Tag Archives: Cronyism

WichitaLiberty.TV July 2, 2014

WichitaLiberty.TV: Water, waste, signs, gaps, economic development, jobs, cronyism, and water again.

In this episode of WichitaLiberty.TV: A look at a variety of topics, including an upcoming educational event concerning water in Wichita, more wasteful spending by the city, yard signs during election season, problems with economic development and cronyism in Wichita, and water again. View below, or click here to view at YouTube. Episode 50, broadcast July 6, 2014.

In Wichita, gap analysis illustrates our problems

Wichita City Hall.
Wichita City Hall.
Following is testimony provided to the Wichita City Council on July 1, 2014. Background on this issue may be found at In Wichita, a public hearing with missing information and Wichita city council schools citizens on civic involvement.

Thank you for providing the gap analysis that I requested.

If the gap analysis is credible, if it really is true that projects like this are not financially feasible without taxpayer assistance, what does that tell us about Wichita? Shouldn’t we work on fixing these problems for everyone, rather than parceling out business welfare on a piecemeal basis?

The agenda packet material for this item says there is a need for incentives “based on the current market.” But not long ago this council was told that downtown Wichita is booming. So why won’t the market support a project like this without a handout from city taxpayers? And if downtown is truly booming but we’re still giving out incentives, will we ever be able to wean ourselves off?

Based on my reading of the gap analysis document, I see another problem with the facade improvement program. It shifts costs from landlords to commercial tenants. Instead of paying for the facade improvement costs as part of a mortgage or other financing, these costs become additional property taxes that commercial tenants pay in addition to rent.

This is really a problem, as Kansas and Wichita commercial property taxes are high. Each year The Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence survey property taxes. Considering the largest city in each of the states, Wichita property taxes are ninth highest in the nation for commercial property.

Wichita taxes are not just a little higher, but a lot higher. For example, for a commercial property valued at $100,000, Wichita property taxes are 38.5 percent higher than the national average.

Some of the reason why commercial property taxes are so high is due to the difference in assessment rates for various property classes. That’s not set by the City of Wichita. But the overall level of spending, and therefore the level of taxation, is set by this council. Further, the cost of incentives like this raise the cost of government for everyone else. One thing the city could do is to reduce spending somewhere else to offset the cost of this incentive. This would mean that other taxpayers do not have to bear the cost of this incentive.

If we wonder why the Wichita economy is not growing, commercial property tax rates and this council’s policy of targeted reductions are a large part of the problem.

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WichitaLiberty.TV: The harm of cronyism, local and national

In this episode of WichitaLiberty.TV: Does Wichita have a problem with cronyism? The mayor, city council, and bureaucrats say no, but you can decide for yourself. Then, from LearnLiberty.org, the harm of cronyism at the national level. Episode 48, broadcast June 22, 2014. View below, or click here to view at YouTube.

In Wichita, the news is not always news the city thinks you should know

In February 2012 the City of Wichita held an election, but you wouldn’t have learned of the results if your only news source was the city’s website or television station. In the following article from March 2012, I wonder why news of the election results was overlooked by the city.

After last week’s election results in Wichita in which voters canceled an ordinance passed by the city council, I noticed there was no mention of the election results on the city’s website. So I dashed off a note to several responsible authorities, writing this:

The City of Wichita's website reports news stories like this, but not the results of a city election held two weeks later.
The City of Wichita’s website reports news stories like this, but not the results of a city election held two weeks later.
“I notice that the city’s website carries no news on the results of the February 28th election. Is this oversight unintentional? Or does the city intend to continue spending its taxpayer-funded news producing efforts on stories with headlines like ‘Valentine’s at Mid-Continent Airport,’ ‘Rain Garden Workshops in February,’ and ‘Firefighter Receives Puppy Rescued at Fire Scene’?”

It’s not as though city staff doesn’t have time to produce a story on the election. The city’s public affairs department employs 15 people with an annual budget of some $1.3 million. While some of these employees are neighborhood assistants, there are still plenty of people who could spend an hour or two writing a story announcing the results of the February 28th election.

Except: That doesn’t fit in with the city’s political strategy. That strategy appears to be to ignore the results of the election, or to characterize the election as a narrowly-focused referendum on one obscure economic development tool.

At one time, however, the attitude of city hall was that the election was over the entire future of downtown Wichita. Mayor Carl Brewer said the election would cause “turmoil inside the community, unrest.” Council member Pete Meitzner (district 2, east Wichita) said we needed to have an early election date so “avoid community discourse and debate.” He later backpedaled from these remarks.

But now that city hall and its allies lost the election, the issue is now cast as having been very narrow, after all. Citizens aren’t against economic development incentives, they say. They’re just against hotel guest tax rebates.

This narrow interpretation illustrates — again — that we have a city council, city hall bureaucracy, and allied economic development machinery that is totally captured by special interests. Furthermore, the revealed purpose of the city’s public affairs department, including its television channel, is now seen as the promotion of Wichita city government, not Wichita and its citizens. These are two very different things.

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WichitaLiberty.TV: Tech advice for activism, then a lesson in economic development in Wichita

In this episode of WichitaLiberty.TV: A few tips on using your computer and the internet. Then, how to be informed. Finally, a look at a recent episode of economic development in Wichita, and what we can we learn from that. Episode 47, broadcast June 15, 2014. View below, or click here to view on YouTube.

Wichita logic Brewer fishing

Before asking for more taxes, Wichita city hall needs to earn trust

Before Wichita city hall asks its subjects for more tax revenue, it needs to regain the trust of Wichitans. Following, from February, an illustration of the problems city hall has created for itself. And, how it would be helpful if the editorial board of the state’s largest newspaper acted as though it cared about ethics, cronyism, government transparency, and corruption.

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.
– P.J. O’Rourke

Your principle has placed these words above the entrance of the legislative chamber: “whosoever acquires any influence here can obtain his share of legal plunder.” And what has been the result? All classes have flung themselves upon the doors of the chamber crying:
“A share of the plunder for me, for me!”
– Frederic Bastiat

Mayor's Downtown VisionTomorrow the Wichita City Council considers a policy designed to squelch the council’s ability to issue no-bid contracts for city projects. This policy is necessary to counter the past bad behavior of Wichita Mayor Carl Brewer and several council members, as well as their inability to police themselves regarding matters of ethical behavior by government officials.

The proposed policy is problematic. For some projects the developer will have to pay for “a third party expert to verify construction estimates and contracts with respect to reasonable market costs and appropriate allocation of costs between public and private funding.”

Ambassador Hotel sign 2014-03-07Why are measures like this necessary? The impetus for this policy is the no-bid contract awarded to Key Construction for the construction of the garage near the Ambassador Hotel, originally called Douglas Place, now known as Block One.

A letter of intent passed by the council on August 9, 2011 gives the cost of the garage: “Douglas Place LLC will administer the construction of the garage and urban park on behalf of the City and the City will pay the cost of designing and constructing the same at a cost not-to-exceed $6,800,000.” Of that, $770,000 was for the urban park, leaving about $6 million cost for the garage. The motion to approve the letter of intent passed with all council members except Michael O’Donnell voting in favor.

By the time the item appeared for consideration at the September 13, 2011 city council meeting, city documents gave the cost of the constructing the garage structure at an even $6 million. The motion to spend that amount on the garage passed with all members except O’Donnell voting in favor, except Brewer was absent and did not vote.

Hockaday sign explanationThen the city manager decided that the project should be put to competitive bid. Key Construction won that competition with a bid of about $4.7 million. Same garage, same company, but $1.3 million saved.

The Wichita Eagle tells the story like this: “The Ambassador garage at Douglas Place, awarded at $4.73 million to Key Construction — a partner in the hotel project and the project’s contractor — came in about 20 percent under estimates provided the City Council, on the heels of some city-financed downtown parking garages that spiraled over budget.” (“Wichita City Council to consider bidding policy extension”, Wichita Eagle, Sunday, February 2, 2014)

Reading the Eagle story, citizens might conclude that due to excellent management by Key Construction, the garage was built at a 20 percent savings under “estimates.”

But that’s not at all what happened. It’s not even close to what really happened.

Without the intervention of O’Donnell, the city manager, and — according to press reports — city council member Pete Meitzner, the garage would have been built for $6 million. That was the intent of a majority of the council. The $6 million price tag for the no-bid contract was in the ordinance that passed, and in the letter of intent that passed a month before. There were no “estimates” as the Eagle reported. There was only the expressed desire of the council to spend $6 million.

Doesn't Wichita have a newspaperSo there were no “estimates” that Key Construction bested. But there was an objectionable no-bid contract that the council agreed to. Fortunately for Wichita, a few people objected and overrode the council’s bad decision.

We’re left to wonder why the Eagle retold the story with Key Construction in the role of hero. That’s about 180 degrees away from the role this company plays.

Key Construction is intimately involved in city politics. Its principals and executives contribute heavily to mayoral and city council election campaigns. Company president David Wells is a personal friend of the mayor.

Did Key’s political involvement and campaign contributions play a role in the council awarding the company a no-bid garage contract? Key Construction executives and their spouses are among a small group who routinely make maximum campaign contributions to candidates. These candidates are both liberal and conservative, which rebuts the presumption that these contributions are made for ideological reasons, that is, agreeing with the political positions of candidates. Instead, Key Construction and a few companies are political entrepreneurs. They seek to please politicians and bureaucrats, and by doing so, receive no-bid contracts and other taxpayer-funded benefits. This form of cronyism is harmful to Wichita taxpayers, as shown by the Ambassador Hotel garage.

The harm of pay-to-play

When it is apparent that a “pay-to-play” environment exists at Wichita City Hall, it creates a toxic and corrosive political and business environment. Companies are reluctant to expand into areas where they don’t have confidence in the integrity of local government. Will I find my company bidding against a company that made bigger campaign contributions than I did? If I don’t make the right campaign contributions, will I get my zoning approved? Will my building permits be slow-walked through the approval process? Will my projects face unwarranted and harsh inspections? Will my bids be subjected to microscopic scrutiny?

Wait a minute: Doesn’t Wichita have a newspaper that keeps a watchful eye on cronyism and corruption? With an editorial board that crusades against these ills?

The answer is no. No such newspaper exists in Wichita.

We need laws to prohibit Wichita city council members from voting on or advocating for decisions that enrich their significant campaign contributors. The Ambassador Hotel garage contract is just one example. Citizens are working on this initiative on several fronts. Some find the actions of these candidates so distasteful and offensive that they are willing to take to the streets to gather thousands of signatures to force the Wichita City Council to act in a proper manner.

That huge effort shouldn’t be necessary. Why? The politicians who accept these campaign contributions say it doesn’t affect their voting, and those who give the contributions say they don’t give to influence votes.

If politicians and contributors really mean what they say, there should be no opposition to such a “pay-to-play” law. Citizens should ask the Wichita City Council to pass a campaign finance reform ordinance that prohibits voting to enrich significant campaign contributors.

There is a law, sort of

Citizens who believe that city council members ought not to vote on matters involving their friends and business associates, we already have such a law. Sort of. Here’s a section from the Wichita city code as passed in 2008 (full section below):

“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

Mayor Carl Brewer voted for this law, by the way. When asked about a specific application of this city law, the Wichita city attorney supplied this interpretation:

Related to the Mayor’s participation in the item, yes, City Code advises Council members to “refrain from making decisions involving business associates, customers, clients, friends and competitors. … ” but the Code does not provide definitions or limits to these broad categories of constituents. Further, the City Code clearly requires Council members to “vote on all matters coming before the City Council except in those particular cases of conflict of interest. …” The city Code does not define what constitutes a conflict but the Council has historically applied the State law for that definition.

Applying that State law specific to local municipalities, the Mayor does not have any substantial interest in Douglas Place LLC, and therefore no conflict. Under the State ethics law, there was no requirement that the Mayor recuse himself from voting on the Ambassador Project.

So we have statutory language that reads “shall refrain,” but the city attorney interprets that to mean “advises.”

We also have statutory language that reads “business associates, customers, clients, friends and competitors.” But the city attorney feels that these terms are not defined, and therefore the mayor and city council members need not be concerned about compliance with this law. We’re left to wonder whether this law has any meaning at all.

Council members shall refrain 01Be advised: If you ask the mayor to adhere to this law, he may threaten to sue you.

If the city attorney’s interpretation of this law is controlling, I suggest we strike this section from the city code. Someone who reads this — perhaps a business owner considering Wichita for expansion — might conclude that our city has a code of ethics that is observed by the mayor and council members and enforced by its attorneys.

Giving that impression, through, would be false — and unethical.

Here’s the Wichita city code:

Sec. 2.04.050. — Code of ethics for council members.

Council members occupy positions of public trust. All business transactions of such elected officials dealing in any manner with public funds, either directly or indirectly, must be subject to the scrutiny of public opinion both as to the legality and to the propriety of such transactions. In addition to the matters of pecuniary interest, council members shall refrain from making use of special knowledge or information before it is made available to the general public; Wichita logic Brewer fishingshall refrain from making decisions involving business associates, customers, clients, friends and competitors; shall refrain from repeated and continued violation of city council rules; shall refrain from appointing immediate family members, business associates, clients or employees to municipal boards and commissions; shall refrain from influencing the employment of municipal employees; shall refrain from requesting the fixing of traffic tickets and all other municipal code citations; shall refrain from seeking the employment of immediate family members in any municipal operation; shall refrain from using their influence as members of the governing body in attempts to secure contracts, zoning or other favorable municipal action for friends, customers, clients, immediate family members or business associates; and shall comply with all lawful actions, directives and orders of duly constituted municipal officials as such may be issued in the normal and lawful discharge of the duties of these municipal officials.

Council members shall conduct themselves so as to bring credit upon the city as a whole and so as to set an example of good ethical conduct for all citizens of the community. Council members shall bear in mind at all times their responsibility to the entire electorate, and shall refrain from actions benefiting special groups at the expense of the city as a whole and shall do everything in their power to ensure equal and impartial law enforcement throughout the city at large without respect to race, creed, color or the economic or the social position of individual citizens.

Warren Theater sells Wichita Mayor Carl Brewer's BBQ sauce

Problems with the Wichita economy. Is it cronyism?

In this excerpt from WichitaLiberty.TV: The Wichita economy has not performed well. Could cronyism be a contributing factor? Mayor Carl Brewer says it’s time to put politics and special interests aside. Is our political leadership capable of doing this? View below, or click here to view at YouTube.

Wichita City Budget Cover, 1992

With new tax exemptions, what is the message Wichita sends to existing landlords?

As the City of Wichita prepares to grant special tax status to another new industrial building, existing landlords must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.

Tomorrow the Wichita City Council considers whether to grant property and sales tax exemptions to a proposed speculative industrial building in north central Wichita. If approved, this will be the second project undertaken under new economic development policies that allow for this type of tax exemption.

Those with tax abatementsCity documents estimate that the property tax savings for the first year will be $312,055. This exemption will be granted for five years, with a second five year period possible if performance goals are met.

The city documents also state that the project will also apply for a sales tax exemption, but no estimate of these tax savings are given. It’s common for a project of this type to have about half its cost in purchases subject to sales tax. With “site work and building” at $10,350,000, sales tax in Wichita on half that amount is $370,012. Undoubtedly a rough estimate, it nonetheless gives an idea of how much sales tax the developers will avoid paying.

(If city hall has its way, the sales tax in Wichita will soon increase by one cent per dollar, meaning the developers of this project would save $421,762 in sales tax. While others will hurry to make purchases before the higher sales tax rate takes effect — if it does — these developers will be in no hurry. Their sales tax is locked in at zero percent. In fact, once having a sales tax or property tax exemption, these developers are now in a position to root for higher sales and property tax rates, as that increases costs for their competitors, thereby giving these tax-exempt developers a competitive advantage.)

City documents give the benefit-cost ratios for the city and overlapping jurisdictions:

City of Wichita General Fund 1.30 to one
Sedgwick County 1.18 to one
USD 259 1.00 to one
State of Kansas 12.11 to one

It’s not known whether these ratios include the sales tax forgiveness.

Wichita City Budget Cover, 1992While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.

When the city granted a similar tax exemption to a speculative warehouse in southwest Wichita, my estimates were that its landlord has a cost advantage of about 20 percent over other property owners. Existing industrial landlords in Wichita — especially those with available space to rent and those who may lose tenants to this new building — must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.

Wichita property taxes

Property taxes in Wichita are high for industrial buildings, and even higher for commercial buildings. See Wichita property taxes compared. So it’s difficult to blame developers for seeking relief. But instead of offering tax relief to those who ask and to those city hall approves of, it would be better to have lower taxes for everyone.

Targeted economic development incentives

The targeted economic development efforts of governments like Wichita fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. In the case of the Wichita, do we really know which industries should be targeted? Is 1.3 to one really the benchmark we should seek, or would we be better off by insisting on 1.4 to one? Or should we relax the requirement to 1.2 to one so that more projects might qualify?

This assumes that these benefit-costs ratios have validity. This is far from certain, as follows:

1. The benefits that government claims are not really benefits. Instead, they’re in the form of higher tax revenue. This is very different from the profits companies earn in voluntary market transactions.

2. Government claims that in order to get these “benefits,” the incentives must be paid. But often the new economic activity (expansion, etc.) would have happened anyway without the incentives.

