters claim that for every dollar spent another three are generated indirectly, as the relocation draws more businesses. (Manufacturers of automotive parts, for example, will establish plants or distribution facilities near a new car assembly plant.) So in 2001, the economy should be pumping along at $140 million—the original $100 million plus $10 million in direct spending plus $30 million from the multiplier effect.

"It never happens," says Phil Porter, an economist at the University of South Florida. Porter has looked at several cities where the multiplier effect was promised and checked to see if it worked as predicted. His method is to take the current economy and work backward—in the case of our hypothetical city, subtracting both the $10 million spent by the enterprise and the $30 million allegedly generated by the multiplier effect. If the effect worked as promised, he'd arrive at $100 million. Instead, he invariably gets less.

For example, local boosters in Tampa, Florida, claimed the 2001 Super Bowl brought $300 million in economic impact to the area. But according to sales tax receipts, sales in Hillsborough County (where Tampa is located) for January 2001 were about $1.44 billion, compared to $1.4 billion for a year earlier. There was growth, sure, but no more than is seen in many year-to-year comparisons when the Super Bowl wasn't a factor; in fact, it was less than the average growth, and far less than what was predicted.

Corrupting Effects
There's one more reason to be wary of corporate subsidies: Doling out all that money has a corrupting effect. In April 2006, just weeks after announcing the new Kia plant in Georgia, the chairman of Kia's parent, Hyundai, was jailed in his home country for operating a $109 million slush fund used to influence Korean officials.

The corruption isn't limited to Korea. In a 2005 federal sting operation, undercover FBI agents claiming to be from a company called E-Cycle Management offered bribes to Tennessee officials in return for state-funded economic development incentives. The result: Nine public officials, including five current or former state legislators, were indicted for bribery.

The corruption of public officials who tap into the flow of public subsidies generates headlines. The corruption of the marketplace is less noted, but it's even more corrosive. The losers aren't just the taxpayers but all the businesses that must succeed or fail on a playing field warped by subsidies.
It's unfair to give carpetbagging companies tax cuts while denying them to businesses that have invested in a community for generations—and are more likely to stay there as well. Many companies that seek subsidies pack up and leave once the public giveaways disappear. A Sony Music factory in Carrollton, Georgia, for example, closed in 2001, laying off 1,500 employees, after its tax benefits and other subsidies came to an end. Sony sought out other markets that would again allow it to avoid paying property and other taxes. In cases like that, when other communities offer similar conditions such as a low-paid work force and cheap land, the benefits do make a difference.

But there are better, neutral, market-friendly ways to attract investment in states or cities. These are rarely discussed in state capitals and city halls. In general, LaFaive notes, officials "don't look at what such things as a tax cut across the board would do. An incentives package admits that it's too expensive to do business. So lower the costs across the board." The result, he says, would be "a fair field with no favors."

"If governors and legislators would just put away the states' wallets, if all of them in every state would do that, you'd see little change in economic development," Holladay predicts. "In fact, if every business got a fairer shake, you'd witness faster economic growth."

John F. Sugg is group senior editor of CL Newspapers, which publishes alternative newsweeklies in Atlanta, Charlotte, Tampa, and Sarasota. He is the 2005 recipient of the Society of Professional Journalists' Green Eyeshade Award for serious commentary.

Why It Is More Blessed to Give: Campaign Contributions

bdoherty@reason.com (Brian Doherty) — Thu, 15 Mar 2007 17:10:00 EDT

Michael Brush at MSN's "Money Central" reports on an academic paper that tries to quantify the benefits businesses get from giving to government. Some of the findings, as he reports them:

Corporations that give the most have beaten the market by 2.5 percentage points a year over the past 25 years.......
What is surprising is how much companies get for so little money. The public companies that do give money, on average, fork out just $1,700 to $2,000 per campaign and support an average of 56 federal candidates in each two-year cycle.
......The best approach to giving, for instance, isn't to buy a single lawmaker. Rather, companies that contribute to the largest number of political campaigns get the biggest benefit.
"Much like a venture capital portfolio of many startups, a few of the supported candidates will 'pay off big' and result in increases in firm shareholder wealth," says the study, which tracked the impact of more than 1 million corporate campaign contributions by about 2,000 companies from 1979 to 2004.

