Tag Archives: Interventionism

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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.

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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:

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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.

For Wichita’s economic development machinery, failure

Delano Clock Tower, WichitaCompared to a broad group of peer metropolitan areas, Wichita performs very poorly. As Wichita embarks upon a new era of economic development, we need to ask who to trust with this important task.

The good news: In a recent op-ed, Wichita Mayor Carl Brewer wrote that the city needs to make a decision regarding “A more aggressive approach to job creation.” (Carl Brewer: Wichita can have a great next year, December 22, 2013 Wichita Eagle)

The bad news: Wichita has performed very poorly in job creation in recent decades, and even if we decide on a more aggressive approach, pretty much the same crew is in charge.

Many in Wichita don’t want to recognize and confront the bad news about the performance of the Wichita-area economy. Last year, when presenting its annual report to local governmental bodies, the leaders of Visioneering Wichita would not present benchmark data to elected officials.

Some, however, have recognized the severity of the problem. In 2008 Harvey Sorensen, who has been chair of Visioneering Wichita, chair of the Wichita Metro Chamber of Commerce, and has held other civic leadership positions, wrote in the pages of the Wichita Eagle: “We are losing ground competitively with our peer communities.” (Community Needs a Common Vision, August 24, 2008 Wichita Eagle)

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So what is the record of the Wichita metropolitan area regarding job creation, that seeming to be the most popular statistic our leaders cite and promote? I’ve prepared statistics from the Bureau of Labor Statistics, U.S. Department of Labor for Wichita and a broad group of peer cities. I included our Visioneering peer cities, cities that Visioneers traveled to on official visits, and a few others. The result, shown nearby, is not pretty. (Click on charts for larger versions, or click here to use the interactive visualization)

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If we look at job creation starting in 1990, Wichita lags behind our Visioneering peers, but not behind all the peer cities that I selected. Wichita does better than Springfield, Illinois, for example. I chose to include that as a peer metropolitan area because that’s the immediate past city that Gary Plummer worked in. He was president of that city’s Chamber of Commerce, and is now president of the Wichita Chamber. Note the position of Springfield: Last place.

In next-to-last place we see Wichita Falls, Texas. I chose to include it because it is the immediate past home of Tim Chase. He was the head of Wichita Falls Economic Development Corporation. He’s now president of Greater Wichita Economic Development Coalition, the primary organization in charge of economic development for the Wichita area.

In second-to-last place we see Pittsburgh, which I added because Visioneering leaders recently made a visit there.

Then, we come to Wichita.

If we look at job creation since 2007, the year before Sorensen wrote his op-ed, we find Wichita in a common position: Last place in job creation, and by a wide margin except for two cities. One is Wichita Falls, where our present GWEDC president recently worked. The other city that barely out-performs Wichita is Chattanooga, which I included because Visioneering civic leaders recently traveled there to learn from that city.

Over the decades in which Wichita has performed poorly, there have been a few common threads. Brewer has been council member or mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for decades. At Sedgwick County, manager William Buchanan has held that position for more than two decades. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. It is these officials who have presided over the dismal record of Wichita.

Wichita City Manager Robert Layton has had less time to influence the course of economic development in Wichita. But he’s becoming part of the legacy of Wichita’s efforts in economic development.

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These leaders often complain that Wichita does not have enough “tools in the toolbox” to compete with other cities in economic development. Wichita does, however, have and use incentives. The State of Kansas regularly offers incentives so generous that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

Incentives: We have them. They haven’t worked for us.

It is nearly certain that this year Wichitans will be asked to approve a higher sales tax in order to pay for many things, including the more aggressive approach to job creation that Brewer mentioned. Based on the track record of our elected officials and bureaucrats, we need to do this: Before approving the tax and expenditures, Wichitans need to take a long look at the people who have been in charge, and ask what will be different going forward.

Sedgwick County illustrates inefficiency of tax credit mechanism

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Tax credits can be an inefficient way for government to distribute benefits, as illustrated by action the Sedgwick County Commission will consider today.

A tax credit is, conceptually, a certificate with a dollar amount written on it. That certificate can be used instead of cash for payment of taxes. So when the State of Kansas issues a tax credit for $100, the state gives up that same amount in tax revenue, as someone will submit that certificate instead of a hundred dollar bill in payment of taxes. The certificate, of course, has no value to the state.

Sedgwick County received Kansas income tax credits under the state’s historic preservation program. Since the county doesn’t pay income tax, it can’t use them as payment for taxes. But since the credits are transferable, the county can sell them to someone who does need to pay taxes. And if that person can buy the tax credits for less than face value, such as paying $90 for a tax credit that’s worth $100, there’s motivation for buyers and sellers to make a deal.

This is what the county is doing. In an auction it sold three tax credits for a total of $507,066.74. This is described by county documents as representing $0.9025 per dollar of value. Working backwards, this means that the tax credits have a face value of $507,066.74/.9025 = $561,847 in face value. Someone will submit these credits to the state instead of a check for that amount when they pay their taxes.

This means that the State of Kansas gives up $561,847 in order to grant a benefit worth $507,067 to Sedgwick County. This is the inefficiency of using tax credits as a mechanism for distributing benefits.

You may be wondering: Why does this state use this inefficient method? One reason is that tax credits operate more or less on autopilot. Once the program is authorized and put in place, people or organizations that qualify for the credits receive them without action by the legislature. This has happened in downtown Wichita on a number of projects such as the renovation of the Broadview and Ambassador Hotels. Both received millions under historic preservation tax credit programs. (See In Wichita, historic preservation tax credits an inefficient form of developer welfare.)

Can you imagine the legislature having to vote to give millions of dollars to specific hotel developers? That probably wouldn’t be popular. But the tax credit program accomplishes the same result, and mostly under the radar without scrutiny.

Tax credits are a direct transfer of money from taxpayers to private parties. But being accomplished through the tax system shrouds the process in mystery. And, no direct action is required by any legislative body. The legislature creates the tax credit program. The developer applies, and if accepted, the credits are granted. No one — at least no one elected by and accountable to voters — votes to grant the specific credits.

The Kansas historic preservation tax credit program, in a short time, has grown from a program designed to help spruce up a few old buildings here and there to a developer welfare program on steroids.