3. Why is it that most companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies?

4. If the relatively small investment the city makes in incentives is solely responsible for such wonderful outcomes in terms of jobs, why doesn’t the city do this more often? If the city has such power to create economic growth, why is anyone unemployed?

Do incentives work?

The uncontroverted peer-reviewed research tells us that targeted economic development incentives don’t work, if we consider the entire economy. See: Research on economic development incentives. Some of the conclusions of the studies listed there include:

No evidence of incentive impact on manufacturing value-added or unemployment”

Small reduction in employment by businesses which received Ohio’s tax incentives”

No evidence of large firm impacts on local economy”

No permanent employment increase across a quasi-experimental panel of all Cabela’s stores”

“Employment impact of large firms is less than gross job creation (by about 70%)”

These research programs illustrate the fallacy of the seen and the unseen. It is easy to see the jobs being created by economic development incentives. It’s undeniable that jobs are created at firms that receive incentives, at least most of the time. But these jobs are easy to see. It’s easy for news reporters to find the newly-hired and grateful workers, or to show video footage of a new manufacturing plant.

But it’s very difficult to find specific instances of the harm that government intervention produces. It is, generally, dispersed. People who lose their jobs usually don’t know the root cause of why they are now unemployed. Businesses whose sales decline often can’t figure out why.

But evidence tells us this is true: These incentives, along with other forms of government interventionism, do more harm than good.

Let’s create something special and unique

Following, Sedgwick County Commissioner Karl Peterjohn explains something that the county could do to boost economic growth that doesn’t require government intervention, doesn’t need fleets of bureaucrats, reduces cronyism and corruption, increases economic freedom, respects property rights, reduces the power of government to control its subjects, and doesn’t give politicians opportunities to inflate their egos and boost their electoral prospects by being photographed at ground-breaking and ribbon-cutting ceremonies taking credit for spending your money on something you don’t want and which does not work to create jobs and prosperity. For these reasons — especially the latter — this won’t be popular with the political class.

I’ve gathered data from the property tax study that Peterjohn mentions and presented data specific to Wichita at Wichita property taxes compared. A version of this commentary appeared in the Wichtia Eagle.

Let’s create something special and unique

By Karl Peterjohn

This community as well as our country is still in an economic crisis. Our community needs a boost, or a comparative growth advantage. Creating a one (1) cent city sales tax in Wichita won’t create economic growth.

In fact, raising taxes would put our community on the same path trail blazed by many other communities across our country. That is the path to fiscal perdition: Detroit.

Sedgwick County Courthouse 2014-03-23This community can create a special and unique comparative advantage by eliminating one of the major disadvantages that this state in general, and Wichita and Sedgwick County face: high property taxes. The high property tax problem for Wichita was once again identified in a national study by the Lincoln Institute on Land Policy and the Minnesota Center for Fiscal Excellence’s, “50 State Property Tax Comparison Study,” issued in March. In this study it identified the fact that Wichita’s property tax on commercial property was 38% above the national average.

High taxes mean less economic growth. This is particularly true for property taxes.

The unique and special approach this community needs is instead of raising the sales tax to expand city spending, the focus should be on eliminating the county’s property tax. Currently the county imposes a 29.3 mill property tax county wide. This mill levy could be eliminated with about a 1.5 cent increase in the sales tax on a revenue neutral basis.

This type of property tax competitiveness would be beneficial on several levels. First, it would provide a unique selling proposition to help attract business to this county and Wichita.

Eliminating the county property tax would provide benefits to all property taxpayers and not just a select few getting special subsidies contained within the city’s sales tax hike plan. Eliminating the county’s property taxes would reduce most county taxpayers’ property tax bills by roughly 25 percent.

Let’s move away from the subsidy model whose odious examples include the failed Solyndra national subsidy boondoggle.

Instead of dangling subsides, which everyone else in the eco-devo game is doing, let’s try a unique incentive: Sedgwick County just eliminated its property tax! We should try this because it can work.

In 1995 Kansas eliminated its state unemployment tax because the fund had developed a large cash balance. This five year tax moratorium created a unique economic advantage for Kansas business. Within a couple of years, the Kansas economy enjoyed a substantial surge in economic growth. Kansas became a leader enjoying some of the fastest economic growth between 1997 to 1999. Eventually, the unemployment fund’s cash balance shrank. By 1999 the unemployment tax was restored. This unique tax advantage was eliminated.

As a county commissioner I am focused on creating a special advantage for everyone in Sedgwick County. Eliminating the county’s property tax is an idea whose time has come.

Wichita Chamber of Commerce 2013-07-09 004

A lesson for Wichita in economic development

When a prominent Wichita business executive and civic leader asked for tax relief, his reasoning allows us to more fully understand the city’s economic development efforts and nature of the people city hall trusts to lead these endeavors.

In November 2013 the Wichita City Council granted an exemption from paying property and sales tax for High Touch Technologies, a company located in downtown Wichita. This application is of more than usual interest as the company’s CEO,

High Touch, Wichita, Kansas.
High Touch, Wichita, Kansas.
Wayne Chambers, is now chair of the Wichita Metro Chamber of Commerce. The Chamber, along with its subsidiary Greater Wichita Economic Development Coalition, are the main agencies in charge of economic development for the Wichita area. Under Chambers’ leadership, these organizations are recommending that the city council authorize a vote on raising the Wichita sales tax for the purposes of economic development.

Let’s take a look at some of the aspects of this company’s application and the city’s agenda packet material (available here).

In its application letter, High Touch argues as follows (emphasis added):

To demonstrate our commitment to Wichita, as well as accommodate our expected growth plans, High Touch Technologies would like to purchase a 106,000 sq. ft. building in Downtown Wichita.

At this time, High Touch Technologies is requesting your support for the issuance of approximately $2,000,000 City of Wichita, Kansas, Taxable Industrial Revenue Bonds. High Touch greatly appreciates any support we can receive on the purchase of this office building through the City’s participation of Industrial Revenue Bonds and the property tax savings associated with this financing method. We intend to continue our growth and expansion over the next several years and these benefits would be helpful in offsetting the substantial capital requirements associated with this project.

High Touch Technologies believes in Wichita and support the community and its economy through corporate stewardship programs. We look forward to working with you and Members of the Council on this project and are always available to answer questions regarding this project or any of our business activities.

Later in the letter:

The applicant agrees to enter into an agreement for Payment in Lieu of Taxes (PILOT) equal to the ad valorem property tax payment amount for the 2013 tax year. The applicant respectfully requests that the payments be capped at that rate for a period of ten (10) years. The tax abatement will permit the applicant to proceed with the anticipated project, allow for its anticipated growth, and result in the public benefits otherwise outlined herein.

The issuance of Industrial Revenue Bonds will be used to lower the cost of office space in the acquired building. The lower costs will give High Touch, Inc. incentive to grow its presence in the corporate office in Wichita. New employees will be added to this Wichita office instead of other offices across the U.S. The savings in office space will allow High Touch, Inc. to use those savings for expansion.

Some remarks:

To demonstrate our commitment to Wichita: This is ironic because High Touch is asking to be excused from paying the same property taxes that most other people and business firms have to pay. Instead of commitment, this demonstrates hostility to the taxpayers of Wichita, who will have to pay more so that this company can pay less.

chutzpa definition 2But that irony is surpassed by the spectacle — chutzpa — of the incoming chair of a city’s chamber of commerce threatening to move his company out of the city unless the company receives incentives.

helpful in offsetting the substantial capital requirements: Well. Who wouldn’t appreciate help in offsetting the cost of anything? We should categorize this as unpersuasive.

corporate stewardship programs: Underlying this argument is that because High Touch makes charitable contributions, it should be excused from the same tax burden that most of us face. Here’s a better argument: Be a good corporate citizen by paying your fair share of taxes. Don’t ask for others to pay your share of taxes. That will let citizens make their own charitable contributions, instead of subsidizing what Wayne Chambers want to do.

Cronyism in Wichita - High Touchanswer questions regarding this project or any of our business activities: This refers to how the members of the city council will make a judgment that this business is worthy of subsidy, and that others are not. The notion that the City of Wichita can decide which companies are worthy of tax exemptions and investment is an illustration of what economist Frederich Hayek called a “conceit.” It’s so dangerous that his book on the topic is titled “The Fatal Conceit.” The failure of government planning throughout the world has demonstrated that it is through markets and their coordination of dispersed knowledge that we best learn where to direct capital investment. It is simply impossible for this city government to effectively decide in which companies Wichitans should invest their tax dollars. Nonetheless the city council made the decision, and it wants a larger role.

Payment in Lieu of Taxes (PILOT): High Touch is not proposing to totally escape its tax burden. Only partially so, through the PILOT. But the proposed payment is quite generous to the company. A few quick (and probably imprecise) calculations shows how small the PILOT is compared to what taxes would be. City documents indicate the proceeds of the IRBs will be used to pay for $2,000,000 of improvements. This amount of commercial property times 25% assessment ratio times 120.602 mill levy rate equals $60,301 in taxes. High Touch, through the PILOT, is proposing to pay $33,250, just a little more than half of what the taxes might be.

But the true value of the taxes being avoided is probably much higher. As an example, nearby office space is listed for sale at $28 per square foot, and that’s a distress-level price. Applying that price to this building, its value would be almost $3 million. If we look at market capitalization rates, which are generally given as from nine to eleven percent for class A space, we arrive at a much higher value: If we say $10 per square foot rental rate times 106,000 square feet at nine percent cap rate, the value would be almost $12 million. Taxes on that would be about $300,000 per year.

Wichita Chamber of Commerce 2013-07-09 004These are back-of-the-envelope calculations using assumed values that may not be accurate, but this gives an idea of what’s actually happening in this transaction: High Touch is seeking to avoid paying a lot of taxes, year after year. But by offering to pay a small fraction as PILOT, the company appears magnanimous.

payments be capped at that rate for a period of ten (10) years: High Touch proposed that what it’s paying in lieu of taxes not be subject to increases. Everyone else’s property taxes, of course, are subject to increases due to either assessed value increases or mill rate increases, or both. High Touch requests an exemption from these forces that almost everyone else faces.

lower the cost of office space: Again, who wouldn’t enjoy lower business or personal expenses? The cost of this incentive spreads the cost of government across a smaller tax base than would otherwise be, raising the cost of government for almost everyone else.

added to this Wichita office instead of other offices across the U.S.: The threat of relocation or expansion elsewhere is routinely used to leverage benefits from frightened local governments. These threats can’t be taken at face value. There is no way to know their validity.

use those savings for expansion: Implicit in this argument is that Wichita taxes prevent companies from expanding. True or not, this is a problem: If taxes are too high, we’re missing out on economic growth. If taxes are not too high, but some companies seek exemption from paying them nonetheless, that’s a problem too.

A prosperous company, establishing the template for seeking business welfare

In a December 2011 interview with the Wichita Eagle, the High Touch CEO bragged of how well the company is doing. The newspaper reported “Ask Wayne Chambers how business is, and he’s going to tell you it’s good. Very good. … Chambers said this week that after two years of robust growth, he’s looking for another one in 2012. ‘We have every reason to believe we’ll continue that growth pattern,’ he said.”

In February 2013 the Wichita Business Journal reported “It should be a great year for High Touch Inc. That’s the initial prediction of CEO Wayne Chambers, who says actions the company took during and leading up to 2012 have positioned High Touch to become a true ‘IT solutions provider.’”

If we take Chambers at his word — that his company is successful — why does High Touch need this business welfare? Economic necessity is usually given as the justification of these incentives. Companies argue that the proposed investment is not feasible and uneconomic without taxpayer participation and subsidy. I don’t see this argument being advanced in this case.

Wichita and peer per capita income, Visioneering

Interestingly, at the time of this application Chambers was co-chair of Visioneering Wichita, which advocates for greater government involvement in just about everything, including the management of the local economy. One of the benchmarks of Visioneering is “Exceed the highest of the annual percentage job growth rate of the U.S., Omaha, Tulsa, Kansas City and Oklahoma City.” As shown in this article and this video, Wichita badly lags the nation and our Visioneering peer cities on this benchmark. Visioneering officials didn’t want to present these results to government officials this year, perhaps on the theory that it’s better to ignore problems that to confront them.

Now Wayne Chambers is the chair of the Wichita Metro Chamber of Commerce. Under his leadership, the Chamber of Commerce recommends that Wichitans pay higher sales tax to support the Chambers’ projects.

Will this blatant cronyism be the template for future management of economic development in Wichita? Let’s hope not, as the working people of Wichita can’t tolerate much more of our sub-par economic growth.

Wichita City Budget Cover, 1975

In Wichita, ‘free markets’ cited in case for economic development incentives

A prominent Wichita business uses free markets to justify its request for economic development incentives. A gullible city council buys the argument.

At the December 10, 2013 meeting of the Wichita City Council, Bombardier LearJet received an economic development incentive that will let it avoid paying some property taxes on newly-purchased property. The amount involved in that particular incident is relatively small. According to city documents, “the value of the abated taxes on that investment could be as much as $1,980.”

Wichita Economic DevelopmentThis week Bombardier was before the council again asking for property tax abatements. City documents estimate the amount of tax to be forgiven as $1,098,294 annually, for up to ten years. The document prepared for council members did not address sales tax, but generally sales taxes are forgiven when using the program Bombardier qualified for.

The December 10 meeting was useful because a representative of Bombardier appeared before the council. His remarks help us understand how some prominent members of Wichita’s business community have distorted the principles of free markets and capitalism. As illustrated by the fawning of Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) and others, elected officials have long forsaken these principles.

Bombardier’s argument

Don Pufahl, who is Director of Finance at Bombardier Learjet, addressed the council regarding this matter. He started his remarks on a positive note, telling the council “There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.”

Economic development incentives reduce riskWe must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the other side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.

But in the field of economic development as practiced by government, incentive means something given to or granted to a company. That’s what the representative from Bombardier meant by incentive. He explained: “One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.”

A few thoughts: First, Bombardier is not investing in the community. The company is investing in itself. I’m sure Bombardier’s shareholders hope that is true.

Second, the free market system that the speaker praised is a system based on voluntary exchange. That flows from property rights, which is the foundational idea that people own themselves and the product of their labor, and are free to exchange with others. But when government uses incentives, many people do not consent to the exchange. That’s not a free market system.

Milton Friedman: Capitalism and FreedomThird, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In the same article Koch wrote: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (Charles G. Koch: Corporate cronyism harms America)

The representative from Bombardier also said that the city’s incentives would reduce Bombardier’s investment risk. There is little doubt this is true. When a company is given money with no strings attached except what the company already intends to do and wants to do, that reduced a company’s risk. What has happened, however, is that risk has not been eliminated or reduced. It has merely been shifted to the people of Wichita, Sedgwick County, the Wichita public school district, and the State of Kansas. When government does this on a piecemeal basis, this is called cronyism. When done universally, we call this socialism.

We can easily argue that actions like this — and especially the large subsidies granted to Bombardier by the state — increase the risk of these investments. Since the subsidies reduce the cost of its investment, Bombardier may be motivated to make risky investments that it might otherwise not make, were it investing its own funds (and that of its shareholders).

Entrepreneurship, EntrepreneurThe cost of Bombardier’s investments, and the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Now the city and Bombardier will say that these investments have a payoff for the taxpayer. That is, if Bombardier grows, it will pay more in taxes, and that constitutes “profit” for taxpayers. Even if we accept that premise — that the city “profits” from collecting taxes — why do we need to invest in Bombardier in order to harvest its “profits” when there are so many companies that pay taxes without requiring subsidy?

Finally, the representative from Bombardier said that these incentives are not a handout. I don’t see how anyone can say that and maintain a straight face.

wichita-chamber-job-growth-2013-12
It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”

Following is a fuller representation of the Bombardier representative’s remarks to the council.

There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.

One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.

As the company moves forward to invest in the community, those investments are not without risk. … Your incentives allow us to offset some of that risk so that we can move forward with those investments, which hopefully create new jobs and also then also improves the quality of life in our community. … These incentives are not a handout. They are a way that the local government uses such things to offset some of the risk that is involved in local companies as they invest in the community, bring jobs to the community, and improve the community overall.

Wichita logic Brewer fishing

Questions for the next Wichita city attorney: Number 3

Wichita will soon select a new city attorney. There are a few questions we ought to ask of candidates, such as: Will the next city attorney advise council members to refrain from making decisions worth millions to their friends and significant campaign contributors?

Two years ago as the Wichita City Council prepared to handle the appeal of the award of a Wichita Eagle Appearance Matters editorialconstruction contract, the Wichita Eagle editorialized that “appearance matters” on city contracts: “There will be an elephant in the Wichita City Council chambers today as Mayor Carl Brewer and the rest of the council formally consider Dondlinger and Sons’ long-shot final appeal of its loss of the contract to build the new airport terminal — the close ties of Brewer and other City Council members to Key Construction, including a letter Brewer wrote last year recommending Key to build the Cabela’s store in northeast Wichita.” (Eagle editorial: Appearance matters on city contracts, July 17, 2012)

The Eagle probably didn’t know at that time what we learned a short while later: There was Jeff Longwell district 5 2010unusual interest in Michigan about the airport contract decision, and the campaign bank account of Wichita City Council Member Jeff Longwell benefited financially.