The study is called "Corporate Political Contributions and Stock Returns," issued in October 2006 by Michael J. Cooper at the University of Utah and Huseyin Gulen and Alexei Ovtchinnikov, both of Virginia Tech. It finds the best-leveraged investments in politicians are to more powerful ones (such as committee heads), to home-state candidates, and to House candidates generally--who are in charge of launching tax and budget law. Also:

Though companies support Republicans more than Democrats ($43,000 per election cycle compared with $31,000, on average), they get a bigger payoff by supporting Democrats. Companies that tilt their contributions to the left, and to home-state candidates, outperform the market by 3 percentage points a year, on average.

Brush's full story here .

Full study about which Brush was reporting here .

Mickey Mao

jwalker@reason.com (Jesse Walker) — Sun, 11 Feb 2007 14:18:00 EST

China has been caught between capitalism and communism for so long that it shouldn't be surprising to learn Sino-Disneyland has a mixed economy too:

The Hong Kong government, which hopes the park will attract tourists to the city for many years, has spent more $2.9 billion on the project, about 82 percent of total costs, while Disney received 43 percent of the joint venture shares.

A survey conducted by AP last year found that 56 percent of Hong Kong residents thought the financial deal with Disney was unfair while 70 percent said their "opinions toward Hong Kong Disneyland have become more negative" because of problems since its opening, including several overbooked days during last year's Chinese New Year.

There have been some culture clashes as well:

For mainland Chinese who visit the park, many of whom don't speak English, a lack of cultural relevance may be more damaging. Some of the shows and rides at Hong Kong Disneyland are presented only in English and many older Chinese do not recognize Disney characters.

"Younger Chinese like Mickey Mouse, but they should include traditional Chinese culture for adults," said Zhu Yuan, a 64-year-old retired professor visiting Hong Kong Disneyland from China's northeastern Tianjin City.

Here's a suggestion:

The Costs of CLEAN Energy

bdoherty@reason.com (Brian Doherty) — Mon, 22 Jan 2007 10:11:00 EST

Jerry Taylor and Peter Van Doren at Cato think hard about a key part of the Democrats' "100 Hours" Agenda, H.R. 6, the "Creating Long-Term Energy Alternatives for the Nation Act," or "CLEAN Energy Act." They have a cheer for "a proposed $14 billion cut over ten years in the subsidies going to the petroleum industry," are skeptical about the "conservation resource fee," are for "the elimination of preferential tax treatment afforded intangible domestic drilling expenses" and give examples of even more Congress could have done in targeting various accelerated depreciations that impact the oil industry's tax bill.

The ultimate joker in the CLEAN Energy deck, though, is that:

The Democrats' somewhat dodgy anti-subsidy crusade, however, collapses into ashes with the proposed "Strategic Energy Efficiency and Renewables Reserve" tacked on to the bill. In short, all fiscal gains to the Treasury associated with the above will be handed back out again to corporations like GE, British Petroleum, and you-name-the-industrial-conglomerate engaged in energy efficiency and renewable energy businesses. But the same arguments against handouts to "Big Oil" can be as easily marshaled against handouts to Big or Little Fill-In-the-Blank. And with energy prices this high, there are ample incentives for investors to spend money on oil and gas production, renewable energy, energy conservation, or other energy exotica.

Whole article here.

Steel Dumping Quotas Dumped

bdoherty@reason.com (Brian Doherty) — Fri, 15 Dec 2006 18:19:00 EST

As discussed over at the Cato blog by Daniel Ikenson, the International Trade Commission has surprisingly done the right thing and revoked "longstanding antidumping and countervailing duty restrictions against imported carbon steel plate and corrosion-resistant steel from 15 different countries." (They are keeping them against corrosion-resistant steel from Germany and Korea for at least another five years.)

My previous blogging on how these duties hurt American steel-using companies in order to help eternally poor-mouthing steel-making companies here .

Closing the Grocery Gap

bdoherty@reason.com (Brian Doherty) — Tue, 28 Nov 2006 16:02:00 EST

You may have heard of the "grocery gap" between suburbs and the inner city--the more limited availability of access to big grocery stores in urban areas. Continuing my dig through some sadly neglected, but very useful, old magazines and professional journals that have been piling up, I came across this article on the topic from the April issue of Governing. While mostly concerned with a Pennsylvania state House members attempts to gin up government money and public-private partnerships to get more grocery stores in the inner city, and other state and local governments trying to emulate him, the article does point out:

What’s become increasingly clear in the past few years is that the problems of running an urban supermarket aren’t a result of things going wrong after the store opens. The issue is the myriad obstacles that stand in the way of getting the store built.