Wichita Airport traffic: The video

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
– Frederic Bastiat

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To keep airfares low at the Wichita Airport, the Wichita City Council in partnership with Sedgwick County and the State of Kansas pays a discount air carrier to operate in Wichita. While the program almost certainly has the intended effect on airfares, there is another effect: The trend of flights and seats available in Wichita is declining, and and at a rate faster than for the nation as a whole.

In this video, I use Tableau Public to analyze and present data from Research and Innovative Technology Administration (RITA), which is part of the U.S. Department of Transportation, to look at trends at the Wichita Airport. I presented this data in different form at a recent Wichita City Council meeting. This interactive visualization is available for you to use here: Wichita airport statistics: the visualization.

You may view the video presentation below, or click here to view it at YouTube, which will probably work best for this video.

Wichita City Council makes an uneconomic decision

Wichita City Hall

Last year the Wichita City Council was faced with a decision regarding a program designed to stimulate the sales of new homes. Analysis revealed that even though the city had an opportunity to make an investment with a purportedly high return on investment, it would be better off, dollar-wise, if it did not make the investment. What did the city council do? The following video explains the decision the council faced. View below, or click here to view in High Definition on YouTube. More information is at Wichita new home tax rebate program: The analysis and Wichita HOME program has negative consequences.

Downtown Wichita tax base: Growing?

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There’s been much investment in downtown Wichita, we’re told, but the goal of increasing the tax base is farther away rather than closer.

Wichita city leaders have promoted public investment in downtown Wichita as wise because it will increase the tax base.

In his State of the City Address for 2013, Wichita Mayor Carl Brewer told the audience (based on his prepared remarks):

As you know, revitalizing downtown has been a key part of growing our community in recent years, recognizing that a healthy and thriving downtown improves our ability to attract new business, keep our young people here, and expand our tax base. With $100 million in completed downtown projects in 2012 and another $115 million starting this year, we’ve made extraordinary progress toward having the downtown that Wichitans have dreamed of. … As development continues downtown, we are closer to reaching our goals of increased pride, an increased tax base, and bringing more businesses and jobs to Wichita.

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In its report on the economics of downtown Wichita redevelopment, the Wichita Downtown Development Corporation says:

The Downtown SSMID (Self Supported Municipal Improvement District — shown above) has seen a ten-year total amount of $396,850,538 in public investment and $564,776,159 in private investment. SSMID property values have increased over $300 million in the last ten years.

The Wichita Downtown Development Corporation sold the planning process to Wichitans by making the argument that “it will grow existing tax base revenues.”

Wichita downtown self-supporting municipal improvement district (SSMID) boundary map

To evaluate the success of the city’s efforts, we might look at the change in assessed property valuation in downtown Wichita over past years. A way to do that is to look at the valuations for property in the Wichita downtown self-supporting municipal improvement district (SSMID). This is a region of the city that pays an additional property tax to fund the activities of the Wichita Downtown Development Corporation. Its boundaries are roughly the Arkansas River east to Washington, and Kellogg north to Central.

Assessed valuation is the basis for levying property tax. The process starts with an appraised value, which is targeted to be fair market value for the property. Then, that is multiplied by 25 percent for commercial property, or by 11.5 percent for residential property. This produces the assessed value. Multiply that by the sum of the several mill levy rates that apply to the property, and you have the total property tax for that property.

With all the new projects coming online in downtown Wichita, we should expect that the assessed valuation is rising. As someone converts an old, dilapidated property into something more valuable, appraised and assessed values should rise. As new buildings are built, new appraised and assessed value is created where before there was none (or very little). This process is the success story that Mayor Brewer and boosters of public investment in downtown trumpet, as the mayor did twice in one paragraph in his State of the City Address.

So what has happened to the assessed valuation of property in downtown Wichita, using the SSMID as a surrogate?

The answer is that after a period of increasing values, the assessed value of property in downtown has has been declining. The peak was in 2008. The nearby table holds the figures.

This is the opposite of what we’ve been promised. We’ve been told that public investment in downtown Wichita builds up the tax base.

Some might excuse this performance by noting there’s been a recession. That’s true. But according to presentations, there has been much activity in downtown Wichita. Hundreds of millions of dollars in worth, we are told.

So why isn’t the assessed valuation rising? Why is it falling during the time of huge successes?

Wichita downtown self-supporting municipal improvement district (SSMID) assessed property valuation

Data can be viewed here.

Spirit Aerosystems applies for tax relief

Wichita City HallThe Wichita City Council will consider excepting a large company from property and sales taxation. Is this action wise for the city’s economy?

Tomorrow the Wichita City Council will consider granting Industrial Revenue Bonds to Spirit Aerosystems, the city’s largest employer.

The amount of the proposed bond issue is $49,000,000. The purpose of the 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.

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 diversified economy

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The mayor and council members have said that we need to diversify our economy. This action contemplated this week 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 uncontroverted 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 for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

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.

Wichita economic development not being managed

The Wichita Eagle has reported that Wichita has increased its granting of property tax exemptions in recent years. (Wichita doubles property tax exemptions for businesses, October 20, 2013) Buried in the story is the really important aspect of public policy. In his reporting, Bill Wilson wrote:

The Eagle asked the city last week for an accounting of the jobs created over the past decade by the tax abatements, a research project that urban development staffers have yet to complete.

“It will take us some time to pull together all the agenda reports on the five-year reviews going back to 2003. That same research will also reveal any abatements that were ‘retooled’ as a result of the five-year reviews,” city urban development director Allen Bell said. “I can tell you that none of the abatements were terminated.”

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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. In January when the city council awarded city manager Robert Layton a large raise, the praise from council members was effusive. This means one of several things: (a) that the mayor and city council have not asked for these job creation numbers, or (b) city council members don’t care about the numbers, or (c) they’re not interested in knowing the numbers. There could be other explanations, but all point to a lack of bureaucratic management and political oversight.

I wonder why the city officials didn’t explain that according to their analysis and way of thinking, these tax abatements don’t have a cost. When presented to the council, each abatement opportunity is generally accompanied by a benefit-cost analysis that purports to show that the city, county, school district, and state gain more in tax revenue than they forego from the abatement. Does this extra government revenue create jobs?

In any case, the number of jobs stemming from our economic development efforts is small. In his State of the City Address for 2012, Mayor Carl Brewer said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context. According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This minuscule number is dwarfed by the normal ebb and flow of other economic activity. (The mayor didn’t mention job creation figures in his 2013 address.)