On July 16, 2012 — the day before the Wichita City Council heard the appeal that resulted in Key Construction winning the airport contract — John Rakolta, Chairman and Chief Executive Officer of Walbridge and his wife contributed $1,000 to Longwell’s campaign for Sedgwick county commissioner. Walbridge is a Michigan-based construction company that is partnering with Key Construction on the airport job. The contract is worth about $100 million.

Then on July 20, three days after the council’s decision in favor of Key/Walbridge, other Walbridge executives contributed $2,250 to Longwell’s campaign. Key Construction and its executives contributed $6,500 to Longwell’s county commission campaign, and they’ve also been heavy contributors to Longwell’s other campaigns.

It is wrong to accept thousands in contributions from those who benefit directly from your vote. In many states it is illegal. But not in Kansas. Though legal, the timing of these contributions to Longwell’s campaign is indelicate.

Wichita logic Brewer fishingThe political influence of Key Construction and its partners extends beyond campaign contributions. Mayor Brewer’s personal Facebook profile has a photo album holding pictures of him on a fishing trip with Dave Wells of Key Construction.

Should the Wichita City Council have made the decision on the airport contract? City documents did not indicate whether the hearing was of a quasi-judicial nature, as it is sometimes when the council rules on certain matters involving appeal of decisions made by city authorities. But the council was asked to make decisions involving whether discretion was abused or whether laws were improperly applied.

That sounds a lot like the role of judges. In 2009 the U.S. Supreme Court ruled that, in the words of legal watchdog group Judicial Watch, “… significant campaign contributions or other electoral assistance pose a risk of actual bias. Writing for the majority, Justice Anthony Kennedy said: ‘Just as no man is allowed to be a judge in his own cause so too can fears of bias arise when a man chooses the judge in his own cause.’”

Judicial Watch also noted “The ruling will likely affect judges in 39 states that elect them — including Washington, Texas and California — from presiding over cases in which their campaign contributions could create a conflict of interest. The nation’s judicial code has long said that judges should disqualify themselves from proceedings in which impartiality might reasonably be questioned, but the Supreme Court ruling is the first to address hefty election spending.”

The mayor and council members are not judges. But they were asked to make a judge-like decision. If held to the same standards as the U.S. Supreme Court says judges must follow, Mayor Brewer and the five council members who accepted campaign contributions from Key Construction should not have participated in the decision on the Wichita airport construction contract. A similar argument can be made for city manager Robert Layton and all city employees. Directly or indirectly they serve at the pleasure of the council.

Question: Did the outgoing city attorney advise the mayor and council members on this topic? We’ll probably never know due to attorney-client privilege. But a good question to ask city attorney candidates is how they would advise council members if another matter like this comes before the council.

Wichita City Budget Cover, 1968

Poll: Wichitans don’t want sales tax increase

kansas-policy-institute-logoFollowing is a press release from Kansas Policy Institute.

Scientific Poll: Wichitans Don’t Want Sales Tax Increase

They’re opposed to business incentives, want to pursue privatization over tax increases, and have concerns about how city hall has recently spent money.

May 2, 2014 — Wichita — According to a newly released poll from Kansas Policy Institute, Wichitans may want more jobs and a secure water source but they certainly don’t support a sales tax increase as the means to get either. A scientific survey of 502 registered Wichita voters, conducted by SurveyUSA, shows strong opposition to a sales tax increase, as well as a possible explanation for their opposition. Full results, cross tabs, and methodology are available here.

  • 63 percent oppose a sales tax increase to provide incentives to businesses; only 28 percent support the idea
  • 64 percent oppose a sales tax increase to expand or renovate convention spaces such as the Hyatt Hotel and Century II; only 28 percent support the idea
  • 78 percent would be willing to pay a higher sales tax to secure a long-term water source and build new infrastructure but 65 percent believe the City should fund those projects through privatization rather than raise taxes.

“Government typically claims that citizen support for certain projects means they are also supportive of higher taxes, but that’s often because citizens are presented with false choices,” said Dave Trabert, president of Kansas Policy Institute. “That’s exactly what the City of Wichita did with their ACT ICT community meetings. Wichita officials were simply looking for justification to do what they wanted to do — raise taxes.”

Trabert believes the survey provides insight on citizens’ opposition to tax increases. “Only 28 percent of Wichitans believe city officials have efficiently used taxpayer money. 78 percent believe the City should adjust spending and be more efficient to fund new infrastructure and secure a long-term water source. City officials would understand that if they had an honest dialogue with citizens about all of the options, instead of just pushing a tax increase.”

Kansas Policy Institute is planning a series of public forums over the coming months to examine multiple options for long-term water solutions, economic development and infrastructure. National experts on privatization and other options will be brought in, as well as government officials who have successfully used privatization to provide services. The effectiveness of taxpayer subsidies will also be explored. Local elected officials and other civic leaders will be invited to participate.

Wichita City Budget Cover, 1971

Wichita economic development incentives: Do they help?

The Wichita City Council regularly awards economic development incentives. Are these incentives helpful, or not?

Wichita City Budget Cover, 1971In November the Wichita City Council granted Industrial Revenue Bonds to Spirit Aerosystems.

The amount of the proposed bond issue was $49,000,000. The purpose of these IRBs is to allow the recipient to escape the payment of property taxes, and often sales taxes too. This action by the council may exempt up to $49,000,000 of property from taxation, both ad valorem (property) and sales. A 100 percent exemption is proposed for five years, plus a second five years if conditions are met.

The city uses benefit-cost ratios to justify its expenditures on economic development incentives. The reasoning is that by spending cash (such as on a forgivable loan) or forgiving taxes (as in the current case), the city (and county, state, and school district) gain even more than they give up. Generally, Wichita requires a benefit-cost ratio of 1.3 to 1 or better, although there are many exceptions and loopholes that are used if a potential deal doesn’t meet this criteria.

The council’s agenda packet gives benefit-cost ratios for the various taxing authorities, but it doesn’t list the dollar amounts of the tax abatements. Usually these dollar amounts are supplied.

One of the taxing jurisdictions affected by this proposed action is USD 260, the Derby school district, as the property is within its boundaries. In this case, the benefit-cost ratio given for the Derby school district is 1.00 to 1. Since the City of Wichita requires 1.3 to 1 or better for itself, by what right does the city impose a burden on a school district that it would not accept for itself? (The tax rate for Derby schools is 59.3 mills; while for the City of Wichita the rate is 32.5 mills.)

It’s important to note that the benefits claimed from the IRBs are in the form of increased taxes paid.

The harm of this incentive is that the taxes not paid by Spirit Aerosystems are shifted to other taxpayers. The money these taxpayers would have spent or invested is instead spent on taxes. Instead of people and businesses firms deciding how to spend or invest, Wichita City Hall does this for them. This brings into play a whole host of problems. These include the deficit of knowledge needed to make good investment decisions, decisions being made for political rather than economic reasons, and the corrosive influence of cronyism.

There is something the city could to do alleviate this problem. Would the city consider reducing its spending by the amount of tax being abated? In this case, the cost of these tax abatements will not be born by others. So far, the city has not considered this possibility.

Wichita’s management of incentives

Recent reporting told us what some have suspected: The city doesn’t manage its economic development efforts. One might have thought that the city was keeping records on the number of jobs created on at least an annual basis for management purposes, and would have these figures ready for immediate review. But apparently that isn’t the case.

We need to recognize that because the city does not have at its immediate disposal the statistics about job creation, it is evident that the city is not managing this effort. Or, maybe it just doesn’t care. This is a management problem at the highest level. Shouldn’t we develop our management skills of tax abatements and other economic development incentives before we grant new?

Wichita’s results in economic development

Wichita and Peer Job Growth, Total Employment
Despite the complaints of many that Wichita doesn’t have a rich treasure chest of incentives, the city has been granting tax abatements for years. What is the result? Not very good. Wichita is in last place in job creation (and other measures of economic growth) among our Visioneering peer cities. See here Wichita and Visioneering peers job growth.

If we believe that incentives have a place, then we have to ask why Wichita has done so poorly.

Particularly relevant to this applicant today: Boeing, its predecessor, received many millions in incentives. After the announcement of Boeing leaving in 2012, a new report contained this: “‘They weren’t totally honest with us,’ said [Wichita Mayor Carl] Brewer of Boeing, which has benefited from about $4 billion of municipal bonds and hundreds of millions of dollars in tax relief. ‘We thought the relationship was a lot stronger.’” Has anything changed?

A few remarks and questions about incentives

1. The benefits that government claims are not really benefits. Instead, they’re in the form of higher tax revenue. This is very different from the profits companies earn in voluntary market transactions.

2. Government claims that in order to get these “benefits,” the incentives must be paid. But often the new economic activity (expansion, etc.) would have happened anyway without the incentives.

3. Why is it that most companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies?

4. If the relatively small investment the city makes in incentives is solely responsible for such wonderful outcomes in terms of jobs, why doesn’t the city do this more often? If the city has such power to create economic growth, why is anyone unemployed?

A diversified economy

wichita-detroit-job-industry-concentration
The mayor and council members have said that we need to diversify our economy. The award of incentives to Spirit Aerosystems reduces diversification. It gives special benefits worth millions to the largest company in our most concentrated industry. The costs of these incentives are born by other companies, especially entrepreneurs and start up companies. It’s these entrepreneurs and young companies that must be the source of diversity and dynamism in our economy.

(If we really believe that these incentives have no cost, why don’t we offer them more often? Think of how many companies go out of business each month. Many of them could be saved with just a little infusion of cash. Why doesn’t the city rescue these firms with incentives?)

Do incentives work?

The uncontroverted peer-reviewed research tells us that targeted economic development incentives don’t work, if we consider the entire economy. See: Research on economic development incentives. Some of the conclusions of the studies listed there include:

No evidence of incentive impact on manufacturing value-added or unemployment”

Small reduction in employment by businesses which received Ohio’s tax incentives”

No evidence of large firm impacts on local economy”

No permanent employment increase across a quasi-experimental panel of all Cabela’s stores”

“Employment impact of large firms is less than gross job creation (by about 70%)”

These research programs illustrate the fallacy of the seen and the unseen. It is easy to see the jobs being created by economic development incentives. It’s undeniable that jobs are created at firms that receive incentives, at least most of the time. But these jobs are easy to see. It’s easy for news reporters to find the newly-hired and grateful workers, or to show video footage of a new manufacturing plant.

But it’s very difficult to find specific instances of the harm that government intervention produces. It is, generally, dispersed. People who lose their jobs usually don’t know the root cause of why they are now unemployed. Businesses whose sales decline often can’t figure out why.

But evidence tells us this is true: These incentives, along with other forms of government interventionism, do more harm than good.

Can officials manage growth?

Alan Peters and Peter Fisher wrote an academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. A few quotes from the study, with emphasis added:

Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.

In 2008 Kansas Legislative Division of Post Audit investigated spending on economic development. It found about the same as did Peters and Fisher.

Going forward

Politicians and bureaucrats promote programs like this tax abatement as targeted investment in our economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by the state that shapes the future direction of the Wichita and Kansas economy.

These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This lack of knowledge, however, does not stop governments from creating policies and awarding incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”

In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”

In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”

There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.

We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.

WichitaLiberty.TV set 2014-03-03 1200

WichitaLiberty.TV: Schools and the nature of competition and cooperation, Wind power and taxes

In this episode of WichitaLiberty.TV: A Kansas newspaper editorial is terribly confused about schools and the nature of competition in markets. Then, we already knew that the wind power industry in Kansas enjoys tax credits and mandates. Now we learn that the industry largely escapes paying property taxes. Episode 38, broadcast April 6, 2014. View below, or click here to view at YouTube.

charles-koch-wall-street-journal-2014-04-03

Cronyism is welfare for rich and powerful, writes Charles G. Koch

“The central belief and fatal conceit of the current administration is that you are incapable of running your own life, but those in power are capable of running it for you. This is the essence of big government and collectivism.”

That’s Charles G. Koch writing in the Wall Street Journal. The article is Charles Koch: I’m Fighting to Restore a Free Society, and is available to read without subscription or payment. In the article, Koch explains his involvement in public affairs:

Far from trying to rig the system, I have spent decades opposing cronyism and all political favors, including mandates, subsidies and protective tariffs — even when we benefit from them. I believe that cronyism is nothing more than welfare for the rich and powerful, and should be abolished.

Koch Industries was the only major producer in the ethanol industry to argue for the demise of the ethanol tax credit in 2011. That government handout (which cost taxpayers billions) needlessly drove up food and fuel prices as well as other costs for consumers — many of whom were poor or otherwise disadvantaged. Now the mandate needs to go, so that consumers and the marketplace are the ones who decide the future of ethanol.

There, Charles Koch explains a big problem with the insidious nature of government. Even those who are opposed to government interventions in markets find themselves forced to participate in government subsidy programs. When they do, they are often label as hypocrites for accepting benefits from the government programs they oppose. Koch Industries, as a manufacturer of gasoline, blends ethanol with the gasoline it produces. Federal law requires that. Even though Koch Industries opposed subsidies for ethanol, the company accepted the payments. A company newsletter explained: “Once a law is enacted, we are not going to place our company and our employees at a competitive disadvantage by not participating in programs that are available to our competitors.” (As Koch explains in the current article, the subsidy program for ethanol has ended, but there is still the mandate requiring its use in gasoline.)

Learn how economic freedom creates prosperity and improves lives throughout the world.
Learn how economic freedom creates prosperity and improves lives throughout the world.
Walter Williams, as he often does, explains the core of the problem using his characteristically blunt imagery: “Once legalized theft begins, it pays for everybody to participate.” Williams says not only does it pay to participate, the reality is that it is often necessary to participate in order to stay in business. This is part of the treacherous nature of government interventionism: A business can be humming along, earning a profit by meeting the needs of its customers, when government radically alters the landscape. Perhaps government backs a competitor, or forces changes to business methods that have been working satisfactorily and harming no one. What is the existing business to do in response? Consent to be driven out of business, just to prove a point?

Existing firms, then, are usually compelled to participate in the government program — accepting subsidies, conforming to mandates, letting government pull the strings. This creates an environment where government intervention spirals, growing by feeding on itself. It’s what we have today.

It happens not only at the federal level, but at state and local levels. Referring to a City of Wichita incentive program for commercial real estate, Wichita developer Steve Clark said: “Once you condition the market to accept these incentives, there’s nothing someone else can do to remain competitive but accept them yourself. Like the things we’re working on with the city, now we have to accept incentives or we’re out of business.”

In Kansas, there are state income tax credit programs that award credits (economically equivalent to cash payments) to companies that meet certain requirements that were established by the legislature and are administered by bureaucrats. These corporate welfare programs, which represent cronyism, are more valuable than lower tax rates, at least to influential Kansas businesses.

All this leads to a country whose government stifles the potential of its people — or even worse, as Koch explains — causes actual and severe harm:

Instead of fostering a system that enables people to help themselves, America is now saddled with a system that destroys value, raises costs, hinders innovation and relegates millions of citizens to a life of poverty, dependency and hopelessness. This is what happens when elected officials believe that people’s lives are better run by politicians and regulators than by the people themselves. Those in power fail to see that more government means less liberty, and liberty is the essence of what it means to be American. Love of liberty is the American ideal.

Charles Koch: I’m Fighting to Restore a Free Society

Instead of welcoming free debate, collectivists engage in character assassination.

By Charles G. Koch

I have devoted most of my life to understanding the principles that enable people to improve their lives. It is those principles — the principles of a free society — that have shaped my life, my family, our company and America itself.

Unfortunately, the fundamental concepts of dignity, respect, equality before the law and personal freedom are under attack by the nation’s own government. That’s why, if we want to restore a free society and create greater well-being and opportunity for all Americans, we have no choice but to fight for those principles. I have been doing so for more than 50 years, primarily through educational efforts. It was only in the past decade that I realized the need to also engage in the political process.

Continue reading at Wall Street Journal (subscription not required). More about Koch Industries, including an interview with Charles Koch that covers some of these topics, is available in a recent issue of Wichita Business Journal. Click here for free access.

Kansas wind turbines

Rural Kansans’ billion-dollar subsidy of wind farms

From Kansas Policy Institute.

Rural Kansans’ Billion-Dollar Subsidy of Wind Farms

By Dave Trabert

Kansas wind turbinesNo, I’m not talking about any federal tax subsidies or mandates to buy high-cost wind energy that have forced higher taxes and electricity prices on every citizen. This billion-dollar gift comes in the form of local property tax exemptions. In some ways, this handout is even more insidious because the cost is borne by a relatively small number of Kansas homeowners and employers in the rural counties where wind farms exist.

Under current law, renewable energy producers enjoy a lifetime exemption from property taxes in Kansas. I testified last week in support of SB 435 to limit their property tax exemption to ten years.  As shown on an attachment to my testimony, the Kansas Legislative Research Department says there is a $108.4 million annual difference between the small fees paid in lieu of taxes and the taxes that would be due if taxed at the regular rates within each county. So technically, the legislation would only “limit” the property tax gift to $1.1 billion over ten years on existing wind farms; more tax gifts would still be done on new wind farms and other renewable energy facilities.