As obvious as the needs are, and as well-documented as the opportunities for profit may be, it takes forever to get an urban supermarket deal done — 10 years in the case of the first Pathmark in Newark; nearly as long before Publix opened its doors in the inner-city Atlanta neighborhood of East Lake. One reason is simple bureaucratic clumsiness. “Urban environments have an arcane development process and a lot of companies don’t have the stomach for it,” says Buzz Roberts, who has run a supermarket assistance program for the nonprofit Local Initiatives Support Corp. “You can do two or three stores in the suburbs in the time it takes to do one in the inner city.”

Whole article here.

Fuel vs. Food or Fuel vs. Forests: Both Eco-Alarmists and Eco-Skeptics Are Worried About Ethanol From Corn

rbailey@reason.com (Ronald Bailey) — Tue, 07 Nov 2006 15:48:00 EST

On the left , perennial predictor of imminent global famine Lester Brown at the Earth Policy Institute warns "Exploding U.S. Grain Demand for Automotive Fuel Threatens World Food Security and Political Stability." On the right, Dennis Avery at the Hudson Institute's Center for Global Food Issues is also worried about the food vs. fuel issue, noting in a recent report:

There are significant trade-offs, however, involved in the massive expansion of the production of corn and other crops for fuel. Chief among these would be a shift of major amounts of the world’s food supply to fuel use when significant elements of the human population remains ill-fed.

But that's not all:

Even without ethanol, the world is facing a clash between food and forests.... Ethanol mandates may force the local loss of many wildlife species, and perhaps trigger some species extinctions. Soil erosion will increase radically as large quantities of low-quality land are put into fuel crops on steep slopes and in drought-prone regions.

However, there is a telling difference between Brown and Avery. Brown wants more government mandates to "solve" the problem, specifically an automotive fuel efficiecy mandate. Avery, on the other hand, argues that "if markets are allowed to discover the winners and losers in future alternative energy sources without government intervention through subsidies and fuel mandates, and with a clear assessment of the trade-offs that may be involved."

As I've asked before, if ethanol makes such economic sense, why does it need federal subsidies or even worse, a California initiative to subsidize venture capitalists?

Disclosure: As far as I know, I own no stocks in any ethanol producing companies. But I do ocassionally drink immoderate amounts of ethanol in the form of Lagavulin.

Steel: The Eternally Infant Industry

bdoherty@reason.com (Brian Doherty) — Mon, 30 Oct 2006 19:15:00 EST

It's an old story, but always worth revisiting: how government actions allegedly meant to "help domestic industries" hurt other domestic industries. See today's Los Angeles Times for a report on industry complaints about steel anti-dumping duties, that punish foreign steel suppliers for allegedly selling at too low a price. Southern California metal stamping companies complain that the duties have doubled their prices on galvanized steel; "U.S. and foreign automakers have joined other U.S. steel consumers to persuade the U.S. International Trade Commission to revoke the duties when it meets in mid-December."

Domestic steel makers say the car makers and steel users are being big crybabies and that, although the steel makers are in the scratch now (after, as the story notes, "shifting much of their multibillion-dollar pension liabilities to the government"), the domestic steel industry hovers always, in its own poormouthing estimations, on the abyss of economic doom: "they say the addition of capacity in China and India could lead to another steel glut and price-slashing if the global economy hits a rough patch."

An exec from Aggressive Engineering Corp., a Southern California metal stamping company. complains:

he had lost two of his biggest customers — a home electronics firm and a fitness equipment company — to competitors in China since the duties were imposed. He said his foreign competitors had access to cheaper steel and were able to produce and ship parts to the U.S. for the same price it costs him for raw materials.

Whole story of steel-sellin' men and the steel-usin' industries they are holding up here.