The case of InfoNXX

Here’s an example of property tax abatements granted for which the city received little in return. In 2005, with great fanfare, the city announced that its economic development recruitment efforts had landed InfoNXX, an operator of call centers. The council agenda report of November 15, 2005 recommended that the council approve a letter of intent for tax abatements. The report stated this:

The Greater Wichita Economic Development Coalition has worked with a national site consultant to recruit a new company to Wichita. InfoNXX, Inc., major provider of telephone directory assistance and enhanced information services to leading communications companies, businesses and consumers located principally in the United States, United Kingdom, France, and Italy. As a result of the recruitment effort, InfoNXX will locate a large customer service center in the former MCI Building, near Rock Road and K-96 in northeast Wichita, and hire over 900 customer care representatives. As an economic development incentive, the City offered InfoNXX Industrial Revenue Bonds (IRBs) and property tax abatement on equipment and furnishings, subject to City Council approval.

RECOMMENDED ACTION: Approve a Letter of Intent to InfoNXX Inc. for Industrial Revenue Bonds in an amount not-to-exceed $6 million, subject to the Letter of Intent conditions, for a term of six-months, approve a 100% tax abatement on all bond-financed property for an initial five-year period plus an additional five years following City Council review, and authorize the application for a sales tax exemption on bond-financed property.

On December 13, 2005 the council approved the ordinance granting the tax abatements.

Fast forward to the February 15, 2011 council agenda packet. The five year initial property tax abatement granted in 2005 was over, and the council could extend it for another five years if the committed goals had been met. The agenda report gave this summary for capital investment: “Purchase furniture, fixtures and equipment for a capital investment of $6 million.” Results, according to city documents, were “Invested $7,331,379 million [sic] in FF&E.”

For job creation, the 2005 commitment was “Create 944 new jobs in five years.” Results, according to city documents, were “Created 870 new jobs; current job level is 185.”

InfoNXX was short of its job creation commitments, but the city used a loophole to grant a one-year extension of the tax abatement. That one-year extension was never the subject of further consideration, as InfoNXX changed its name, and in January 2012 closed the Wichita facility that was the subject of these incentives.

It’s unfortunate for Wichita and the InfoNXX employees that the facility closed. The important public policy consideration is that we learn from this. So, when Wichita counts the number of jobs created, does it adjust for short-lived jobs like these?

The answer, I believe, is no. We don’t adjust our job creation statistics, and we don’t learn.

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In fact, we don’t even keep current. GWEDC — that’s the Greater Wichita Economic Development Coalition credited with recruiting InfoNXX to Wichita — doesn’t update its website to reflect current conditions. InfoNXX closed its facility in Wichita in 2012, and as we saw above, city documents said that at its peak the company employed 870 in Wichita. As of today, here’s what GWEDC says on a page titled Office Operations:

Wichita hosts over a dozen customer service and processing centers – including a USPS Remote Encoding Center (985 employees), InfoNXX (950), T-Mobile (900), Royal Caribbean (700), Convergys (600), Protection One (540), Bank of America (315) and Cox Communications (230.) (emphasis added)

So the official Wichita-area economic development agency proclaims the existence of a company that no longer exists in Wichita, and claims a job count that the company never achieved. This is beyond careless negligence. This is malpractice.

The USPS Remote Encoding Center mentioned? It’s being closed this year.

Going forward

In his State of the City address for 2013 the Wichita mayor lamented the fact that Wichita has no dedicated funding source for economic development. It’s likely that Wichitans will be asked to approve increased taxes for economic development, as well as for many other things we want like a new central library, new water and sewer pipes, improved public transit, and downtown development.

But before Wichita officials ask for more taxes so there can be more spending, they need to convince us that they care about measuring and managing results. They haven’t shown this so far.

For Wichita, more districts, more taxes, more bureaucracy

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Tomorrow the Wichita City Council will consider formation of a Tourism Business Improvement District. Actually, the council will formation of a planning committee to determine boundaries, parameters, budgets, and how to fund the budget.

The impetus behind the TBID, according to city documents, is “Go Wichita has proposed that a TBID be created to enhance its marketing efforts.” Go Wichita is the Wichita Convention and Visitors Bureau. The source of its funds, again from city documents: “A fee is assessed to each of these properties based on room night sales. This fee is usually determined as a percentage of the room rate or as a flat dollar amount per night. The funds collected in the district are spent exclusively for the benefit of the hotels and are usually programmed by the local convention and visitor’s bureau.”

What will be done with the money that is raised? “The funds generated from the district would be used to increase convention advertising in key meeting planner publications, convention sales initiatives in key markets and digital advertising. Additionally, a significant portion of the new funds would be earmarked for leisure marketing efforts.”

Tomorrow’s action contemplated by the council is just the formation of a planning committee, not he actual TBID. So there’s still time to think this through. Here’s what I hope the city considers:

First, is there any way to distinguish this “fee” from a tax? A tax that will probably be passed along to visitors to Wichita?

Second: Is there any way to characterize this as anything other than an expansion of bureaucracy in Wichita? I really wonder if the hotel operators know what they’re getting themselves mixed up in. If the hotels feel they need more marketing firepower to attract business to Wichita, I’m sure they’d do better to form a voluntary association to undertake this task. This would be nimble and flexible in way that a government bureaucracy can never be. But who will stand up to this expansion of our tourism bureaucracy? A hotel owner that wishes to receive referrals? Like most government bureaucrats, those who will run this new program “profit” from increasing their power and influence, and by expansion of their budgets, perks, and staffs. They won’t look favorably on those who don’t go along with the program.

Then: The members of the committee are appointed by the mayor. Hotel owners: Do you want Carl Brewer to be in charge of appointing people to oversee something important to your business?

Finally, the people of Wichita need to realize that pursuit of convention and tourism business is not the wisest path to follow. Wall Street Journal reporting from last year concluded with:

“Mr. Sanders, the University of Texas professor, predicts the glut of convention space will only get worse, because a number of cities continue to push expansions. He blames cities’ hired consultants, who he said predict “all these people are going to come and do wonderful things to your economy.”

“But the problem is they aren’t coming anymore, because there are lots of other convention centers … that desperately want that business,” he said. “So Atlanta steals from Boston, Orlando steals from Chicago and Las Vegas steals from everywhere.”