And while renewable energy producers were basically getting a free ride, property taxes on everyone else where going through the roof!

Giving property tax exemptions to private companies, regardless of the rationale, only increases everyone else’s property tax. Local government spending is not curtailed to absorb the exemption; cities and counties just raise taxes on everyone else. We encouraged the Legislature to also require that local mill rates be reduced proportionately if these property tax gifts are limited to ten years so that the new revenue from renewable energy producers’ property tax is used to reduce the burden on everyone else. (You should have seen the stink-eye this produced from the tax-and-spend crowd.)

Predictably, wind farm lobbyists lined up to protest that this legislation would increase their property taxes and send a bad message to the wind industry. Even local governments are opposed to taking away the exemption — after all, they can get their money from everyone else and take credit for bringing jobs and investment to their communities. They refuse to acknowledge that any economic benefit enjoyed by the green energy industry (and their own political benefit) comes out of the pockets of everyone else.

P.S. Remember this billion-dollar gift the next time you’re angered by cronyism in Washington, DC. Bad players in Washington often learn their craft at the state level; fending off bad policy at the state level has many long term benefits.

John Philip Sousa wrote a march honoring the Washington Post newspaper.

Washington Post out on a limb, again

John Philip Sousa wrote a march honoring the Washington Post newspaper.
John Philip Sousa wrote a march honoring the Washington Post newspaper.
It’s really astonishing to see John Hinderaker of Powerline take apart the Washington Post. I wonder if Jeff Bezos of Amazon.com is aware of what he bought last year for $250 million?

The background of the story is that the Washington Post has published an article that is demonstrably false, and for political reasons. As to why the Post has walked out on a limb too far, he writes:

Let me offer an alternative explanation of why the Washington Post published their Keystone/Koch smear:

1) The Washington Post in general, and Mufson and Eilperin in particular, are agents of the Left, the environmental movement and the Democratic Party.
2) The Keystone Pipeline is a problem for the Democratic Party because 60% of voters want the pipeline built, while the party’s left-wing base insists that it not be approved.
3) The Keystone Pipeline is popular because it would broadly benefit the American people by creating large numbers of jobs, making gasoline more plentiful and bringing down the cost of energy.
4) Therefore, the Democratic Party tries to distract from the real issues surrounding the pipeline by claiming, falsely, that its proponents are merely tools of the billionaire Koch brothers–who, in fact, have nothing to do with Keystone one way or the other.
5) The Post published its article to assist the Democratic Party with its anti-Keystone talking points.

Hinderaker also introduces to the curious story of billionaire Tom Steyer. It’s worth reading. Summing up, he concludes:

You can’t separate the reporters from the activists from the Obama administration officials from the billionaire cronies. Often, as in this instance, the same people wear two or more of those hats simultaneously. However bad you think the corruption and cronyism in Washington are, they are worse than you imagine. And if you think the Washington Post is part of a free and independent press, think again.

Continue reading at The Washington Post responds to me, and I reply to the Post.

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WichitaLiberty.TV: For whose benefit are elections, school employment, wind power, unions, unemployment

Wichita City HallIn this episode of WichitaLiberty.TV: The controversy over the timing of city and school board elections provides an insight into government. Then: Can a candidate for governor’s claims about Kansas school employment be believed? Wind power is expensive electricity, very expensive. A Wichita auto dealer pushes back against union protests. Finally, what is the real rate of unemployment in America? Episode 36, broadcast March 23, 2014. View below, or click here to view at YouTube.

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Wichita City Council to consider entrenching power of special interest groups

city-council-chambers-sign-800On Tuesday the Wichita City Council will consider a resolution in support of the status quo for city elections. Which is to say, the council will likely express its support for special interest groups whose goals are in conflict with the wellbeing of the public.

The proposed resolution expresses support for retaining the present system in which city council and school board members are elected in non-partisan elections held in the spring. Candidates for all other offices (county commissioner, district court judge, district attorney, county clerk, county treasurer, register of deeds, sheriff, state representative, state senator, governor, attorney general, secretary of state, state treasurer, insurance commissioner, state board of education member, president, U.S. senator, U.S. representative, etc.) compete in partisan elections held in August and November.

Yes, the proposed resolution is full of language supporting lofty ideals. It mentions local control, concern over low voter turnout, the complexity of making changes, partisan politics, and even the Hatch Act, whatever that is.

(The Hatch Act restricts the ability of federal executive branch employees and certain state and local government employees to participate in some political activities, such as running for office in partisan elections. Non-partisan elections — that’s okay. The city is concerned that this could “disqualify many local candidates and office holders.” As if anyone already working for government also should also be an officeholder, non-partisan election or not.)

Why should we be concerned? Why would the city council support the current system of spring elections? Doesn’t the city council always act in the best interests of the body politic?

Here’s the answer, quite simply: In the spring elections, voter turnout is low. This makes it easier for special interest groups to influence the election outcomes. These special interest groups are not your friends (unless you are a member of one of the special groups).

Voter turnout is low in spring elections. Really low. I’ve gathered statistics for elections in Sedgwick County, and these numbers show that voter turnout in spring elections is much lower than in fall elections. (For these statistics I count the August primary as part of the fall election cycle.) Since 2000, turnout for fall elections, both primary and general, has been 44 percent. Over the same period, spring elections turnout has been 18 percent.

Remarkably, a special Wichita citywide election in February 2012 with just one question on the ballot had voter turnout of 13.7 percent. One year earlier, in April 2011, the spring general election had four of six city council districts contested and a citywide mayoral election. Turnout was 12.8 percent. That’s less than the turnout for a single-question election on year later.

The problem of low voter participation in off-cycle elections is not limited to Sedgwick County or Kansas. In her paper “Election Timing and the Electoral Influence of Interest Groups,” Sarah F. Anzia writes “A well developed literature has shown that the timing of elections matters a great deal for voter turnout. … When cities and school districts hold elections at times other than state and national elections, voter turnout is far lower than when those elections are held at the same time as presidential or gubernatorial elections.”

In the same paper, Anzia explains that when voter participation is low, it opens the door for special interest groups to dominate the election: “When an election is separated from other elections that attract higher turnout, many eligible voters abstain, but interest group members that have a large stake in the election outcome turn out at high rates regardless of the increase in the cost of voting. Moreover, interest groups’ efforts to strategically mobilize supportive voters have a greater impact on election outcomes when overall turnout is low. Consequently, the electoral influence of interest groups is greater in off-cycle elections than in on-cycle elections. As a result, the policy made by officials elected in off-cycle elections should be more favorable to dominant interest groups than policy made by officials elected in on-cycle elections.” (Election Timing and the Electoral Influence of Interest Groups, Sarah F. Anzia, Stanford University, Journal of Politics, April 2011, Vol. 73 Issue 2, p 412-427, version online here.)

Moving the spring elections so they are held in conjunction with the fall state and national elections will help reduce the electoral power and influence of special interest groups.

An example of special interests influencing elections

In January 2013 candidates for Wichita City Council filed campaign finance reports covering calendar year 2012. That year was the ramp-up period for elections that were held in February and March 2013. Two filings in particular illustrate the need for campaign finance and election reform in Wichita and Kansas.

Two incumbents, both who had indicated their intent to run in the spring 2013 elections, received campaign contributions in 2012 from only two sources: A group of principals and executives of Key Construction, and another group associated with theater owner Bill Warren.

The incumbent candidates receiving these contributions are Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) and Wichita City Council Member Lavonta Williams (district 1, northeast Wichita).

Except for $1.57 in unitemized contributions to Clendenin, these two groups accounted for all contributions received by these two incumbents during an entire year. Those associated with Key Construction gave a total of $7,000. Williams received $4,000, and $3,000 went to Clendenin. Those associated with Warren gave $5,000, all to Clendenin.

You may be wondering: Do these two groups have an extraordinarily keen interest in Wichita city government that’s not shared by anyone else?

Yes they do, and it’s not benevolent. Both have benefited from the cronyism of the Wichita City Council, in particular members Williams and Clendenin. Both groups are symptomatic of the problem of special interests influencing low-turnout elections. See Campaign contributions show need for reform in Wichita for details.

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WichitaLiberty.TV: Wichita’s city tourism fee, Special taxes for special people

In this episode of WichitaLiberty.TV: The Wichita City Council will hold a meeting regarding an industry that wants to tax itself, but really is taxing its customers. Also, the city may be skirting the law in holding the meeting. Then: The Kansas Legislature is considering special tax treatment for a certain class of business firms. What is the harm in doing this? Episode 35, broadcast March 16, 2014. View below, or click here to view at YouTube.

Kansas wind turbines

Special interests defend wind subsidies at taxpayer cost

man-digging-coinsThe spurious arguments made in support of the wind production tax credit shows just how difficult it is to replace cronyism with economic freedom. From October, 2012.

We often see criticism of politicians for sensing “which way the wind blows,” that is, shifting their policies to pander to the prevailing interests of important special interest groups. The associated negative connotation is that politicians do this without regard to whether these policies are wise and beneficial for everyone.

So when a Member of Congress takes a position that is literally going against the wind in the home district and state, we ought to take notice. Someone has some strong convictions.

This is the case with U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties.)

The issue is the production tax credit (PTC) paid to wind power companies. For each kilowatt-hour of electricity produced, the United States government pays 2.2 cents. Wind power advocates contend the PTC is necessary for wind to compete with other forms of electricity generation. Without the PTC, it is said that no new wind farms would be built.

Kansas wind turbinesThe PTC is an important issue in Kansas not only because of the many wind farms located there, but also because of wind power equipment manufacturers that have located in Kansas. An example is Siemens. That company, lured by millions in local incentives, built a plant in Hutchinson. Employment was around 400. But now the PTC is set to expire on December 31, and it’s uncertain whether Congress will extend the program. As a result, Siemens has laid off employees. Soon only 152 will be at work in Hutchinson, and similar reductions in employment have happened at other Siemens wind power equipment plants.

Rep. Pompeo is opposed to all tax credits for energy production, and has authored legislation to eliminate them. As the wind PTC is the largest energy tax credit program, Pompeo and others have written extensively of the market distortions and resultant economic harm caused by the PTC. A recent example is Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away, which appeared in the Wall Street Journal.

The special interests that benefit from the PTC are striking back. An example comes from Dave Kerr, who as former president of the Hutchinson/Reno County Chamber of Commerce played a role in luring Siemens to Hutchinson. Kerr’s recent op-ed in the Hutchinson News is notable not only for its several attempts to deflect attention away from the true nature of the PTC, but for its personal attacks on Pompeo.

There’s no doubt that the Hutchinson economy was dealt a setback with the announcement of layoffs at the Siemens plant that manufactures wind power equipment. Considered in a vacuum, these jobs were good for Hutchinson. But we shouldn’t make our nation’s policy in a vacuum, that is, bowing to the needs of special interest groups — sensing “which way the wind blows.” When considering everything and everyone, the PTC paid to producers of power generated from wind is a bad policy. We ought to respect Pompeo for taking a principled stand on this issue, instead of pandering to the folks back home.

Kerr is right about one claim made in his op-ed: The PTC for wind power is not quite like the Solyndra debacle. Solyndra received a loan from the Federal Financing Bank, part of the Treasury Department. Had Solyndra been successful as a company, it would likely have paid back the government loan. This is not to say that these loans are a good thing, but there was the possibility that the money would have been repaid.

But with the PTC, taxpayers spend with nothing to show in return except for expensive electricity. And spend taxpayers do.

Kerr, in an attempt to distinguish the PTC from wasteful government spending programs, writes the PTC is “actually an income tax credit.” The use of the adverb “actually” is supposed to alert readers that they’re about to be told the truth. But truth is not forthcoming from Kerr — there’s no difference. Tax credits are government spending. They have the same economic effect as “regular” government spending. To the company that receives them, they can be used — just like cash — to pay their tax bill. Or, the company can sell them to others for cash, although usually at a discounted value.

From government’s perspective, tax credits reduce revenue by the amount of credits issued. Instead of receiving tax payments in cash, government receives payments in the form of tax credits — which are slips of paper it created at no cost and which have no value to government. Created, by the way, outside the usual appropriations process. That’s the beauty of tax credits for big-government spenders: Once the program is created, money is spent without the burden of passing legislation.

If we needed any more evidence that PTC payments are just like cash grants: As part of Obama’s ARRA stimulus bill, for tax years 2009 and 2010, there was in effect a temporary option to take the federal PTC as a cash grant. The paper PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States explains.

Astonishingly, the wind PTC is so valuable that wind power companies actually pay customers to take their electricity. It’s called “negative pricing,” as explained in Negative Electricity Prices and the Production Tax Credit:

As a matter of both economics and public policy, no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet, the federal Production Tax Credit (“PTC”) for wind generation is doing just that with increasing frequency in electricity markets across the United States. In some “wind-rich” regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the “negative price” payment, because they receive a $22/MWH federal production tax credit for every MWH generated.

In western Texas since 2008, wind power generators paid the electrical grid to take their electricity ten percent of the hours of each day.

Once we recognize that tax credits are the same as government spending, we can see the error in Kerr’s argument that if the PTC is ended, it is the same as “a tax increase on utilities, which, because they are regulated, will pass on to consumers.” Well, government passes along the cost of the PTC to taxpayers, illustrating that there really is no free lunch.

Kerr attacks Pompeo for failing to “crusade” against two subsidies that some oil companies receive: Intangible Drilling Costs and the Percentage Depletion Allowance. These programs are deductions, not credits. They do provide an economic benefit to the oil companies that can use them (“big oil” can’t use percentage depletion at all), but not to the extent that tax credits do.

Regarding these deductions, last year Pompeo introduced H. Res 267, titled “Expressing the sense of the House of Representatives that the United States should end all subsidies aimed at specific energy technologies or fuels.”

In the resolution, Pompeo recognized the difference between deductions and credits, the latter, as we’ve seen, being direct subsidies: “Whereas deductions and cost-recovery mechanisms available to all energy sectors are different than credits, loans and grants, and are therefore not taxpayer subsidies; [and] Whereas a deduction of costs and cost recovery with respect to timing is not a subsidy.”

Part of what the resolution calls for is to “begin tax simplification and reform by eliminating energy tax credits and deductions and reducing income tax rates.”

Kerr wants to deflect attention away from the cost and harm of the PTC. Haranguing Pompeo for failing to attack percentage depletion and IDC with the same fervor as tax credits is only an attempt to muddy the waters so we can’t see what’s happening right in front of us. It’s not, as Kerr alleges, “playing Clintonesque games of semantics with us.” As we’ve seen, Pompeo has called for the end of these two tax deductions.

If we want to criticize anyone for inconsistency, try this: Kerr criticizes Pompeo for ignoring the oil and gas deductions, “which creates a glut in natural gas that drives down the price to the lowest levels in a decade.” These low energy prices should be a blessing to our economy. Kerr, however, demands taxpayers pay to subsidize expensive wind power so that it can compete with inexpensive gas. In the end, the benefit of inexpensive gas is canceled. Who benefits from that, except for the wind power industry? The oil and gas targeted deductions also create market distortions, and therefore should be eliminated. But at least they work to reduce prices, not increase them.

By the way, Pompeo has been busy with legislation targeted at ending other harmful subsidies: H.R. 3090: EDA Elimination Act of 2011, H.R. 3994: Grant Return for Deficit Reduction Act, H.R. 3308: Energy Freedom and Economic Prosperity Act, and the above-mentioned resolution.

I did notice, however, that Pompeo hasn’t called for the end to the mohair subsidy. Will Kerr attack him for this oversight?

Finally, Kerr invokes the usual argument of government spenders: Cut the budget somewhere else. That’s what everyone says.

Creating entire industries that exist only by being propped up by government subsidy means that we all pay more to support special interest groups. A prosperous future is best built by relying on free enterprise and free markets in energy, not on programs motivated by the wants of politicians and special interests. Kerr’s attacks on Pompeo illustrate how difficult it is to replace cronyism with economic freedom.

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WichitaLiberty.TV: Wichita’s missing water, beyond politics and special interests

In this episode of WichitaLiberty.TV: The people of Wichita have told officials that water is an important issue. What has the city done in this regard? Then, Wichita Mayor Brewer Carl says it’s time to put politics and special interests aside. Is our political leadership capable of this? Episode 34, broadcast March 9, 2014. View below, or click here to view at YouTube.

Coming to Wichita for business. (Click for a larger version.)

Wichita seeks to add more tax to hotel bills

Wichita City Hall.
Wichita City Hall.

The city of Wichita wants hotel guests to make a “marketing investment” in Wichita by paying a “City Tourism Fee.”

This Tuesday the Wichita City Council will hold a public hearing regarding the formation of a Tourism Business Improvement District (TBID).

Go Wichita Convention and Visitors Bureau

The main characteristic of the proposed TBID is that it will add 2.75 percent tax to most hotel rooms sold in the City of Wichita. The funds would go to Go Wichita Convention and Visitors Bureau to be used to enhance that agency’s marketing efforts. The tax is estimated to raise $2.5 million per year.

What is the motivation of the city’s hotel operators to assent to this added tax on their product? City documents state: “Go Wichita estimates that the new marketing investment could result in a 6% rise in hotel occupancy and a growth of $12 million in hotel revenue.”