Giving Away the Store to Get a Store

info@reason.com (Daniel McGraw) — Sun, 01 Jan 2006 00:00:00 EST

If you're imagining an attraction that will draw 4.5 million out-of-town visitors a year, the first thing that jumps to mind probably isn't a store that sells guns and fishing rods and those brown jackets President Bush wears to clear brush at his ranch in Crawford, Texas. Yet last year Cabela's, a Nebraska-based hunting and fishing mega-store chain with annual sales of $1.7 billion, persuaded the politicians of Fort Worth that bringing the chain to an affluent and growing area north of the city was worth $30 million to $40 million in tax breaks. They were told that the store, the centerpiece of a new retail area, would draw more tourists than the Alamo in San Antonio or the annual State Fair of Texas in Dallas, both of which attract 2.5 million visitors a year.

The decision was made easier by the financing plan that Fort Worth will use to accommodate Cabela's. The site of the Fort Worth Cabela's has been designated a tax increment financing (TIF) district, which means taxes on the property will be frozen for 20 to 30 years.

Largely because it promises something for nothing--an economic stimulus in exchange for tax revenue that otherwise would not materialize--this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela's can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises.

A Crummy Way to Treat Taxpaying Citizens

TIFs have been around for more than 50 years, but only recently have they assumed such importance. At a time when local governments' efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don't want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

"There is always this expectation with TIFs that the economic growth is a way to create jobs and grow the economy, but then push the costs across the public spectrum," says Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. "But what is missing here is that the cost of developing private business has some public costs. Road and sewers and schools are public costs that come from growth." Unless spending is cut--and if a TIF really does generate economic growth, spending is likely to rise, as the local population grows--the burden of paying for these services will be shifted to other taxpayers. Adding insult to injury, those taxpayers may include small businesses facing competition from well-connected chains that enjoy TIF-related tax breaks. In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens.

"The original concept of TIFs was to help blighted areas come out of the doldrums and get some economic development they wouldn't [otherwise] have a chance of getting," says former Fort Worth City Councilman Clyde Picht, who voted against the Cabela's TIF. "Everyone probably gets a big laugh out of their claim that they will draw more tourists than the Alamo. But what is worse, and not talked about too much, is the shift of taxes being paid from wealthy corporations to small businesses and regular people.

"If you own a mom-and-pop store that sells fishing rods and hunting gear in Fort Worth, you're still paying all your taxes, and the city is giving tax breaks to Cabela's that could put you out of business," Picht explains. "The rest of us pay taxes for normal services like public safety, building inspections, and street maintenance, and those services come out of the general fund. And as the cost of services goes up, and the money from the general fund is given to these businesses through a TIF, the tax burden gets shifted to the regular slobs who don't have the same political clout. It's a crummy way to treat your taxpaying, law-abiding citizens."

Almost every state has a TIF law, and the details vary from jurisdiction to jurisdiction. But most TIFs share the same general characteristics. After a local government has designated a TIF district, property taxes (and sometimes sales taxes) from the area are divided into two streams. The first tax stream is based on the original assessed value of the property before any redevelopment; the city, county, school district, or other taxing body still gets that money. The second stream is the additional tax money generated after development takes place and the property values are higher. Typically that revenue is used to pay off municipal bonds that raise money for infrastructure improvements in the TIF district, for land acquisition through eminent domain, or for direct payments to a private developer for site preparation and construction. The length of time the taxes are diverted to pay for the bonds can be anywhere from seven to 30 years.

Local governments sell the TIF concept to the public by claiming they are using funds that would not have been generated without the TIF district. If the land was valued at $10 million before TIF-associated development and is worth $50 million afterward, the argument goes, the $40 million increase in tax value can be used to retire the bonds. Local governments also like to point out that the TIF district may increase nearby economic activity, which will be taxed at full value.

So, in the case of Cabela's in Fort Worth, the TIF district was created to build roads and sewers and water systems, to move streams and a lake to make the property habitable, and to help defray construction costs for the company. Cabela's likes this deal because the money comes upfront, without any interest. Their taxes are frozen, and the bonds are paid off by what would have gone into city coffers. In effect, the city is trading future tax income for a present benefit.

But even if the dedicated tax money from a TIF district suffices to pay off the bonds, that doesn't mean the arrangement is cost-free. "TIFs are being pushed out there right now based upon the 'but for' test," says Greg LeRoy. "What cities are saying is that no development would take place but for the TIF....The average public official says this is free money, because it wouldn't happen otherwise. But when you see how it plays out, the whole premise of TIFs begins to crumble." Rather than spurring development, LeRoy argues, TIFs "move some economic development from one part of a city to another."