The “Mr. Sanders” referred to in the Journal reporting is Heywood T. Sanders, who is professor in the Department of Public Administration at the University of Texas at San Antonio. He is a noted critic of public efforts to chase convention business for economic development. His 2005 report report Space Available: The Realities of Convention Centers as Economic Development Strategy was published by the left-leaning think tank The Brookings Institution. It provides a look at the realities of the convention trade.

Sanders writes that convention center business has been on the decline, and it started well before the terrorist attacks in 2001. In a section titled “Trends: Portrait of a Faltering Industry” we can read that attendance is down, exhibit space demand is down, and hotel room demand in cities has fallen too.

The author notes that the decline in convention business is a structural decline: “[Reasons for decline] are the product of industry consolidation, particularly in the hardware and home improvement industry, reductions in business travel in the face of increasing cost and difficulty, and alternative means of conveying and gathering information.” These are not cyclical trends that are likely to reverse in the future.

Despite shrinking demand, cities are building more convention space: “Despite diminishing demand, the last few years have seen a remarkable boom in the volume of exhibit space in U. S. convention centers.” The building of larger convention centers in many cities means that more cities are able to host the larger events, or, cities can now host several smaller events simultaneously. The result, says the author, is fierce competition for both large and small events.

What about the costs? The author introduces a section on costs with: “The studies that justify both the new center space and the publicly-owned hotels paint a picture of tens of thousands of new out-of-town visitors and millions of dollars in economic impact. Despite that rhetoric, these projects carry real risks and larger potential costs, particularly in an uncertain and highly competitive environment.”

The convention center is just the start of costs: “A new [convention] center is thus often followed by a subsidized or fully publicly-owned hotel.” Wichita, of course, has a fully publicly-owned hotel, the large 303-room Hyatt. Now Wichita has been providing, and will probably continue, subsidy programs to other downtown hotels. None of the hotels alone provide as many rooms as Wichita convention planners say the city needs, so we are likely to see proposals for a subsidies to hotels continue.

In fact, until Wichita has as many hotel rooms as our nation’s largest convention cities have, there is always a larger goal — a next step on the ladder. Can you imagine our city leaders ever proclaiming that we have enough hotel rooms in downtown Wichita?

Other things Sanders says that are likely to be proposed are a sports arena. Wichita, of course, recently opened a taxpayer-financed and government-owned facility, the Intrust Bank Arena. After a brief honeymoon fling with good financial performance, the arena has settled down to a less-acceptable level of revenue production. Residents of Sedgwick County, which owns the arena, should be cautioned that the financial results hailed by the county don’t include depreciation costs, so the true financial picture is not anywhere near complete.

Entertainment, retail, and cultural attractions are often proposed, Sanders writes, and Wichita downtown planners have indicated their desire for these.

The conclusion to this paper describes Wichita’s current situation and foreshadows what is likely for the future of Wichita:

But if taxing, spending, and building have been successful, the performance and results of that investment have been decidedly less so. Existing convention centers have seen their business evaporate, while new centers and expansions are delivering remarkably little in terms of attendance and activity.

What is even more striking, in city after city, is that the new private investment and development that these centers were supposed to spur — and the associated thousands of new visitors — has simply not occurred. Rather, city and convention bureau officials now argue that cities need more space, and more convenience, to lure those promised conventions. And so underperforming convention centers now must be redeemed by public investment and ownership of big new hotels. When those hotels fail to deliver the promises, then the excuse is that more attractions, or more retail shops, or even more convention center space will be needed to achieve the goal of thousands of new visitors.

We already see some of this excuse-making taking place: Private investment in downtown Wichita has been weak, it is said, because there’s not yet a critical mass of development. It is promised by downtown boosters that given enough public money, critical mass will be achieved, and private investment will rush in. But since there is no definition of what constitutes critical mass, this excuse is always available to justify failure.

WichitaLiberty.TV September 1, 2013

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In this episode of WichitaLiberty.TV, host Bob Weeks presents an analysis of the delinquent real estate tax list and wonders why our institutions don’t provide this simple enhancement. Then, a review of the first two chapters of “Economics in One Lesson” with application to situations in Wichita. Finally, Amanda BillyRock illustrates Chapter 3: Blessings Of Destruction, and examples in Wichita are noted. Episode 11, broadcast September 1, 2013. View below, or click here to view on YouTube.

Wichita City Council makes an economic decision

Last year the Wichita City Council was faced with a decision regarding a program designed to stimulate the sales of new homes. Analysis revealed that even though the city had an opportunity to make an investment with a purportedly high return on investment, it would be better off, dollar-wise, if it did not make the investment. What did the city council do? The following video explains the decision the council faced. View below, or click here to view in high definition on YouTube. More information is at Wichita new home tax rebate program: The analysis and Wichita HOME program has negative consequences.

Seen and unseen on display

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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:

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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.

Incentive program ignores ‘One Lesson’

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Recording an episode of WichitaLiberty.TV on the topic of “Economics in One Lesson” reminded me of a story I reported last year. The lesson is “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.” A program implemented last year in Wichita provides examples of how governments ignore this lesson.

A document released by the City of Wichita casts strong doubt on the wisdom of a new home property tax rebate program. The document also lets us know that city staff are not being entirely honest with the citizens of Wichita.

The new home tax rebate program, according to city documents prepared for the February 14, 2012 city council meeting, provides free Wichita city property taxes to buyers of qualifying new homes: “To promote additional new home construction and new home ownership, the City of Wichita, after extensive coordination and discussion with WABA, is proposing a New HOME (New Home Ownership Made Easy) Program. The program will provide a 5 year rebate of City property taxes for eligible property. To be eligible, property must be in a participating development, with all taxes through 2010 (general and special assessment) current in the development. In addition, to be eligible, the special assessment and general taxes must be paid current at the date of sale and closing of a property.”

WABA is The Wichita Area Builders Association , a trade association for home builders. The document recently released is a study or analysis of the program dated February 1 from Wichita State University Center for Economic Development and Business Research.

During the period of the tax rebate program, the study estimates that 787 homes would be built and sold even if there was no rebate program. It is assumed that 1,000 homes would be sold during that period with the rebate program, but that is not certain.

Following is an excerpt from a table that presents the results of analysis. The benefits and costs are to the City of Wichita General Fund. Benefits are, according to the study, “sales tax revenues, from construction worker spending and construction material purchases, and property tax revenues.” The costs are the lost revenue due to the tax rebates.