What the city calls a “marketing investment” will appear on hotel bills as the “City Tourism Fee,” according to city documents.

How to succeed in business by having others pay for your advertising

When most business firms want to increase their business through advertising, they pay for it themselves. They don’t tack on an additional “advertising fee” to customer’s bills.

But not so with Wichita hotels. Unlike most businesses, Wichita hotels propose to have someone else pay for their advertising.

On top of that, the city and the hotels don’t have the integrity to label the added tax to let customers know its true purpose. Instead, the tax will appear on customer bills as a “City Tourism Fee.” If hotel customers are angry at the fee, well, who is to blame? The hotel, which is merely collecting what city code says it must? Visitors to Wichita likely won’t know the real reason for the tax, which is to shift expenses to someone else through the mechanism of government.

Clever. I wonder if other industries will try something like this? Also: Will the Wichita hotels that currently engage in advertising reduce their spending on advertising, now that a government agency is in charge and taxpayers are footing the bill?

Who pays this tax

City leaders argue that taxes like hotel taxes are largely paid for by people from out of town. Whether that is a wise strategy is debatable. People and business firms notice these taxes. Wichita hotel owner Jim Korroch is an advocate of the new Wichita tax. But he told the Wichita Eagle recently “You know, I used to like to take my girls shopping at the Legends in Kansas City. I thought that was a great deal with the outlet malls, but for the first time I’ve looked at my receipts, and it isn’t. They charge almost 20 percent at the Legends with that district.” So he noticed — eventually — the high taxes charged.

Coming to Wichita for business. (Click for a larger version.)
Coming to Wichita for business. (Click for a larger version.)

If the tourism fee is implemented, some hotels in Wichita that are located in community improvement districts (including one Korroch owns) will have taxes totaling 17.9 percent added to customer bills.

Here’s something else regarding the myth of shifting hotel taxes to people from out of town. Are there are any Wichita business firms that have employees who live in other cities, and those employees travel to Wichita on business and stay in hotels? Often these hotel bills are paid by the employee and then reimbursed by the Wichita company they work for. So as far as a hotel knows, and as far as any marketing analysis might show, someone from Fresno spends a few days in a Wichita hotel. This person might work for Cargill Beef’s Fresno facility and have traveled to Wichita to visit the headquarters of Cargill Meat Solutions. In the end, the hotel bill and taxes are paid by Cargill Meat Solutions, a Wichita company.

Do any Wichita business firms employ consultants who travel to Wichita and stay in hotels, and those hotels bills are part of the consultants’ billable expense? In the end, who pays those taxes? A Wichita business firm does.

So at the public hearing, I hope someone asks the question: How often are these taxes actually paid by Wichita companies? Does the city know the answer to this?

Further: Isn’t it a sham to call this tax a “City Tourism Fee” when hometown companies are paying hotel bills for their employees and consultants to come to Wichita for business?

More secret spending

It is the position of Go Wichita that the agency doesn’t have to conform to the Kansas Open Records Act. The City of Wichita backs this interpretation of the law. Thus, we will have more taxpayer funds spent in secret.

The bureaucrats profit

Writing in Public Choice — A Primer Eamonn Butler explains the motivations of bureaucrats:

In terms of what bureaucrats actually do pursue, Niskanen suggested that budget maximisation provided a fair measure. It is an approximation to the objective of profit in the market context. And it provides a simple proxy for all the other things that go with a large and growing budget — such as job security, promotion prospects, salary increases and so on.

In their pursuit of these benefits, bureaucrats are just as much players in the political process as any other interest group — and they have no free-rider problem because their group is so well defined that they can easily keep the benefits of their lobbying to themselves. …

Bureaucrats can also rely on the political support of the interest groups that depend on the grants and programmes that they administer, and which would almost certainly like to see those budgets increased; and they can rely on the support of the commercial businesses that supply goods and services to the programmes that the agencies administer.

We see these characteristics revealing themselves: A government agency seeking to expand its budget and power, at the expense of taxpayers.

Corporate cronyism harms America

As the Wichita Business Journal features an interview with Charles Koch today, here’s a repeat of his article from September 2012 in which he address many of the same topics as covered in the WBJ interview.

“The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

The editorial in today’s Wall Street Journal by Charles G. Koch, chairman of the board and CEO of Wichita-based Koch Industries contains many powerful arguments against the rise of cronyism. The argument above is just one of many.

In his article, Koch makes an important observation when he defines cronyism: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

“Rent-seeking” was always a difficult term to use and understand. It had meaning mostly to economists. But “cronyism” — everyone knows what that means. It is a harsh word, offensive to many elected officials. But we need a harsh term to accurately describe the harm caused, as Koch writes: “This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

The entire article is available at the Wall Street Journal. Koch has also contributed other articles on this topic, see Charles G. Koch: Why Koch Industries is speaking out and Charles Koch: The importance of economic freedom.

Charles G. Koch: Corporate Cronyism Harms America

When businesses feed at the federal trough, they threaten public support for business and free markets.

By Charles G. Koch

“We didn’t build this business — somebody else did.”

So reads a sign outside a small roadside craft store in Utah. The message is clearly tongue-in-cheek. But if it hung next to the corporate offices of some of our nation’s big financial institutions or auto makers, there would be no irony in the message at all.

It shouldn’t surprise us that the role of American business is increasingly vilified or viewed with skepticism. In a Rasmussen poll conducted this year, 68% of voters said they “believe government and big business work together against the rest of us.”

Businesses have failed to make the case that government policy — not business greed — has caused many of our current problems. To understand the dreadful condition of our economy, look no further than mandates such as the Fannie Mae and Freddie Mac “affordable housing” quotas, directives such as the Community Reinvestment Act, and the Federal Reserve’s artificial, below-market interest-rate policy.

Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.

With partisan rhetoric on the rise this election season, it’s important to remind ourselves of what the role of business in a free society really is — and even more important, what it is not.

Continue reading at The Wall Street Journal

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Wichita Business Journal remodels, features Charles Koch interview

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The Wichita Business Journal has, it its own words, “reinvented” itself, and starts its new life with features on Koch Industries and an extended interview with Charles Koch.

To get started, the weekly newspaper has made its complete digital edition available to read at no charge. Click here for access.

The interview with Koch is wide-ranging, covering the business interests of Koch Industries and Koch’s political involvement, detailing his relationship with Americans for Prosperity. An example quote: “When you start attacking cronyism and people’s political interests, it gets nasty.”

In Wichita, citizens want more transparency in city government

Wichita city hallIn a videographed meeting that is part of a comprehensive planning process, Wichitans openly question the process, repeatedly asking for an end to cronyism and secrecy at city hall.

As part of the Wichita-Sedgwick County Comprehensive Plan, the City of Wichita held a number of focus groups meetings. Their purpose, according to city documents, was to provide “information on the components of the Plan and provide input on a draft survey.”

(Some indication of the reverence given to the plan to city planners may be inferred by the city’s use of capitalization when referring to it.)

The community meetings were structured in a way reminiscent of the Delphi method, described in Wikipedia as “a structured communication technique, originally developed as a systematic, interactive forecasting method which relies on a panel of experts.” Others have a more skeptical view, believing that the Delphi technique leads citizens to believe they have participated in community democratic decision-making when in reality, that is not the goal of the process.

In October Americans for Prosperity-Kansas invited the city to hold a focus group meeting. Video from the meeting is below, or click here to view at YouTube.

Dave Barber, who is Advanced Plans Manager at Wichita-Sedgwick County Metropolitan Area Planning Department, facilitated the meeting. Susan Estes of AFP was the meeting organizer and host. Mike Shatz is the videographer. His description of the meeting is “The City of Wichita is holding a series of meetings to gain input from the public on future spending plans. The meetings are based off a survey the city conducted, which, by all accounts, was full of loaded questions geared towards promoting the programs that city officials want to see. In this meeting, one of the first in the series, citizens openly question the process and repeatedly ask for an end to cronyism and secrecy at city hall.”

Wichita/Sedgwick County Community Investment Plan logo.

Wichita planning documents hold sobering numbers

Wichita/Sedgwick County Community Investment Plan logo.
Wichita/Sedgwick County Community Investment Plan logo.

This week the City of Wichita held a workshop where the Community Investments Plan Steering Committee delivered a progress report to the city council. The documents hold information that ought to make Wichitans think, and think hard. The amounts of money involved are large, and portions represent deferred maintenance. That is, the city has not been taking care of the assets that taxpayers have paid for.

The time frame of this planning process is the period 2013 to 2035. Under the heading “Trends & Challenges” we find some troubling information. Wichita Mayor Carl Brewer hinted at the problem last year in his State of the City Address when he said the city would need to spend $2.1 billion over 30 years on maintenance and replacement of water and sewer systems. The city’s performance measure report also told us that our pavement condition index has been deteriorating, and is projected to continue to decline.

So if we’ve been paying attention, it should not have been a surprise to read this in the presentation: “Decades of under-investment in infrastructure maintenance … 38% of Wichita’s infrastructure is in ‘deficient/fair’ condition.”

The cost to remedy this lack of maintenance is substantial. The document says that on an annual basis, Wichita needs to spend $180 million on infrastructure depreciation/replacement costs. Currently the city spends $78 million on this, the presentation indicates.

The “cost to bring existing deficient infrastructure up to standards” is given as an additional $45 to $55 million per year.

This is a lot of money. To place these numbers in context, here are some figures that help illustrate Wichita city finances:

Property tax collected in 2013: $105 million
Budgeted 2014 expenditures for fire department: $44 million
Budgeted 2014 expenditures for police department: $79 million

It’s thought that an additional one cent per dollar city sales tax would generate around $80 million per year.

The amounts by which the city is deficient in maintaining its assets is staggering, compared to other expenses the city has. The size of the deficiency overwhelms possible sources of new revenue. A one cent per dollar increase in sales tax would not cover the deficiencies in maintaining our current assets. Then, remember the things Wichita wants to increase spending on — a new library, economic development, expanded public transit, new convention center, economic development, and perhaps other things.

The report lists three scenarios for future growth: Maintaining current trends, constrained suburban growth, and suburban and infill growth mix. Whenever we see words like “constrained” we need to be cautious. We need to be on guard. The Wichita Eagle reported this: “In the city’s recently completed series of 102 public meetings, citizens were clear, City Manager Robert Layton said: Redevelop the core. We’ve had enough suburban growth for awhile.”

It’s unclear how closely the findings from the public meetings reflects actual citizen preference. Cynics believe that these meetings are run in a way that produces a predetermined outcome aligned with what city officials want to hear. At any rate, when you ask people about their preferences, but there is no corresponding commitment to act on their proclaimed preferences, we have to wonder how genuine and reliable the results are.

There is a very reliable way to find out what people really want, however. Just let them do it. If people want to live downtown on in an inner city neighborhood, fine. If they want suburban-style living, that’s fine too. Well, it should be fine. But reading between the lines of city documents you get the impression that city planners don’t think people should live in suburban-style settings.

Sometimes we don’t have to read between the lines. Sometimes the attitude of planners is explicit. In 2010 the city — actually the Wichita Downtown Development Corporation — employed Goody Clancy, a Boston-based planning firm, to help plan the revitalization of downtown Wichita. In the article Goody Clancy market findings presented to Wichita audience I reported on some of what the planners said. For example, David Dixon, the Goody Clancy principal for this project, told how that in the future, Wichitans will be able to “enjoy the kind of social and cultural richness” that is found only at the core. “Have dinner someplace, pass a cool shop, go to a great national music act at the arena, and then go to a bar, and if we’re lucky, stumble home.”

This idea that only downtown people are socially and culturally rich is an elitist attitude that we ought to reject. By the way, when I presented to the Wichita City Council on this topic, I noted that no council members, except for possibly one, lived in neighborhoods that might be described as in “the core.”

Other speakers from Goody Clancy revealed a condescending attitude towards those who hold values different from this group of planners. One presenter said “Outside of Manhattan and Chicago, the traditional family household generally looks for a single family detached house with yard, where they think their kids might play, and they never do.”

This, again, is an elitist attitude. No, it’s worse than that. It’s condescending. It reveals that the professional planning class thinks that the ordinary people of Wichita can’t decide for themselves what they really want. Somehow, people are duped into buying homes that don’t really meet their needs, and they’re not smart enough to realize that. That is the attitude of the professional planning class. It’s an elitism that Wichitans ought to reject.

The planning process

The planners tells us that the process is based on data. “Data-driven” is a term they use. But when we look under the covers at the data, we realize that we need to be very skeptical of claims.

Returning to the Goody Clancy plan for downtown Wichita, the principal planner used Walk Score in a presentation delivered in Wichita. Walk Score is purported to represent a measure of walkability of a location in a city. Walkability is a key design element of the master plan Goody Clancy has developed for downtown Wichita.

Walk Score is not a project of Goody Clancy, as far as I know, and Dixon is not responsible for the accuracy or reliability of the Walk Score website. But he presented it and relied on it as an example of the data-driven approach that Goody Clancy takes.

Walk Score data for downtown Wichita, as presented by planning firm Goody Clancy. Click image for a larger version.
Walk Score data for downtown Wichita, as presented by planning firm Goody Clancy. Click image for a larger version.

The score for 525 E. Douglas, the block the Eaton Hotel and Wichita Downtown Development Corporation is located in and mentioned by Dixon as a walkable area, scored 91, which means it is a “walker’s paradise,” according to the Walk Score website.

But here’s where we can start to see just how bad the data used to develop these scores is. For a grocery store — an important component of walkability — the website indicates indicates a grocery store just 0.19 miles away. It’s “Pepsi Bottling Group,” located on Broadway between Douglas and First Streets. Those familiar with the area know there is no grocery store there, only office buildings. The claim of a grocery store here is false.

There were other claimed amenities where the data is just as bad. But the chairman of the Wichita Downtown Development Corporation at that time said that Walk Score has been updated. I should no longer be concerned with the credibility of this data, he told me through a comment left on my website.

He was correct in one regard: Walk Score had been updated. For the same location the walk score was revised to 85%, which is considered “very walkable.” The “grocery store” is no longer the Pepsi Bottling Group. It’s now “Market Place,” whose address is given as 155 N. Market St # 220.

Someone strolling by that location would notice that address, 155 N. Market number 220, is the management office for an office building whose name is Market Place.

Still no grocery store. Nothing even resembling a grocery store.

I looked this week at the Walk Score website. It’s been updated and redesigned. Now for the same block in the heart of downtown Wichita the walk score is 74, which is “very walkable,” according to the site. In a narrative explanation, the site says this: “The closest grocery stores are Ray Sales Co, Market Place and The Hot Spot Detox Shop.”

Ray Sales Co., in the shadow of Intrust Bank Arena.
Ray Sales Co., in the shadow of Intrust Bank Arena.

I don’t know if you’ve been to Ray Sales, but it’s a tiny store with a very limited product selection. It’s not the type of place that will attract people to downtown Wichita. We know that because officials say a grocery store is one of downtown’s most pressing needs, despite the existence of Ray Sales.

Market Place is listed again as evidence of a grocery store in downtown Wichita. Remember, Market Place is the name of an office building located on Market Street. It’s not a grocery store.

The third location listed as a grocery store is a shop that sells kits to help people pass drug tests. It’s nothing like a grocery store.

Again, David Dixon and Goody Clancy did not create the Walk Score data. But they presented it to Wichitans as an example of the data-driven, market-oriented approach to planning that they use. Dixon cited Walk Score data as the basis for higher real estate values based on the walkability of the area and its surrounding amenities. But anyone who relies on the evidence Dixon and Goody Clancy presented would surely get burnt unless they investigated the area on their own.

Keep in mind that the presentation of this Walk Score data was made after Goody Clancy staff had spent considerable time in Wichita. That someone there could not immediately recognize how utterly bogus the data is: That should give us cause for concern that the entire planning process is based on similarly shoddy data and analysis.

Constraining growth

Returning to the city’s presentation: How does the city “constrain” suburban growth? By taking away the freedom for people to live where they want. Why would the city want do that? City leaders say that suburban development is expensive. It’s not sustainable. Suburban living depends on the personal automobile. And remember the attitude of the professional planners Wichita Downtown Development Corporation hired: People can’t be trusted to know what they really want for themselves.

Special taxes paid on a residential home.
Special taxes paid on a residential home.

If it really is more expensive to develop new suburban areas, the city should simply charge what it costs. To some extent this already happens. Anyone who builds a new home in a new area will pay for the residential street and other infrastructure through special taxes. If the city feels it needs to charge for building arterial streets to serve new suburban areas, it should do so. But the city should realize that people spending their own money to buy or rent a residence — this is the best indication of their true preferences. What people say in focus groups or on paper survey forms is nowhere near as reliable.

Community input

The survey that Wichita used has its own problems. Here’s an example of a question respondents were asked to agree or disagree with: “Local government, the school district, community organizations and the business community should work together to create an investment climate that is attractive to business.”

The meaning of an attractive investment climate means different things to different people. Some people want an investment climate where property rights are respected, where government refrains from meddling in the economy and transferring one person’s property to another. An environment free from cronyism, in other words. But the Wichita way is, unfortunately, cronyism, where government takes an active role in managing economic development. We in Wichita never know when our local government will take from us to give to politically-favored cronies, or when city hall will set up and subsidize a competitor to your business.