Development Would Have Occurred Anyway

Local officials usually do not consider how much growth might occur without a TIF. In 2002 the Neighborhood Capital Budget Group (NCBG), a coalition of 200 Chicago organizations that studies local public investment, looked at 36 of the city's TIF districts and found that property values were rising in all of them during the five years before they were designated as TIFs. The NCBG projected that the city of Chicago would capture $1.6 billion in second-stream property tax revenue--used to pay off the bonds that subsidized private businesses--over the 23-year life spans of these TIF districts. But it also found that $1.3 billion of that revenue would have been raised anyway, assuming the areas continued growing at their pre-TIF rates.

The experience in Chicago is important. The city invested $1.6 billion in TIFs, even though $1.3 billion in economic development would have occurred anyway. So the bottom line is that the city invested $1.6 billion for $300 million in revenue growth.

The upshot is that TIFs are diverting tax money that otherwise would have been used for government services. The NCBG study found, for instance, that the 36 TIF districts would cost Chicago public schools $632 million (based on development that would have occurred anyway) in property tax revenue, because the property tax rates are frozen for schools as well. This doesn't merely mean that the schools get more money. If the economic growth occurs with TIFs, that attracts people to the area and thereby raises enrollments. In that case, the cost of teaching the new students will be borne by property owners outside the TIF districts.

Such concerns have had little impact so far, in part because almost no one has examined how TIFs succeed or fail over the long term. Local politicians are touting TIFs as a way to promote development, promising no new taxes, and then setting them up without looking at potential side effects. It's hard to discern exactly how many TIFs operate in this country, since not every state requires their registration. But the number has expanded exponentially, especially over the past decade. Illinois, which had one TIF district in 1970, now has 874 (including one in the town of Wilmington, population 129). A moderate-sized city like Janesville, Wisconsin--a town of 60,000 about an hour from Madison--has accumulated 26 TIFs. Delaware and Arizona are the only states without TIF laws, and most observers expect they will get on board soon.

First used in California in the 1950s, TIFs were supposed to be another tool, like tax abatement and enterprise zones, that could be used to promote urban renewal. But cities found they were not very effective at drawing development into depressed areas. "They had this tool, but didn't know what the tool was good for," says Art Lyons, an analyst for the Chicago-based Center for Economic Policy Analysis, an economic think tank that works with community groups. The cities realized, Lyons theorizes, that if they wanted to use TIFs more, they had to get out of depressed neighborhoods and into areas with higher property values, which generate more tax revenue to pay off development bonds.

The Entire Western World Could Be Blighted

Until the 1990s, most states reserved TIFs for areas that could be described as "blighted," based on criteria set forth by statute. But as with eminent domain, the definition of blight for TIF purposes has been dramatically expanded. In 1999, for example, Baraboo, Wisconsin, created a TIF for an industrial park and a Wal-Mart supercenter that were built on farmland; the blight label was based on a single house in the district that was uninhabited. In recent years 16 states have relaxed their TIF criteria to cover affluent areas, "conservation areas" where blight might occur someday, or "economic development areas," loosely defined as commercial or industrial properties.

The result is that a TIF can be put almost anywhere these days. Based on current criteria, says Jake Haulk, director of the Pittsburgh-based Allegheny Institute for Public Policy, you could "declare the entire Western world blighted."

In the late 1990s, Pittsburgh decided to declare a commercial section of its downtown blighted so it could create a TIF district for the Lazarus Department Store. The construction of the new store and a nearby parking garage cost the city more than $70 million. But the property taxes on the new store were lower than expected, as the downtown area surrounding Lazarus never took off the way the city thought it would. Sales tax receipts were also unexpectedly low. Lazarus decided to close the store last year, and the property is still on the block. Because other businesses were included in the TIF, it is impossible to predict whether the city will be on the hook for the entire $70 million. But given that the Lazarus store was the centerpiece of the development, it is safe to say this TIF is not working very well, and Pittsburgh's taxpayers may have to pick up the tab.

If businesses like Lazarus cannot reliably predict their own success, urban planners can hardly be expected to do a better job. Typically, big corporations come to small cities towing consultants who trot out rosy numbers, and the politicians see a future that may not materialize in five or 10 years. "The big buzzwords are economic development," says Chris Slowik, organizational director for the South Cooperative Organization for Public Education (SCOPE), which represents about 45 school districts in the southern suburbs of Chicago, each of which includes at least one TIF. "The local governments see a vacant space and see something they like that some company might bring in. But no one thinks about what the costs might be....They are giving away the store to get a store." Big-box retail chains such as Target and Wal-Mart seem to be the most frequent beneficiaries of TIFs. (Neither company would comment for this story, and local politicians generally shied away as well.)