                   No Incentives    Incentives
Public Benefits       $2,364,429    $3,004,315
Public Costs                  $0    $2,032,312
Net Public Benefits   $2,364,429      $730,457
Return on Investment      N/A           1.48

Some, undoubtedly, will focus on the return on investment (ROI) ratio of 1.48 if the tax rebate incentive is used. (There is no such ratio if there are no incentives, as there is no investment.) The study explains the ratio this way: “for every dollar invested, the city will receive the initial dollar plus an additional 48 cents in return.”

That sounds like a good deal, and the ratios like this that are calculated by CEDBR are often used by the city to justify incentives.

But there is another way to look at this deal: the net value to the city. In this case, if the city doesn’t offer the incentives, the benefits to the city are $2,364,429. If incentives are used, the benefits are $730,457. This means that if the city does nothing, it is $1,633,972 to the better.

That’s right: Even though the city has an opportunity to make an investment with a purportedly high ROI, it would be better off, dollar-wise, if it did not make the investment.

The analysis concludes that with the tax rebate program, there will be more construction jobs. But, caution the study authors: “Please note, the jobs supported in 2012 and 2013 are not net new jobs — they are jobs that already exist. The analysis simply identifies a funding stream for these jobs.”

In a separate but similar analysis dated March 22, 2012 prepared for Sedgwick County, some limitations of the analysis were itemized, as follows:

It was beyond the scope of this analysis to account for:

  • Changes in household consumption due to a change in homeownership.
  • The impact of renters who become owners. The program would likely encourage renters to become homebuyers. As these individuals leave the rental market, there may be adverse effects, including falling rental rates.
  • An increase in demand. Although an increase in new home purchases, above existing demand, is likely if incentives are offered, the actual increase in demand has not been quantified.
  • Any increase in demand that offsets future home purchases. It is likely that any increase in new home purchases will simply offset future home purchases as seen in the national Cash for Clunkers program.
  • A change in the price of new homes due to additional supply or higher demand.
  • A fall in home prices, or the associated tax collections, from existing homes. There is a strong likelihood that the increased demand in new homes could lower the value of existing homes.
  • Sunk costs. All costs associated with the creation of a new development, including specials, are viewed as sunk costs. Because they have already occurred, these sunk costs are not included in the analysis.
  • Increased cost of public services. Incentives provided to rural areas could increase public costs as new services are required, including roads, sewer, fire and the like. These increased costs are location specific and not included in the analysis.
  • Cost associated with not providing incentives. The costs associated with a poor new home market have not been analyzed. Without incentives, new home purchases are expected to be lower. This could have negative consequences to builders, developers and taxing entities.

Some of these problems I presented to the city council in my testimony delivered at the February 14th council meeting. Specifically, I warned council members of the devaluing of existing homes, the “cash for clunkers” effect, the costs of providing city services to homes that aren’t contributing property tax to pay for them, and the question of how much new activity will be induced: “Related to this is the question as to how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program … But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

In the case of a new home property tax rebate program for Sedgwick County, the study concludes that the benefit of the program to the county is negative $1,832,294 — a huge cost.

Missing candor

Now that the CEDBR study is released, we can see how city staff failed to present the entire economic impact of the tax rebate program to citizens. Here’s what city staff presented to council members, and by extension, all Wichitans:

“The Center for Economic Development and Business Research at Wichita State University analyzed the fiscal impact of the proposed New HOME incentive program on the City’s General Fund. The analysis compares the present value cost of incentives to the present value benefits of direct and indirect jobs created and construction expenditures. In this case, a 1.48 to one ratio of benefits-to costs is reported.”

Every word in this statement is true. But what’s missing is that if the city does nothing, it is $1,633,972 better off.

City staff had this information. Sources tell me, however, that staff did not present it to council members or the public before the council voted on the program. We are left with this conclusion: City staff presented only the information from the study that promoted the result the city wanted. This is lying by omission.

This is not the first time city staff has misled the council and the public. Regarding the economic impact of subsidies to the Ambassador Hotel, the city touted a positive cost-benefit ratio to one fund, while ignoring a negative impact to a much larger fund. The difference was a factor of 23 times. Later the city backpedaled, saying that it didn’t intend for downtown projects to be evaluated on the cost-benefit ratio to the debt service fund. See In Wichita, economic development policies are questioned.

At some time council members and citizens need to demand that someone be held accountable for this behavior. Demands for accountability are not likely to come from the city council, as many members have shown themselves willing to overlook all facts and reason in order to promote their goals. The editorial board of the Wichita Eagle does the same. It remains important for citizens to perform this watchdog function.

Wichita Eagle reporting on this matter is at Sedgwick County won’t join property tax rebate for new-home buyers.

WichitaLiberty.TV August 25, 2013

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In this episode of WichitaLiberty.TV, host Bob Weeks leads viewers through the first two chapters of Henry Hazlitt’s book “Economics in One Lesson,” using cartoons created by Amanda BillyRock. It’s about looking at not only the immediate effects but at the longer effects of any act or policy; and tracing the consequences of that policy not merely for one group but for all groups. Amanda uses the parable of the broken window to illustrate. Then, Bob wonders about an evaluation committee formed by the City of Wichita to vet downtown development partners: Did the committee overlook important information, and why didn’t the city council object as its members had previously? Episode 10, broadcast August 25, 2013. View below, or click here to view on YouTube.

Do economic development incentives work?

Government takes and gives

Judging the effectiveness of economic development incentives requires looking for the unseen effects as well as what is easily seen. It’s easy to see the groundbreaking and ribbon cutting ceremonies that commemorate government intervention — politicians and bureaucrats are drawn to them, and will spend taxpayer funds to make sure you’re aware. It’s more difficult to see that the harm that government intervention causes.

That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. 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.

The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or 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 their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

Following is the full paper, or click here.

WichitaLiberty.TV August 18, 2013

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In this episode of WichitaLiberty.TV, host Bob Weeks shows his “Prezi” that illustrates the disregard for the law shown by Wichita’s mayor. Then, Bob walks viewers through a visualization that illustrates the unintended consequences of government intervention at the Wichita Airport. Finally, Bob introduces Henry Hazlitt’s book “Economics in One Lesson,” which will be the topic of future episodes of WichitaLiberty.TV. Episode 9, broadcast August 18, 2013. View below, or click here to view on YouTube.