Wichita flights compared to the nation.
Wichita flights compared to the nation.

Sometimes the questions are misleading. A question relating to the subsidy program at the Wichita airport read “I’m willing to pay increased taxes or fees to support investment … that uses public dollars to reduce the cost and increase the number of commercial flights at Mid-Continent Airport.”

This is an example of a question which has a false premise. Since the subsidy programs have been in place, the number of flights from the Wichita airport has declined, not increased as the question would lead readers to believe. See Wichita flight options decrease, despite subsidies and Wichita airfare subsidy: The negative effects.

Leadership of city fathers

On these and other issues, the Wichita Eagle quoted mayor Brewer: “We’ve put them off for too long. We didn’t want the challenges. We didn’t want the tax bills. But now, to maintain our quality of life, we’ve got to catch up.”

It’s almost as if the mayor is speaking as a bystander. But he’s been mayor for nearly seven years, and was on the city council before that time. During that time, he and other city leaders have boasted of not increasing property taxes. While the property tax rate has been stable, property tax revenue has increased due to development of new property and rising assessment values. In spite of this, the city has a huge backlog of deferred maintenance. The way to interpret this is that the city has really been engaging in deficit spending under Brewer’s leadership. We didn’t spend what was needed to maintain our assets, and now the mayor tells us we need to increase spending to make up for this.

The economist Milton Friedman told us that it’s more important to look at government spending rather than the level of taxation. That’s because spending must eventually be paid for, either through current taxes or future taxation. The federal government generate deficits and can pay for spending through creating inflation. Fortunately, cities and states can’t do that.

But, as we’ve seen, cities like Wichita can incur costs without paying for them. This is a form of deficit spending. By deferring maintenance of our infrastructure, the city has pushed spending to future years. The report released this week gives an idea of the magnitude of this deferred spending: It’s huge.

This form of deficit spending is “off the books” and doesn’t appear in city financial statements. But it’s real, as the mayor now admits. The threat to our freedom to live where we want is real, too. We must be watchful and diligent.

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Viewing the seen and unseen

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The lesson of the book “Economics in One Lesson” by Henry Hazlitt is this: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

(The Ludwig von Mises Institute has published an edition of this book which is available at no cost at its website; click here. Amanda BillyRock has illustrated most of the chapters in video. Click here for the playlist.)

Looking beyond what we see at first glance, that’s important. And considering everyone, not just some small group, is important too. You may be familiar with the term “special interest group.” A local example might be the Wichita Area Builders Association, which represents homebuilders. The purpose of groups like this — and I’m sorry to have to single out this group — is to represent their members, and them alone. So last year the Builders Association was able to persuade the Wichita City Council to pass a program that rebates Wichita property taxes on new homes for a few years. This makes it easier to sell these new homes. Homes which are built, of course, by members of the Wichita Area Builders Association.

Did the city council consider the long term effects of this policy, such as the effect on tax revenue in future years? Did the council consider the “Cash for Clunkers” effect, in which incentive programs induce people to buy now, only to depress sales in later years after the program ends? The answer is either a) No, the council did not consider these effects, or b) The council decided to ignore these effects.

Then, what about the effect on other groups besides the builders? Did the council consider that by offering savings when buying these select new homes, it likely reduced the appeal and value of all other homes across the city? Did the council consider that these new homes will require services like police and fire protection, but since they don’t contribute property tax, other taxpayers have to pay to provide these services?

And what about setting another precedent, that when business is not doing well, a special interest group appeals to government for special favors?

This is an example of the city council considering only the immediate effects of a policy, and also the effects on only a single group — the self-interested homebuilders. Things like this happen all the time.

Remember how Hazllitt said these groups will argue “plausibly and persistently?” That happened. As an example, Wichita State University economists prepared an analysis showing that this rebate program benefited the city. Did that analysis consider the long-term effects or only the immediate effects of the policy? Did that analysis consider the effects on all groups? I’m afraid that if we could look under the hood of these models, we’d find that they suffer from the problems Hazlitt warns about.

And the president of the Builders Association argued persuasively before the council. That’s an example of when Hazlitt wrote about a special interest group: “It will hire the best buyable minds to devote their whole time to presenting its case.”

Hazlitt told us what we need to do in these cases, writing: “In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups.”

broken-window-glassSpecial interest groups expend lot of effort to get government to look at the seen and skip the unseen. That’s a reference to the famous parable of the broken window from chapter two of “Economics in One Lesson.” Ahe child who threw a rock through the window of the bakery. The crowd that gathered around the broken window: Someone suggested that the damage is actually a good thing, because the windowmaker now has work to do and earns money. And the windowmaker in turn will spend his new income somewhere else, and so forth. Economic development professionals who make arguments for subsidies to business call this the multiplier effect. It creates what they call indirect impacts.

A few years ago in an effort to drum up taxpayer subsidies for arts, a national organization — a special interest group — made this argument:

paint-bucket

A theater company purchases a gallon of paint from the local hardware store for $20, generating the direct economic impact of the expenditure. The hardware store then uses a portion of the aforementioned $20 to pay the sales clerk’s salary; the sales clerk respends some of the money for groceries; the grocery store uses some of the money to pay its cashier; the cashier then spends some for the utility bill; and so on. The subsequent rounds of spending are the indirect economic impacts.

Thus, the initial expenditure by the theater company was followed by four additional rounds of spending (by the hardware store, sales clerk, grocery store, and the cashier). The effect of the theater company’s initial expenditure is the direct economic impact. The subsequent rounds of spending are all of the indirect impacts. The total impact is the sum of the direct and indirect impacts.

That is the same argument made to excuse the destruction of the broken window in the bakery. Doesn’t this sound plausible? But Hazlitt, echoing Bastiat before him, notes this: The baker was going to buy a suit of clothes, and buying that suit would set off its own chain of economic activity.

But now he must spend that money on fixing the broken window. The new window is what is seen. The unbought suit of clothes is more difficult to see. It is the unseen.

If the window was not broken, the baker has a functional window and a new suit of clothes. After the window is broken, however, all the baker has is a replacement window. No new suit of clothes is purchased.

As Hazlitt summarized: “The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new ‘employment’ has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.”

In the case I cited above, it’s easy to see the benefit granted to the homebuilders. But the economic activity that does not take place because of the diversion of resources to the homebuilders? Where is that? It is unseen.

When the theater company spends $20 of taxpayer-provided money to buy paint: Where did that $20 come from? Isn’t it possible that a homeowner might have bought the same gallon of paint, but now is not able to because he must pay taxes to support the theater company? It’s easy to see the theater production with its taxpayer-funded painted set. It’s not easy to see the house that sits unpainted for a year to pay for the theater company’s paint. That is the seen and unseen.

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What type of watchdog are you?

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To help citizens become government watchdogs, the Franklin Center for Government and Public Integrity is providing a new resource. It’s the Watchdog Quiz, and it will help you discover what type of role you will want to fill as a government watchdog.

The quiz takes just a few moments to complete, and answering the questions will help you discover all the things that citizens can do to be involved in government, especially at the local level. My Watchdog type is “Content Creator.” What is yours?

Click here to take the quiz.

Following is some material from Watchful Citizens Follow Founders’ Vision For America.

“The salvation of the state is watchfulness in the citizen.”

This quote inscribed on the state capitol building in Lincoln, Nebraska, has become our North Star here at Watchdog Wire. We believe that citizens can contribute to better and more efficient local government by staying involved in their communities and speaking up when something doesn’t add up.

But what does it mean to be “watchful?”

The answer is different for everyone, and has changed throughout American history. For Thomas Paine and Ben Franklin, staying watchful came in the form of pamphlets and newspaper columns. Later, being watchful was entrusted to elected representatives in Congress. Now, technology has made it easier than ever for citizens to stay informed and hold government accountable.

The medium used is ever-changing but the sentiment of keeping watch remains the same — to ensure the blessing of liberty to ourselves and our posterity.

So where do you fit into the American story? How do you keep watch on government and its expanding role in our lives? Take the Watchdog Quiz to find out.

Continue reading at Watchful Citizens Follow Founders’ Vision For America.

Wichita considers policy to rein in council’s bad behavior

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When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.
– P.J. O’Rourke

Your principle has placed these words above the entrance of the legislative chamber: “whosoever acquires any influence here can obtain his share of legal plunder.” And what has been the result? All classes have flung themselves upon the doors of the chamber crying:
“A share of the plunder for me, for me!”
– Frederic Bastiat

Update: The council deferred this item to a later date.

Tomorrow the Wichita City Council considers a policy designed to squelch the council’s ability to issue no-bid contracts for city projects. This policy is necessary to counter the past bad behavior of Wichita Mayor Carl Brewer and several council members, as well as their inability to police themselves regarding matters of ethical behavior by government officials.

The proposed policy is problematic. For some projects the developer will have to pay for “a third party expert to verify construction estimates and contracts with respect to reasonable market costs and appropriate allocation of costs between public and private funding.”

Why are measures like this necessary? The impetus for this policy is the no-bid contract awarded to Key Construction for the construction of the garage near the Ambassador Hotel, originally called Douglas Place, now known as Block One.

A letter of intent passed by the council on August 9, 2011 gives the cost of the garage: “Douglas Place LLC will administer the construction of the garage and urban park on behalf of the City and the City will pay the cost of designing and constructing the same at a cost not-to-exceed $6,800,000.” Of that, $770,000 was for the urban park, leaving about $6 million cost for the garage. The motion to approve the letter of intent passed with all council members except Michael O’Donnell voting in favor.

By the time the item appeared for consideration at the September 13, 2011 city council meeting, city documents gave the cost of the constructing the garage structure at an even $6 million. The motion to spend that amount on the garage passed with all members except O’Donnell voting in favor, except Brewer was absent and did not vote.

Then the city manager decided that the project should be put to competitive bid. Key Construction won that competition with a bid of about $4.7 million. Same garage, same company, but $1.3 million saved.

The Wichita Eagle tells the story like this: “The Ambassador garage at Douglas Place, awarded at $4.73 million to Key Construction — a partner in the hotel project and the project’s contractor — came in about 20 percent under estimates provided the City Council, on the heels of some city-financed downtown parking garages that spiraled over budget.” (“Wichita City Council to consider bidding policy extension”, Wichita Eagle, Sunday, February 2, 2014)

Reading the Eagle story, citizens might conclude that due to excellent management by Key Construction, the garage was built at a 20 percent savings under “estimates.”

But that’s not at all what happened. It’s not even close to what really happened.

Without the intervention of O’Donnell, the city manager, and — according to press reports — city council member Pete Meitzner, the garage would have been built for $6 million. That was the intent of a majority of the council. The $6 million price tag for the no-bid contract was in the ordinance that passed, and in the letter of intent that passed a month before. There were no “estimates” as the Eagle reported. There was only the expressed desire of the council to spend $6 million.

So there were no “estimates” that Key Construction bested. But there was an objectionable no-bid contract that the council agreed to. Fortunately for Wichita, a few people objected and overrode the council’s bad decision.

We’re left to wonder why the Eagle retold the story with Key Construction in the role of hero. That’s about 180 degrees away from the role this company plays.

Key Construction is intimately involved in city politics. Its principals and executives contribute heavily to mayoral and city council election campaigns. Company president David Wells is a personal friend of the mayor.

Did Key’s political involvement and campaign contributions play a role in the council awarding the company a no-bid garage contract? Key Construction executives and their spouses are among a small group who routinely make maximum campaign contributions to candidates. These candidates are both liberal and conservative, which rebuts the presumption that these contributions are made for ideological reasons, that is, agreeing with the political positions of candidates. Instead, Key Construction and a few companies are political entrepreneurs. They seek to please politicians and bureaucrats, and by doing so, receive no-bid contracts and other taxpayer-funded benefits. This form of cronyism is harmful to Wichita taxpayers, as shown by the Ambassador Hotel garage.

The harm of pay-to-play

When it is apparent that a “pay-to-play” environment exists at Wichita City Hall, it creates a toxic and corrosive political and business environment. Companies are reluctant to expand into areas where they don’t have confidence in the integrity of local government. Will I find my company bidding against a company that made bigger campaign contributions than I did? If I don’t make the right campaign contributions, will I get my zoning approved? Will my building permits be slow-walked through the approval process? Will my projects face unwarranted and harsh inspections? Will my bids be subjected to microscopic scrutiny?

We need laws to prohibit Wichita city council members from voting on or advocating for decisions that enrich their significant campaign contributors. The Ambassador Hotel garage contract is just one example. Citizens are working on this initiative on several fronts. Some find the actions of these candidates so distasteful and offensive that they are willing to take to the streets to gather thousands of signatures to force the Wichita City Council to act in a proper manner.

That huge effort shouldn’t be necessary. Why? The politicians who accept these campaign contributions say it doesn’t affect their voting, and those who give the contributions say they don’t give to influence votes.

If politicians and contributors really mean what they say, there should be no opposition to such a “pay-to-play” law. Citizens should ask the Wichita City Council to pass a campaign finance reform ordinance that prohibits voting to enrich significant campaign contributors.

There is a law, sort of

Citizens who believe that city council members ought not to vote on matters involving their friends and business associates, we already have such a law. Sort of. Here’s a section from the Wichita city code as passed in 2008 (full section below):

“[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

Mayor Carl Brewer voted for this law, by the way. When asked about a specific application of this city law, the Wichita city attorney supplied this interpretation:

Related to the Mayor’s participation in the item, yes, City Code advises Council members to “refrain from making decisions involving business associates, customers, clients, friends and competitors. … ” but the Code does not provide definitions or limits to these broad categories of constituents. Further, the City Code clearly requires Council members to “vote on all matters coming before the City Council except in those particular cases of conflict of interest. …” The city Code does not define what constitutes a conflict but the Council has historically applied the State law for that definition.

Applying that State law specific to local municipalities, the Mayor does not have any substantial interest in Douglas Place LLC, and therefore no conflict. Under the State ethics law, there was no requirement that the Mayor recuse himself from voting on the Ambassador Project.

So we have statutory language that reads “shall refrain,” but the city attorney interprets that to mean “advises.”

We also have statutory language that reads “business associates, customers, clients, friends and competitors.” But the city attorney feels that these terms are not defined, and therefore the mayor and city council members need not be concerned about compliance with this law. We’re left to wonder whether this law has any meaning at all.

Be advised: If you ask the mayor to adhere to this law, he may threaten to sue you.

If the city attorney’s interpretation of this law is controlling, I suggest we strike this section from the city code. Someone who reads this — perhaps a business owner considering Wichita for expansion — might conclude that our city has a code of ethics that is observed by the mayor and council members and enforced by its attorneys.

Giving that impression, through, would be false — and unethical.

Here’s the Wichita city code:

Sec. 2.04.050. — Code of ethics for council members.

Council members occupy positions of public trust. All business transactions of such elected officials dealing in any manner with public funds, either directly or indirectly, must be subject to the scrutiny of public opinion both as to the legality and to the propriety of such transactions. In addition to the matters of pecuniary interest, council members shall refrain from making use of special knowledge or information before it is made available to the general public; shall refrain from making decisions involving business associates, customers, clients, friends and competitors; shall refrain from repeated and continued violation of city council rules; shall refrain from appointing immediate family members, business associates, clients or employees to municipal boards and commissions; shall refrain from influencing the employment of municipal employees; shall refrain from requesting the fixing of traffic tickets and all other municipal code citations; shall refrain from seeking the employment of immediate family members in any municipal operation; shall refrain from using their influence as members of the governing body in attempts to secure contracts, zoning or other favorable municipal action for friends, customers, clients, immediate family members or business associates; and shall comply with all lawful actions, directives and orders of duly constituted municipal officials as such may be issued in the normal and lawful discharge of the duties of these municipal officials.

Council members shall conduct themselves so as to bring credit upon the city as a whole and so as to set an example of good ethical conduct for all citizens of the community. Council members shall bear in mind at all times their responsibility to the entire electorate, and shall refrain from actions benefiting special groups at the expense of the city as a whole and shall do everything in their power to ensure equal and impartial law enforcement throughout the city at large without respect to race, creed, color or the economic or the social position of individual citizens.

In Wichita, why do some pay taxes, and others don’t?

Wichita City Hall

A request by a luxury development in downtown Wichita raises issues, for example, why do we have to pay taxes?

Tomorrow the Wichita City Council considers yet another layer of business welfare for The Lux, a luxury real estate development in downtown Wichita. This project, despite having already received millions in assistance from taxpayers, is not economically viable, according to city documents.

Because the transaction contemplated tomorrow is shrouded in the mystery of Internal Revenue Bonds (IRBs), we can expect that the important aspects of this transaction will be under-reported. We’re likely to see headlines that The Lux is receiving $14,450,000 in IRBs. City council members may clumsily explain to citizens that the city is not lending this money, and that taxpayers are not on the hook if the bonds are not repaid. The city may tell us that a local bank will buy the bonds and that the Lux will issue a mortgage to protect the bank’s interest, as though that was a matter of public concern rather than a private business dealing.

The city’s documents, for all their words and effort spent in preparation, don’t state the amount of sales tax relief this project will receive. But the amount of the bonds contemplated is $14,450,000, so an upper estimate of the amount of sales tax forgone is that amount times the city’s sales tax rate, or $1,033,175.