Given the competition between cities eager to attract new businesses, TIFs are not likely to disappear anytime soon. "Has it gone overboard?" asks University of North Texas economist Terry Clower. "Sure....But the problem is that if a city doesn't offer some tax incentives, the company will just move down the road." According to Clower, "In a utopian world, there would be no government handouts, and every business would pay the same tax rate. But if a city stands up and says they aren't doing [TIFs] anymore, they will lose out."

Instead, it's the competitors of TIF-favored businesses that lose out. Academy Sports & Outdoors, which employs 6,500 people, has about 80 sporting goods stores in eight Southern states, including a store in Fort Worth. When the Fort Worth City Council was considering the TIF for Cabela's, Academy Sports Chairman David Gochman spoke out against the tax incentives, realizing that his company is a big business, but not big enough. "This is not a nonprofit, not a library, not a school," he said. "They are a for-profit business, a competitor of ours, along with Oshman's and Wal-Mart and others."

TIFs Have Become the Standard Handout

Al Dalton, owner of Texas Outdoors, a 10,000-square-foot hunting and fishing shop in Fort Worth, echoed the sentiment that the city was favoring one business over another. "We don't have the buying power, and we don't have the advertising dollars," Dalton said. "It doesn't make any difference even if we've got the best price in town if nobody knows about it. The deep pockets, in every way, [make] a lot of difference."

And that may be the key to understanding how TIFs are now applied: The companies with the deep pockets are able to fill them with subsidies.

The Cabela's location in Fort Worth does not fit any of the blight criteria people had in mind when TIFs were first created. The 225,000-square-foot store, with its waterfalls, multitude of stuffed animals, and wild game caf�, sits on prime property just off Interstate 35. It is a few miles down the road from the Texas Motor Speedway (which has its own TIF), and the 200,000 NASCAR and IRL fans who attend races there three times a year--not to mention the fans who come to the speedway's concerts and other special events--might want to shop at Cabela's.

The area around Cabela's is affluent and has been growing for years. A half-dozen shopping centers nearby were on the drawing board well before the TIF was considered. Within a five-mile radius of the hunting/fishing megastore, 10,000 new homes have been built since 2000. That same area is expected to grow by 20,000 people in the next two years.

But the argument against the "but for" assumption is not being heard. In 2004 a state judge threw out a lawsuit against the Cabela's TIF by a Fort Worth citizens' group that claimed blight was never proven, and that the city was misusing TIFs in a prosperous area that needed no tax breaks for future development. The blight designation came from a pond and stream on the property. It was an odd designation, given that the property is in a prime development area and ponds and streams are not what one would classify as blighted.

The press releases and newspaper articles about the new Cabela's emphasize that the store is going to draw more people to Texas than visit the Alamo (the studies were done by Cabela's). The press release never mentions that a Bass Pro Shop store, part of a chain almost identical to Cabela's, is just 10 miles down the road. While Cabela's was negotiating its TIF with Fort Worth, it was also negotiating a TIF with the city of Buda, 120 miles away, outside of Austin. Cabela's got about $20 million from Buda, and the same tourist claims are being made there. If each Texas store is going to draw 4.5 million tourists, as the chain claims, that means 9 million people will be coming to Texas every year just to visit the two Cabela's stores.

"The notion that a hunting store would draw all these tourists is ridiculous," says Greg LeRoy. "But what is even more ridiculous is cities thinking that tax breaks are the primary reason businesses relocate or expand in certain areas. There are so many other factors at play--transportation costs, good employment available, housing costs and quality of life for executives--that the tax breaks like TIFs aren't very high up on their priority list. But these corporations are asking for them--and getting them--because everyone is giving them out. TIFs have become the standard handout, and the businesses have learned how to play one city off the other. Businesses would be stupid for not asking for them every time."

If TIFs continue to multiply at the present rate, we may see the day when every new 7-Eleven and McDonald's has its own TIF. That prospect may seem farfetched, but it wasn't too long ago that cities wouldn't even have considered giving up tens of millions of dollars in exchange for yet another store selling guns and fishing rods.