Wichita income is not keeping up

Visioneering Wichita uses per capita income growth as one benchmark of economic progress. What do the numbers say about the city’s progress? The following video illustrates. View below, or click here to view in higher resolution at YouTube, which may work better for some people.

For more in this, and to access the interactive visualization, see Wichita personal income growth benchmark.

Wichita Airport statistics: The video

To keep airfares low at the Wichita Airport, the Wichita City Council in partnership with Sedgwick County and the State of Kansas pays a discount air carrier to operate in Wichita. While the program almost certainly has the intended effect on airfares, there is another effect: The trend of flights and seats available in Wichita is declining, and and at a rate faster than for the nation as a whole.

In this video, I use Tableau Public to analyze and present data from Research and Innovative Technology Administration (RITA), which is part of the U.S. Department of Transportation to look at trends at the Wichita Airport. I presented this data in different form at a recent Wichita City Council meeting. This interactive visualization is available for you to use here: Wichita airport statistics: the visualization.

You may view the video presentation below, or click here to view it at YouTube, which will probably work best for this video.

Kansas Affordable Airfares program: Benefits and consequences

To keep airfares low at the Wichita Airport, the Wichita City Council in partnership with Sedgwick County and the State of Kansas pays a discount air carrier to operate in Wichita. While the program almost certainly works with regard to airfares, there is another effect of the program: The trend of flights and seats available in Wichita is declining, and faster than for the nation as a whole.

Today I appeared and presented the council this information. The article holding my charts and an interactive visualization of the data is Wichita airport statistics: the visualization.

The harm of business welfare

What is the effect of the issuance of business welfare in Wichita, of the intervention in the economy by politicians? Based on an article by Bob Weeks, Amanda BillyRock illustrates — literally — the harm caused when government intervenes in the economy. Thanks also to Henry Hazlitt for the insights in his simple but imposing book Economics in One Lesson.

It will be a busy Tuesday in Wichita

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Tuesday’s meeting of the Wichita City Council is likely to take more than a few moments, as the agenda is loaded with items. The agenda packet may be viewed at this page in general, or this link specifically for the August sixth meeting.

First, there are four speakers on the public agenda, which is where citizens may sign up in advance to speak on any topic. (When speaking on specific agenda items, speakers do not need to sign up in advance, but need to stay on topic.)

Then, the city will consider a forgivable loan to Triumph Aerospace Systems, Inc., as the Sedgwick County Commission also did. Information on that item is at Why is business welfare necessary in Wichita? and Sedgwick County votes for harmful intervention.

Then, the public hearing for the formation of a new Community Improvement District (CID).

Then, selection of the developer for the west bank apartments site. This is contentious; see this reporting: Clark group says city of Wichita acted in bad faith on west-bank plans, Wichita city manager’s letter offered support for Clark plan; mayor expresses concern, Developer of Arkansas River apartment project criticizes city’s handling of proposals, and Wichita council expected to choose developer Tuesday for Arkansas River’s west bank.

Then, approval of the subsidy for discount carriers at the Wichita airport. The goal of this program, the Affordable Airfares program, is usually stated as “to provide more air flight options, more competition for air travel, and affordable airfares for Kansas.” Fares are probably lower — there’s no way to tell what they would be without this program — but this is certain: The number of available flights and seats available to Wichita flyers is declining, and at a rate faster than that of the nation. See here for an interactive visualization and discussion.

Then, a public hearing on the Request for Resolution of Support for Application for Housing Tax Credits; Market and Main Apartments.

Then, a proposal to grant a cash subsidy to United States Bowling Congress, Inc. so that Wichita can host the 2019 Tournament. City documents state “For cities to be competitive they must not only sell USBC on the merits of the community but be willing to offer financial support.” The amount contemplated is $650,000.

Then, a public hearing on the 2013 budget.

The council will receive the annual report on the city’s retirement plans. This has been placed on the consent agenda, meaning there will be no discussion unless a council member requests.

There’s more, but these are the major items affecting the economy, jobs, prosperity, and economic freedom. And to top it off, at the start of the meeting the mayor will proclaim this as National Clown Week. Really.

Laws that do harm

As we approach another birthday of Milton Friedman, here’s his column from Newsweek in 1982 that explains that despite good intentions, the result of government intervention often harms those it is intended to help.

There is a sure-fire way to predict the consequences of a government social program adopted to achieve worthy ends. Find out what the well-meaning, public-interested persons who advocated its adoption expected it to accomplish. Then reverse those expectations. You will have an accurate prediction of actual results.

To illustrate on the broadest level, idealists from Marx to Lenin and the subsequent fellow travelers claimed that communism would enhance both freedom and prosperity and lead to the “withering away of the state.” We all know the results in the Soviet Union and the People’s Republic of China: misery, slavery and a more powerful and all-encompassing government than the world had ever seen.

Idealists, from Harold Laski to Jawaharlal Nehru, promised the suffering Indian masses that “democratic economic planning” would abolish famines, bring material prosperity, resolve age-old conflicts between the castes and eliminate inequality. The result has been continued deprivation for the masses, continued violence between the castes and widened inequality.

To come down to less sweeping cases rent control has been promoted for millenniums as a way to hold down rents and ensure more housing for the disadvantaged. Wherever it has been adopted, the actual result has been precisely the opposite for all but a few favored tenants. Rent control has encouraged the wasteful use of housing space and has discouraged the building of more housing units. As a result, rents actually paid — whether legally or under the table — by all tenants except those who do not move have skyrocketed. And even the tenants who do not move complain about not being able to.

Over two years ago, when the San Francisco supervisors were contemplating a form of rent control, I republished in a local paper a NEWSWEEK column of mine on rent control, prefacing it with the comment that only a “fool or a knave” could support rent control after examining the massive evidence on its effects. Needless to say, that did not prevent the majority of a board of supervisors, consisting of neither fools nor knaves, from enacting the ordinance I objected to. And the lessons of experience have not prevented the adoption of rent control in other cities — or the repetition of that same experience.

Urban renewal programs were urged to cure “urban blight” and improve the housing available to the poor. The result was a “Federal Bulldozer,” as Martin Anderson titled his searching examination of urban renewal. More dwelling units were torn down than were constructed. The new units constructed were mostly for middle- and upper-income classes. Urban blight was simply shifted and made worse by the still higher density created elsewhere by removing the poor from the “renewed” area.