The item on tomorrow’s agenda features another example of the city adapting to meet the needs of its cronies. The letter of intent originally called for a certain level of investment, but now that has been reduced:

The Letter of Intent approved by the City Council stated that “LUX Building, LLC has represented that it will make a total capital investment in the project of at least $24,000,000.” The projection was intended to be an estimate of the not-to-exceed project costs at that time and not a requirement of minimum capital investment. Since the actual total cost of the project will be closer to $20,000,000 the developer is requesting that the minimum investment requirement be waived.

It’s a small point, but big numbers like $24,000,000 are a “wow” factor to city council members and are cited and praised as evidence of the goodness of the city’s economic development incentives. But now: never mind.

Why do we tax?

TaxThere are a variety of theories of taxation, such as taxes being “dues” paid, or payment for services the city provides, or as the cost of a civilized society. In any case, we have to wonder why the owners of The Lux are being excused from paying perhaps one million dollars of these dues, or payment for government services it will consume, or it share of the cost of a civilized society.

Tale of two cash registers

Supporters will point to the cost/benefit ratios. These ratios are simply recognition that economic activity is good, and government taxes it. But unless the city, county, and state will each reduce their spending by the amount of sales tax forgiveness given to The Lux, other taxpayers have to pay.

It’s worth noting that the subsidy being granted to The Lux is in the form of sales tax exemption. Kansas taxes food at the same rate as everything else. This means that while the owners of The Lux are enjoying the privilege of saving perhaps one million dollars in sales tax, others — including poor people struggling to provide food for their families — are making up the sales tax that The Lux is not paying.

man-digging-coinsWhen other taxpayers have to bear the cost of incentives for the Lux and its owners, other spending and investment is reduced. While the spending on incentives is concentrated and easy to see — there will be groundbreaking and ribbon-cutting ceremonies to make sure we don’t miss it — the missing spending and investment is dispersed. That means the missing spending and investment is difficult to see. But it is every bit as real as this project.

In fact, this missing spending and investment is more valuable than government spending on this project. That’s because when people spend and invest on their own, they choose what is most important to them, not what is important to politicians and bureaucrats. This is a special problem in Wichita, where the mayor and city council members have a history of awarding over-priced no-bid contracts to their campaign contributors. (A separate item on tomorrow’s agenda will attempt to address that problem.)

Sometimes these subsidies are justified by the claim that renovating historic buildings like The Lux is more expensive than new construction. If that’s true, we have to recognize that investing in, or living in, a historic building is a lifestyle choice. The people who make these choices should pay themselves, just like we expect others to pay for the characteristics of the housing they choose. For example , building a home with granite kitchen counter tops and marble floors in the bathrooms is more expensive than a plainer home. These premium features are chosen voluntarily by the homeowner, and it is right and just that they alone should pay for them.

We should recognize historic buildings for what they are: a premium feature or amenity whose extra cost should be born solely by those who chose to own them or rent them. There’s no difference between these premium features and choosing to live in a historic building. Those who desire them choose them voluntarily, and should pay their full cost. Forcing everyone to subsidize this choice is wrong. It’s an example of a special interest gone wild. But in Wichita we call this economic development.

The nature of tax credits

The sales tax exemption is not the only form of taxpayer subsidy The Lux will receive. The historic preservation tax credits approved for this the project are worth millions. These credits are equal to grants of cash. They are a cost to government that taxpayers must bear.

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The confusing nature of tax credits leads citizens to believe that they have no cost to the state or federal government. But tax credits are equivalent to government spending. By mixing spending programs with taxation, some are lead to believe that tax credits are not cash handouts. But not everyone falls for this seductive trap. In an article in Cato Institutes’s Regulation magazine, Edward D. Kleinbard explains:

Specialists term these synthetic government spending programs “tax expenditures.” Tax expenditures are really spending programs, not tax rollbacks, because the missing tax revenues must be financed by more taxes on somebody else. … Tax expenditures dissolve the boundaries between government revenues and government spending. They reduce both the coherence of the tax law and our ability to conceptualize the very size and activities of our government. (The Hidden Hand of Government Spending, Fall 2010)

The use of tax credits to pay for economic development incentives leads many to believe that what government is doing is not a direct subsidy or payment. In order to clear things up, perhaps we should require that government write checks instead of issuing credits.

Indeed, if government issued checks to real estate developers, citizens would look at things differently. They’d wonder why they’re subsidizing the construction of expensive apartments and condos. They’d be angry. Using a semi-mysterious mechanism like tax credits shrouds the true economic transaction taking place.

These expenditures of tax money — being issued as credits rather than appropriations — go through a different process than most expenditures of taxpayer money. Recently some have started to use the word “tax appropriations” to describe tax credits. These expenditures don’t go through the normal legislative process as do most appropriations.

It’s time to recognize these historic preservation tax credits as payments to a special interest group. Unfortunately, as with most special interest groups, the group receiving the payment — tax credits in this case — has an extreme interest in the matter. They benefit greatly. But to the rest of the populace — well, does it really matter to them? John Stossel explains the problem like this:

The Public Choice school of economics calls this the problem of concentrated benefits and dispersed costs. Individual members of relatively small interest groups stand to gain huge rewards when they lobby for government favors, but each taxpayer will pay only a tiny portion of the cost of any particular program, making opposition pointless.

That’s the situation we face with the historic preservation tax credits. A few real estate developers will enrich themselves at taxpayer expense. Well-to-do renters will get a better deal. To everyone else, it’s just another way that government nickels and dimes us to death.

What’s the matter with Wichita?

We have to wonder why so many projects in downtown Wichita require massive doses of taxpayer subsidy. Here’s what city documents tell us:

The Office of Urban Development has reviewed the economic (gap) analysis of the project and determined a financial need for incentives exists based on the current market. The project lender, Intrust Bank, has advised that the bank cannot increase the loan amount, leaving a gap in funding sources that is filled by the City’s facade program.

When the city is willing to fill in financing gaps, you can be sure that gaps will be created.

Here’s an idea: Instead of handing out economic development incentives on a piecemeal basis, let’s try to fix what prevents projects like The Lux from moving forward on its own. If, in fact, the obstacles are real, and don’t exist only in the imagination of those seeking to finance their projects on the backs of Wichita taxpayers.

WichitaLiberty.TV February 2, 2014

In this episode of WichitaLiberty.TV: A Kansas college professor claims that college costs are rising only a tad faster than inflation. We’ll take a look at the actual numbers. Then, this week Wichita Mayor Carl Brewer delivered the annual State of the City address. A few things deserve comment. Episode 30, broadcast February 2, 2014. View below, or click here to view at YouTube.

The state of Wichita, 2014

Wichita city hall

Wichita Mayor Carl Brewer delivered the annual State of the City address. He said a few things that deserve discussion.

This week Wichita Mayor Carl Brewer delivered his annual State of the City address. We expect a certain amount of bragging and over-the-top community pride, things like “Wichita is the BEST place to work and raise a family!” That’s good, to a point. Because if we take these boasts seriously, and if they are not based on factual information, then we have a problem. We may believe that everything is fine in Wichita. But if the actual state of the city is otherwise, we may take unwise action that ultimately is harmful.

(While the city took prominent measures to promote the mayor’s speech, so far the text has not been made available on the city’s website. But you may click here to read it.)

Here’s an example, and perhaps the most important. The mayor said “Our community partnerships have helped us overcome the challenges of the great recession — which brought layoffs to many sectors of our economy.” But the problem is that we haven’t overcome the recession.

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If we take a look at job growth in Wichita over the last two decades, we see Wichita performing very poorly. That’s not only on an absolute basis, but relative to our self-chosen peer cities. The relative part is important, because the recession was nation-wide. All cities suffered. Note that there are a few cities over which Wichita ranked higher: Springfield, Illinois, and Wichita Falls, Texas. These cities are relevant because we recently hired people from these cities to lead our economic development efforts.

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I’ve shown data like this to the city council. I don’t think they believed me. I can understand their reluctance, as it’s not easy to admit things like this. Few like to admit failure. But that doesn’t excuse a reluctance to face facts. I also believe that some council members think that city hall critics take joy in presenting these figures. At least for me, that’s not true. I realize that these statistics tell a story of human hardship. So for those who don’t believe or trust my research, here’s a chart prepared by the Wichita Metro Chamber of Commerce for a presentation to its leadership committee. It uses a different time frame and a slightly different set of peers for comparison, but the results are the same: Wichita lags behind in terms of job growth.

Greater Wichita Economic Development Coalition

Despite this evidence, the mayor thinks we’re doing well, and he is proud of our economic development efforts. In his address, he told the audience this: “For the past five years — the Greater Wichita Economic Development Coalition has helped generate nearly 10,000 jobs and more than 400 million in capital investment.”

That sounds like a lot of jobs. But we have to temper that number. We know that we don’t update our job statistics to reflect jobs that didn’t last for very long. We also must realize that some of these jobs would have been created without the involvement of our economic development agencies. We also must realize that these economic development efforts have a cost, and that cost is harmful to our economy and job creation.

But even if we give our economic development agencies sole credit for these 10,000 jobs, let’s apply a little arithmetic to provide some context. The Bureau of Labor Statistics tells us that the labor force in the Wichita Metropolitan area is about 302,000 people. that number, by the way, has been declining since 2009. If we take the 10,000 jobs — recognizing that was for five years — that averages to 2,000 jobs per year. That’s in the neighborhood of six percent of the labor force.

Does that represent a significant factor in the Wichita area economy? Remember, that calculation gives government more credit that it deserves. When we combine this with Wichita’s lackluster performance in creating jobs compared to our peers, I really don’t think we should be proud of our government’s economic development efforts.

In his State of the City Address, Wichita Mayor Carl Brewer also said we need to “continue to diversify our economy.” But we’re not doing that. Our economic development programs heavily favor the aviation industry, which makes it more difficult for aspiring companies in other diverse industries to start and thrive.

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The mayor told the audience that “We will also continue to support our successful affordable airfares program.” This is the program whereby Wichita and the state of Kansas pay a discount airline to provide service in Wichita. It was AirTran, but is now Southwest. It is thought that if one airline has low fares, others will reduce their fares to match. That’s probably the case. But I’ve done the research, and there is another effect. As can be seen in the nearby chart, the number of flights and the number of available seats is declining in Wichita. These measures are also declining on a national level, but they are declining faster in Wichita than for the nation.

The mayor also asked for cooperation in using Southwest Airlines, advising the audience: “So when you make your corporate travel plans, please remember our community’s commitment to supporting low-cost carriers.” Well. How would you feel if you worked for one of our air carriers that don’t receive a subsidy, such as American, United, and Delta? How would you feel if you owned stock in one of these airlines, as does nearly everyone who holds broad-based index funds in their retirement or investment accounts?

In the past, the subsidized discount carrier has carried around ten percent of Wichita’s passengers. So we are vitally dependent on the legacy, or major, airlines, and we don’t need to insult them, as I believe the mayor did.

(To help you explore Wichita airport data, I’ve created an interactive visualization. Click here to open the visualization in a new window. You may add or remove any number of airports. Or, if you’d like to watch a video, click on Wichita Airport statistics: The video.)

Water was another topic that the mayor touched on. He told the audience: “The city has also invested in the second phase of the aquifer storage and recovery project known as ASR. New construction was completed in time to help with the drought. More than 100 million gallons were diverted from the little Arkansas River directly to customers.” 100 million gallons sounds like a lot of water. But what is the context? Well, 100 million gallons is about how much water we use on a single hot summer day.

And what about the ASR, or aquifer storage and recovery program? Its cost, so far for Phases I and II, is $247 million. Two more phases are contemplated. Despite this investment, and despite the plan’s boasts, Wichitans were threatened with huge fines for excessive water usage. The Wichita City Council also started a rebate program so that citizens were forced to pay for other people to buy low-water usage appliances. Expensive city decorative fountains were dry for a time.

Why were these measures necessary? A document created in March 2013 — that’s just as Wichita realized the city was running out of water — is titled “Wichita Area Future Water Supply: A Model Program for Other Municipalities.” It states: “In 1993 the Wichita City Council adopted an Integrated Local Water Supply Plan that identified cost effective water resources that would be adequate to meet Wichita’s water supply needs through the year 2050.” This squares with what former mayor Bob Knight recently told the Wichita Pachyderm Club, that when he was in office, Wichita had sufficient water for the next 50 years. He was told that about 10 years ago.

Just to give you an idea of how seriously we should take the claims made in speeches like this, here’s what the mayor told us in his 2009 State of the City Address: “We will continue work on the state-of-the art water supply system, known as the ASR project. It will provide the Wichita area with sufficient water for the next 50 years. Economic Development is not possible without an adequate water supply.” The mayor’s right. We need an adequate water supply. But it appears that despite huge expense and the boasts of city officials — including the mayor — we don’t have a secure water supply.

The mayor also addressed transit. He asked the community to answer a few questions, such as:

Should we have more stops to drop off and pick up riders?
Should we run later hours during the week and on the weekends?
Should we find new partners to extend our service area and help with costs?

The problem with questions like these are that citizens don’t have all the information needed to make an informed answer. Would we like to have more bus service? Who could answer no to such a question?

But if the mayor had told us that the cost per passenger mile for Wichita transit buses is 95 cents, or that only 30 percent of the operating costs are paid by fares, people might answer these questions differently. (That 30 percent would be lower if we included the cost of capital, that is, the cost of the buses.) And when the mayor asked citizens to weigh in at the Activate Wichita website: I looked, and there’s no topic for transit.

But even if citizens were informed of these costs, their answers are still not fully reliable. That’s because of the disconnect between the payment for the service and the actual bus service. Because so much of the cost of providing bus service is paid for someone else, we don’t really see the total cost of a bus trip. That’s often a problem with services provided by the government. Since someone else is paying, there’s not the same concern for receiving value as there is when people spend their own money.

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The Activate Wichita website, by the way. When citizens are asked to rate ideas, to express their approval or — well, that’s the problem. Your choices for voting on an idea are: “I Love It!” … “I Like It!” … “It’s OK.” … “Neutral.” That’s it. There’s no voting option for expressing disagreement or disapproval with an idea. “Neutral” is as much dissent as Wichitans are allowed to express in this system. On this system that city leaders say they rely on for gathering citizen input, there needs to be a voting selection that expresses disagreement or disapproval with an idea. Otherwise when votes are tallied, the worst that any idea can be is “neutral.” City planners may get a false impression that all these ideas a fine and dandy.

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On the topic of citizen involvement: The mayor also told us this: “A few weeks ago – the city launched the Office of Community Engagement.” That’s something that the city needs, based on data the city has gathered. The Wichita Performance Measures Report holds some data from a survey called the National Research Center National Citizen Survey. Survey respondents were asked to rate “the job Wichita does at welcoming citizen involvement.” The results are shown in the nearby chart I created from data in the most recent version of the Wichita Performance Measure Report. The numbers are the percent of respondents giving “excellent” or “good” as their response to the question. The values for the last three administrations of the survey are between 35 percent and 39 percent. The report says this performance is “much below” a benchmark set by the National Research Center. The report tells us that the city expects to re-survey citizens in 2014. For that year, the city has given itself the lofty target of 40 percent of citizens rating the job Wichita does at welcoming citizen involvement as excellent or good. Maybe an Office of Community Engagement will help.

Last year the city conducted an extensive survey of residents. Of this survey, the mayor said: “We learned that more than 70% of our residents are willing to rise above their personal interests to do what’s best for the community.”

The problem with this is that it relies on the false concept of a conflict between personal interests and what is good for the community. In the marketplace, which is the opposite of government, people advance their self-interest in one legitimate way: By finding out the goods and services that others want, and then providing them. If you can do this well and efficiently, you can earn profits. It’s the quest for profits — that’s self interest — that drives people to figure out what others want, and then to work hard to provide that. Everyone benefits.

This quest for profits could, and should, apply to areas that are under the control of government. But people are so afraid that someone will earn a profit by serving their fellow man. Recently John Stossel spotlighted a park in New York City that is run by a private corporation with the aim of earning a profit. People are happy with the new park. They feel safe, even though the park doesn’t discriminate and still lets homeless people stay there. There’s commerce going on, selling food, for example. People like that, and evidence of that is the profit being earned. But Stossel’s guest was critical and unhappy because someone was earning a profit, even though park patrons were happy with the park and most were unaware of its private sector operation.

So when the park was operated by the city — for the common good, that is — not many people used it. It was dirty and trashy, and people didn’t feel safe. Under the profit motive, people like the park and they use it. So where is the conflict between personal interest and what is good for the community?

Now, not everything government does is bad. But when government dabbles in areas that the private sector can do very well, we see problems. As an example, the city wants to help real estate developers, but the city handled a recent situation so badly that the mayor apologized in his address, saying “We are also taking steps to ensure we have integrity and openness when we solicit proposals for development in the core area.”

Citizens that pay attention at city hall also note there are several small groups that contribute heavily to campaigns. Then the mayor and council members vote to give financial benefits to these people. These are not isolated incidents. This behavior is repeated over and over. Some cities have laws against this type of behavior. But in Wichita, while we’re being encouraged to put “what is good for the community” above our personal self-interest, we see city hall run over by cronyism. That is, by people using city government for their own interests. In the name of the “common good,” of course.