In education, professionalization, integration, bilingualism, massive doses of federal assistance — all have been promoted to improve the quality of schooling and reduce racial tension and discrimination. The result was predictable: a drastic lowering of educational performance and an increase in actual segregation of races, at least in the North.

President Nixon introduced price controls on Aug. 15, 1971, to eliminate inflation, which at the time was running at about 4 to 5 percent per year. When controls ended in 1974, inflation soared into double digits.

The Interstate Commerce Commission was promoted in the 1880s and 1890s by the Ralph Naders of the day to discipline monopolistic railroads and benefit their customers. One group in today’s Nader conglomerate has published a devastating study of the ICC demonstrating that it strengthened the monopoly power of the railroads, and later of trucking. The users of transportation have had the dubious privilege of paying higher prices for poorer service.

Need I go on? I challenge my readers to name a government social program that has achieved the results promised by its well-meaning and public-interested proponents. I keep repeating “well-meaning and public-interested proponents” because they have generally been the dupes of others who had very clear self-interested motives and often did achieve the results that they intended — the railroads in the 1890s for example.

The amazing thing to me is the continued gullibility of intellectuals and the public. I wish someone would explain that to me. Is it simply because no one has given this widely documented generalization a catchy name – like … (suggestions welcome)?

Wichita airport statistics: the visualization

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
– Frederic Bastiat

While the program to reduce airfares in Wichita has probably met that goal, there have been consequences.

In particular, the availability of air travel in Wichita is lower than it has been, and the trend is in the wrong direction. In some aspects the Wichita trend mirrors that of the nation and other airports, and in others Wichita is falling farther behind.

wichita-airport-dashboard-2013-07-29

The illustration nearby (click it for a larger version) is a static snapshot of data for the nation as a whole (blue line), Wichita (brown), and a few other airports in cities that Wichita’s Visioneering effort identifies as our peers. For each series, I show the percentage change over time, so that all series operate on the same scale. Data is through the end of 2012.

Of particular concern should be the trend in departures and seats. Both are declining in Wichita, as they are also for the nation. But the gap between Wichita and the nation is widening in recent years.

This trend is an example of unintended consequences of government intervention and regulation. The Affordable Airfares program imposes a rough form of price control on airfares in Wichita. If the program didn’t do that — and it appears it succeeds at this goal — then there would be no point in having the program.

The inevitable effect of price controls is that less is supplied, compared to what would have been supplied. This economic phenomenon is reliable and predictable. While travelers prefer low air fares to high, this is not the only consideration. For those who need to travel on short notice, the availability of flights is very important, and on this measure, Wichita is doing much worse than the nation.

For more about the subsidy programs in use at the Wichita airport, see these articles:

Wichita flight count continues decline. “A program designed to bring low air fares to Wichita appears to meet that goal, but the unintended and inevitable consequences of the program are not being recognized. In particular, the number of flights available at the Wichita airport continues to decline.”

Affordable Airfares audit embarrassing to Wichita. “An audit of Affordable Airfares produced by the Kansas Legislative Division of Post Audit is an embarrassment to City of Wichita elected officials and staff, the Kansas Regional Area Economic Partnership, and the Wichita State University Center for Economic Development and Business Research.”

Mixed message on Southwest subsidies. “Now that Southwest Airlines has announced that it will offer service in Wichita, the question is this: Will Southwest tap the subsidy?”

To help you explore this 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.

Data is from Research and Innovative Technology Administration (RITA), which is part of the U.S. Department of Transportation. Visualization created by myself using Tableau Public.

Friedman: The fallacy of the welfare state

As we approach another birthday of Milton Friedman, here’s an insightful passage from the book he wrote with his wife Rose: Free to Choose: A Personal Statement. It explains why government spending is wasteful, how it leads to corruption, how it often does not benefit the people it was intended, and how the pressure for more spending is always present.

A simple classification of spending shows why that process leads to undesirable results. When you spend, you may spend your own money or someone else’s; and you may spend for the benefit of yourself or someone else. Combining these two pairs of alternatives gives four possibilities summarized in the following simple table:

friedman-spending-categories-2013-07

Category I in the table refers to your spending your own money on yourself. You shop in a supermarket, for example. You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend.

Category II refers to your spending your own money on someone else. You shop for Christmas or birthday presents. You have the same incentive to economize as in Category I but not the same incentive to get full value for your money, at least as judged by the tastes of the recipient. You will, of course, want to get something the recipient will like — provided that it also makes the right impression and does not take too much time and effort. (If, indeed, your main objective were to enable the recipient to get as much value as possible per dollar, you would give him cash, converting your Category II spending to Category I spending by him.)

Category III refers to your spending someone else’s money on yourself — lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth.

Category IV refers to your spending someone else’s money on still another person. You are paying for someone else’s lunch out of an expense account. You have little incentive either to economize or to try to get your guest the lunch that he will value most highly. However, if you are having lunch with him, so that the lunch is a mixture of Category III and Category IV, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

All welfare programs fall into either Category III — for example, Social Security which involves cash payments that the recipient is free to spend as he may wish; or Category IV — for example, public housing; except that even Category IV programs share one feature of Category III, namely, that the bureaucrats administering the program partake of the lunch; and all Category III programs have bureaucrats among their recipients.

In our opinion these characteristics of welfare spending are the main source of their defects.

Legislators vote to spend someone else’s money. The voters who elect the legislators are in one sense voting to spend their own money on themselves, but not in the direct sense of Category I spending. The connection between the taxes any individual pays and the spending he votes for is exceedingly loose. In practice, voters, like legislators, are inclined to regard someone else as paying for the programs the legislator votes for directly and the voter votes for indirectly. Bureaucrats who administer the programs are also spending someone else’s money. Little wonder that the amount spent explodes.

The bureaucrats spend someone else’s money on someone else. Only human kindness, not the much stronger and more dependable spur of self-interest, assures that they will spend the money in the way most beneficial to the recipients. Hence the wastefulness and ineffectiveness of the spending.