At the end of his speech, the mayor asked citizens to “get into the game,” saying: “We need you to be a player — not a spectator — to win a better and brighter tomorrow.”

But we’ve seen what happens when people want to be involved, but not in the way the mayor and council want. Do you remember the chart of airport data? Last year I presented that information to the city council. It so happened that Sedgwick County Commissioner Karl Peterjohn had appointed me to the Airport Advisory Board, and later in that same meeting the city council voted on my appointment. I was rejected. Only one council member voted in my favor. The Wichita Eagle reported: “Mayor Carl Brewer was clear after the meeting: The city wants a positive voice on the airport advisory board, which provides advice to the council on airport-related issues.” A positive voice is more valued than a critical voice, it seems.

Council members shall refrain 01

You may also remember how Susan Estes of Americans for Prosperity testified at a meeting of the Wichita City Council. She cited a section of the Wichita City Code that says council members shall refrain from making decisions involving, among other things, friends and business associates. She asked the mayor to observe that part of the city code. But the mayor lashed out at Estes and others and threatened a lawsuit.

At least this year the mayor didn’t mention the importance of open and transparent government, as he usually does. Because based on Activate Wichita — where there is no disagreement allowed, to rejecting board appointments simply because someone might be critical of the city’s programs, to threatening those who ask the mayor and council members to follow the laws that they passed, to the city’s hostile attitude towards the citizen’s right to know: The message we get is this: The city welcomes your involvement, but only up to a point. Question the authority, and you’re not welcome.

That’s the state of Wichita government, that government to be distinguished from the many wonderful people who live here. We can be thankful for the difference.

Voice for Liberty Radio: Private enterprise and markets

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In this episode of WichitaLiberty Radio: Mary Beth Jarvis delivered the keynote address of the Kansas Republican Party Convention for 2014. She spoke on the topics of private enterprise and the profit and loss system.

Mary Beth Jarvis is Chief Executive Officer and President at Wichita Festivals. Prior to that, she worked in communications at Koch Industries, and before that in the United States Air Force.

In her speech, she said “Entrepreneurial capitalism — you know what that is — it’s not cronyism. It’s real courage, real risk, real passion, and real effort.”

Expanding on the importance of entrepreneurial capitalism, she told the audience:

“What else is necessary for that kind of entrepreneurial capitalism, that kind of engine for improvement, is that you always respect that what you need is a clear tie to market signals of what’s really adding value, what’s really making people’s lives better. That dedication to maintaining strong markets and to maintaining liberty is absolutely essential.

“It is also essential to find out quickly and clearly if this is the necessary message, that our efforts — however industrious — are not creating value. Because only then can you divert resources to that which will help us all. So the reward for successfully bringing value to someone ought to be clear, and the signal that you are not, ought to be clear, and the only way to do that is an absolute adherence to the principles of free markets and the improvement that they provide.”

In conclusion, she said: “In those public policy endeavors that you work so hard, and devote your energy and passion to, doing what’s right really means: Measuring ideas and actions by the yardstick of freedom and markets. The mantra that markets matter then becomes the platform for which the greatest progress and the greatest good in the improvement of our quality of life can happen.”

This was recorded on Friday January 24, 2014. This is a portion of her speech.

Shownotes

Wichita River Festival
Mary Beth Jarvis at LinkedIn

Wichita campaign finance reform, and local elections in Kansas

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In this excerpt from WichitaLiberty.TV: An illustration of the need for campaign finance reform in Wichita and Kansas. A related issue is the need to change the timing of local elections in Kansas. View below, or click here to view at YouTube.

In January 2013 candidates for Wichita City Council filed campaign finance reports, and the filings illustrate the need for campaign finance reform in Wichita and Kansas.

Two incumbents, both who have indicated their intent to run in the spring elections, received campaign contributions in 2012 from two sources: A group of principals and executives of Key Construction, and another group associated with theater owner Bill Warren.

The incumbent candidates receiving these contributions are Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) and Wichita City Council Member Lavonta Williams (district 1, northeast Wichita).

Except for $1.57 in unitemized contributions to Clendenin, these two groups accounted for all contributions received by these two incumbents. As the election grew nearer, other parties contributed to these candidates. But for one year, only two groups made contributions.

So do these two groups have an extraordinarily keen interest in Wichita city government that’s not shared by anyone else? Yes they do, and it’s not benevolent. Both have benefited from the cronyism of the Wichita City Council, in particular members Williams and Clendenin. We’ve covered the benefits these parties have received, such as overpriced no-bid contracts and interest-free loans made to prop up an earlier failing loan from taxpayers. We need laws in Wichita and Kansas like some states and cities have. These are generally called pay to play laws, and they can be very simple, such as elected officials can’t vote on matters that enrich their significant campaign contributors. It could be that easy. See Kansas needs pay-to-play laws for more.

Here’s something that seems inconsequential, but is really important: The timing of our city council and school board elections. Currently these are held in the spring of odd-numbered years. These elections are also non-partisan, meaning that candidates don’t run as members of a political party.

I was asked to testify before a committee of the Kansas Senate. In preparation, I did some research. I found that for elections in Sedgwick County, voter turnout in spring elections is much lower than in fall elections. Since 2000, turnout for fall elections, both primary and general, has been 44 percent. Over the same period, spring elections turnout has been 18 percent. Other research I found confirmed that this pattern is common across the country.

You may be asking: Is this a problem?

Political scientist Sarah Anzia has done the research. She wrote this in a research paper: “When an election is separated from other elections that attract higher turnout, many eligible voters abstain, but interest group members that have a large stake in the election outcome turn out at high rates regardless of the increase in the cost of voting. Moreover, interest groups’ efforts to strategically mobilize supportive voters have a greater impact on election outcomes when overall turnout is low. Consequently, the electoral influence of interest groups is greater in off-cycle elections than in on-cycle elections. As a result, the policy made by officials elected in off-cycle elections should be more favorable to dominant interest groups than policy made by officials elected in on-cycle elections.” For more on this issue, see Kansas spring elections should be moved.

Special interest groups benefit from these low-turnout spring elections. Do you remember the first story I reported on today, where campaign contributions for two Wichita city council members came from only two sources? That’s an illustration of special interest groups in action. It’s harmful to our city and its economy.

What happened to the bill I testified on? There was much opposition by cities and school boards and the special interest groups that benefit from these low-turnout, off-cycle elections. The bill went nowhere. I hope that it is revived this year for another attempt.

WichitaLiberty.TV January 5, 2014

In this episode of WichitaLiberty.TV: A look back at a few problematic issues regarding ethical government in Wichita in 2013. Topics include: Campaign contributions, the timing of city and school board elections, Mayor Carl Brewer’s integrity and threats, the need for campaign finance reform, the firing of a television news reporter, the apparently non-transparent way the city formulates policy, and the useless feedback systems the city relies on. Episode 26, broadcast January 5, 2014. View below, or click here to view at YouTube.

Wichita’s policymaking on display

Wichita city hall logo

When asked to provide documents that establish the city’s proclaimed policy, Wichita city hall is not able to do so, leaving us to wonder just how policy is made.

At an April meeting of the Wichita City Council, both Urban Development Director Allen Bell and Wichita city manager Robert Layton explained that for downtown projects, the city’s policy that the debt service fund must show a cost-benefit ratio of 1.3 to one or better doesn’t apply. (Video of Bell explaining this policy is here, and of Layton doing the same, here. Meeting minutes are here.)

More about this policy is available in In Wichita, economic development policies are questioned.

In that article, I mentioned that I attempted to find a document that states this policy. I asked the city to provide this document, or perhaps tell me when the city council acted to approve this policy, just as it has approved other similar policies.

After two days of searching, city officials have said that there is no such document that establishes this policy.

The people of Wichita ought to ask city hall just when this policy was made. City officials say Wichita has a transparent, open government. The Public-Private Partnership Evaluation Criteria for the redevelopment of downtown Wichita states “The business plan recommends public-private partnership criteria that are clear, predictable, and transparent.”

But in the first project to be approved under this plan, the city finds itself apparently making policy on the fly to fit the needs of a group of politically-connected developers. This is not economic development. Instead, it’s cronyism.

Some have said that we should just shrug this off as an innocent oversight. But this project is steeped in cronyism. It is the poster child for why Wichita and Kansas need pay-to-play laws so that city council members are prohibited from voting to send millions to their significant campaign contributors and the mayor’s fishing buddy.

Soon the city will probably ask Wichitans to trust it with more tax revenue so the city can do more for its citizens. The city commissioned a survey to justify this. Also, the mayor wants a dedicated stream of funding so that the city can spend more on economic development.

In other words, the city wants its citizens to trust their government. But in order to gain that trust, the city needs to avoid episodes like this.

Wichita economic development: Worth higher taxes?

In this excerpt from WichitaLiberty.TV: Wichita city and business leaders are likely to ask Wichitans to support a higher sales tax in order to support additional economic development efforts. Should Wichitans vote in favor of this? View below, or click here to view at YouTube.

Another thing that a tax increase in Wichita might be used for is for economic development. That is, paying subsidies to companies so that they will provide jobs in Wichita.

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It’s felt that Wichita needs to step up its economic development efforts because things haven’t been going well lately. Not that everyone agrees. You’ve seen the charts I showed you, showing the growth of jobs in Wichita and also other economic indicators. When we compare Wichita with the nation as a whole and with our Visioneering peer cities, Wichita is almost always in last place. When I presented this data to the Wichita city Council, the Council members did not believe these numbers. So here’s a chart that was presented recently at a Wichita Metro Chamber of Commerce meeting. It uses the same data source that I use, the Bureau of Economic Analysis, and it shows the same data using the same methodology. It comes to the same conclusion: Wichita performs poorly.

Our chamber of commerce and its leadership will use this poor performance to argue that Wichita needs to spend more money on economic development. And that’s a problem.

Your chamber of commerce radio buttons
Very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that allow free enterprise and genuine capitalism to flourish.

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

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

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

This is the argument that the Wichita Chamber of Commerce and the city council will be making: We don’t spend enough on business welfare. Capitalism and the free market: These things don’t work, they will tell us. Only government can save Wichita from decline. Business leaders will tell us we need more taxes for more spending on economic development. But be careful here:

There’s a difference between “business leaders” and “capitalists.”

Last year Charles Koch explained the difference in an article in the Wall Street Journal. He wrote:

“Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

He continued:

“The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In his article, Koch makes an important observation when he defines cronyism: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

You regular viewers know that we have a problem with cronyism in Wichita. This is exemplified by incidents like where a mayor votes to send millions of taxpayer dollars to a man who owns movie theaters, and then the mayor sells his barbeque sauce in those theaters. It’s when a real estate developer lists the mayor and city manager as business references when bidding for a city project and thinks that no one will care or notice. It’s when a city council member receives thousands in campaign contributions from an out-of-state construction company right at the time he votes to award a contract to that company. It’s when the city council votes to give over-priced no-bid construction contracts to their significant campaign contributors.

In other words, instead of allowing people to direct resources to where they believe they will be most useful, our local government direct resources to their cronies. Where it’s useful for their political careers.

I’m of the opinion that it has harmed Wichita’s economic growth. It’s one of the reasons why Wichita is the bottom line in the charts we’ve seen. But many of our business leaders, and almost all of our political leaders, propose more of the same.

That’s right. Instead of focusing on things like water and sewer pipes, government wants to raise taxes so that it can direct more of our economy. Having neglected our water and sewer infrastructure to the point where the mayor says we need to spend at the rate of $70 million dollars per year for the next 30 years, our city leaders are going to ask us for more tax money so that they can try to fix the Wichita economy.

Returning to Stephen Moore’s article. Here he quotes Jon Caldera of the Independence Institute. “I used to think that public employee unions like the National Education Association were the main enemy in the struggle for limited government, competition and private sector solutions. I was wrong. Our biggest adversary is the special interest business cartel that labels itself ‘the business community’ and its political machine run by chambers and other industry associations.”

Let’s ask our business and political leaders some questions. First, will we acknowledge Wichita’s poor economic performance, or will we continue to ignore the facts and statistics? Second: Will we realize that the cozy relationship between city hall and a small group of insiders — Wichita’s cronies, if you will — is harmful and corrosive? Third: Will we realize that free enterprise and capitalism work better than cronyism?

In Wichita, ‘free markets’ used to justify business welfare

Wichita City HallIncredibly, a prominent Wichita business uses the free market to justify its request for economic development incentives. A gullible city council buys the argument.

At the December 10, 2013 meeting of the Wichita City Council, Bombardier LearJet received an economic development incentive that will let it avoid paying some property taxes on newly-purchased property. The amount involved in this particular incident is relatively small. According to city documents, “the value of the abated taxes on that investment could be as much as $1,980.”

(Bombardier receives millions each year in other government subsidies; see Kansas PEAK program: corporate welfare wrapped in obfuscation and Bombardier Learjet should pay just a little for examples.)

While the amount of the incentive granted in the December 10 action is small, the meeting was useful in letting us understand how some prominent members of Wichita’s business community have distorted the principles of free markets and capitalism. As illustrated by the fawning of Wichita City Council Member and Vice Mayor Pete Meitzner (district 2, east Wichita) and others, elected officials have long forsaken these ideas.

Bombardier’s argument

Don Pufahl, who is Director of Finance at Bombardier Learjet, addressed the council regarding this matter. He started his remarks on a positive note, telling the council “There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.”

We must be careful when using the term incentive. In a free-market economy or capitalism, incentive refers to the motivation of the possibility of earning profits. Another incentive — the flip side of the same coin — is avoiding losses. That’s why capitalism is called a profit-and-loss system. The losses are just as important as profits, as losses are a signal that the economic activity is not valued, and the resources should be shifted to somewhere else where they are valued more highly.

But in the field of economic development as practiced by government, incentive means something given to or granted to a company. That’s what the representative from Bombardier meant by incentive. He explained: “One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.”

A few thoughts: First, Bombardier is not investing in the community. The company is investing in itself.

Second, the free market system that the speaker seemed to praise is a system based on voluntary exchange. That flows from property rights, which is the fundamental idea that people own themselves and the product of their labor, and are free to exchange with others, or to not exchange. But when government uses incentives, many people do not consent to the exchange. That’s not a free market system.

Third, an important part of a free market system is market competition. That is, business firms compete with others for customers. They also compete with other business firms for resources needed for production, such as capital. When government makes these decisions instead of markets, we don’t have a free market system. Instead, we have cronyism. Charles G. Koch has described the harm of cronyism, recently writing: “The effects on government are equally distorting — and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

In the same article Koch wrote: “We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.” (Charles G. Koch: Corporate cronyism harms America)

The representative from Bombardier also said that the city’s incentives would reduce Bombardier’s investment risk. There is little doubt this is true. What has happened, however, is that the risk has not been eliminated or reduced. It has merely been shifted to the people of Wichita, Sedgwick County, the Wichita public school district, and the State of Kansas. When government does this on a piecemeal basis, this is called cronyism. When done universally, we call this socialism.

We can easily argue that actions like this — and especially the large subsidies granted to Bombardier the by state — increase the risk of these investments. Since the subsidies reduce the cost of its investment, Bombardier may be motivated to make risky investments that it might otherwise not make, were it investing its own funds (and that of its shareholders).

The cost of Bombardier’s investments, and the accompanying risk, is spread to a class of business firms that can’t afford additional cost and risk. These are young startup firms, the entrepreneurial firms that we need to nurture in order to have real and sustainable economic growth and jobs. But we can’t identify these. We don’t know who they are. But we need an economic development strategy that creates an environment where these young entrepreneurial firms have the greatest chance to survive. (See Kansas economic growth policy should embrace dynamism and How to grow the Kansas economy.)

Now the city and Bombardier will say that these investments have a payoff for the taxpayer. That is, if Bombardier grows, it will pay more in taxes, and that constitutes “profit” for taxpayers. Even if we accept that premise — that the city “profits” from collecting taxes — why do we need to invest in Bombardier in order to harvest its “profits” when there are so many companies that pay taxes without requiring subsidy?

Finally, the representative from Bombardier said that these incentives are not a handout. I don’t see how anyone can say that and maintain a straight face.

wichita-chamber-job-growth-2013-12
It would be one thing if the Wichita area was thriving economically. But it isn’t. We’re in last place among our self-identified peers, as illustrated in Wichita and Visioneering peers job growth. Minutes from a recent meeting of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development, holds this paragraph: “As shown in the Chart below Wichita economy suffered the largest loss of employment among peer cities and has not seen any signs of rebounding as the other communities have. Wichita lost 31,000 jobs during the recession principally due to the down turn in general aviation.”

Following is a fuller representation of the Bombardier representative’s remarks to the council.

There are various aspects to a free-market economy. There’s the rule of law, there’s property rights, and another major aspect is incentives.

One party, in this case, the local government, uses incentives for another party, in this case our company, to invest in the community.

As the company moves forward to invest in the community, those investments are not without risk. … Your incentives allow us to offset some of that risk so that we can move forward with those investments, which hopefully create new jobs and also then also improves the quality of life in our community. … These incentives are not a handout. They are a way that the local government uses such things to offset some of the risk that is involved in local companies as they invest in the community, bring jobs to the community, and improve the community overall.


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