But that is not all. The lure of getting someone else’s money is strong. Many, including the bureaucrats administering the programs, will try to get it for themselves rather than have it go to someone else. The temptation to engage in corruption, to cheat, is strong and will not always be resisted or frustrated. People who resist the temptation to cheat will use legitimate means to direct the money to themselves. They will lobby for legislation favorable to themselves, for rules from which they can benefit. The bureaucrats administering the programs will press for better pay and perquisites for themselves — an outcome that larger programs will facilitate.

The attempt by people to divert government expenditures to themselves has two consequences that may not be obvious. First, it explains why so many programs tend to benefit middle- and upper-income groups rather than the poor for whom they are supposedly intended. The poor tend to lack not only the skills valued in the market, but also the skills required to be successful in the political scramble for funds. Indeed, their disadvantage in the political market is likely to be greater than in the economic. Once well-meaning reformers who may have helped to get a welfare measure enacted have gone on to their next reform, the poor are left to fend for themselves and they will almost always he overpowered by the groups that have already demonstrated a greater capacity to take advantage of available opportunities.

The second consequence is that the net gain to the recipients of the transfer will be less than the total amount transferred. If $100 of somebody else’s money is up for grabs, it pays to spend up to $100 of your own money to get it. The costs incurred to lobby legislators and regulatory authorities, for contributions to political campaigns, and for myriad other items are a pure waste — harming the taxpayer who pays and benefiting no one. They must be subtracted from the gross transfer to get the net gain — and may, of course, at times exceed the gross transfer, leaving a net loss, not gain.

These consequences of subsidy seeking also help to explain the pressure for more and more spending, more and more programs. The initial measures fail to achieve the objectives of the well-meaning reformers who sponsored them. They conclude that not enough has been done and seek additional programs. They gain as allies both people who envision careers as bureaucrats administering the programs and people who believe that they can tap the money to be spent.

Category IV spending tends also to corrupt the people involved. All such programs put some people in a position to decide what is good for other people. The effect is to instill in the one group a feeling of almost God-like power; in the other, a feeling of childlike dependence. The capacity of the beneficiaries for independence, for making their own decisions, atrophies through disuse. In addition to the waste of money, in addition to the failure to achieve the intended objectives, the end result is to rot the moral fabric that holds a decent society together.

Another by-product of Category III or IV spending has the same effect. Voluntary gifts aside, you can spend someone else’s money only by taking it away as government does. The use of force is therefore at the very heart of the welfare state — a bad means that tends to corrupt the good ends. That is also the reason why the welfare state threatens our freedom so seriously.

Research on economic development incentives

symbols-going-upwardsHere’s a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view. “Peer-reviewed” means these studies were stripped of identification of authorship and then subjected to critique by other economists, and were able to pass that review.

Ambrosius (1989). National study of development incentives, 1969 — 1985.
Finding: No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective.

Trogan (1999). National study of state economic growth and development programs, 1979 — 1995.
Finding: General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).

Gabe and Kraybill (2002). 366 Ohio firms, 1993 — 1995.
Finding: Small reduction in employment by businesses which received Ohio’s tax incentives.

Fox and Murray (2004). Panel study of impacts of entry by 109 large firms in the 1980s.
Finding: No evidence of large firm impacts on local economy.

Edmiston (2004). Panel study of large firm entrance in Georgia, 1984 — 1998
Finding: Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.

Hicks (2004). Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties).
Finding: No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries.

LaFaive and Hicks (2005). Panel study of Michigan’s MEGA tax incentives, 1995 — 2004.
Finding: Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.

Hicks (2007a). Panel study of California’s EDA grants to Wal-Mart in the 1990s.
Finding: The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall.

Hicks (2007b). Panel study of entry by large retailer (Cabela’s).
Finding: No permanent employment increase across a quasi-experimental panel of all Cabela’s stores from 1998 to 2003.

(Based on Figure 8.1: Empirical Studies of Large Firm Impacts and Tax Incentive Efficacy, in Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, Russell S. Sobel, editor. Available here.)

In discussing this research, the authors of Unleashing Capitalism explained:

Two important empirical questions are at the heart of the debate over targeted tax incentives. The first is whether or not tax incentives actually influence firms’ location choices. The second, and perhaps more important question, is whether, in combination with firms’ location decisions, tax incentives actually lead to improved local economic performance.

We begin by noting that businesses do, in fact, seem to be responsive to state and local economic development incentives. … All of the aforementioned studies, which find business location decisions to be favorably influenced by targeted tax incentives, also conclude that the benefits to the communities that offered them were less than their costs.

References:

Ambrosius, Margery Marzahn. 1989. The Effectiveness of State Economic Development Policies: A Time-Series Analysis. Western Political Quarterly 42:283-300.
Trogen, Paul. Which Economic Development Policies Work: Determinants of State Per Capita Income. 1999. International Journal of Economic Development 1.3: 256-279.
Gabe, Todd M., and David S. Kraybill. 2002. The Effect of State Economic Development Incentives on Employment Growth of Establishments. Journal of Regional Science 42(4): 703-730.
Fox, William F., and Matthew Murray. 2004. Do Economic Effects Justify the Use of Fiscal Incentives? Southern Economic Journal 71(1): 78-92.
Edmiston, Kelly D. 2004. The Net Effects of Large Plant Locations and Expansions on County Employment. Journal of Regional Science 44(2): 289-319.
Hicks, Michael J. 2004. A Quasi-Experimental Estimate of the Impact of Casino Gambling on the Regional Economy. Proceedings of the 93rd Annual Meeting of the National Tax Association.
LeFaivre, Michael and Michael Hicks 2005. MEGA: A Retrospective Assessment. Michigan:Mackinac Center for Public Policy.
Hicks, Michael J. 2007a. The Local Economic Impact of Wal-Mart. New York: Cambria Press.
Hicks, Michael J. 2007b. A Quasi-Experimental Test of Large Retail Stores’ Impacts on Regional Labor Markets: The Case of Cabela’s Retail Outlets. Journal of Regional Analysis and Policy, 37 (2):116-122.

WichitaLiberty.TV July 28, 2013

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In this episode of WichitaLiberty.TV, economist Dr. Russell Sobel joins host Bob Weeks. Topics include local economic development incentives, the environment of favor-seeking, how regulation stifles entrepreneurship, the seen and the unseen, the broken window fallacy, and Dr. Sobel’s research on how intergovernmental grants lead to higher taxes. Episode 6, broadcast July 28, 2013.

Links to material mentioned in this episode:
Dr. Sobel’s page.
Unleashing Capitalism.
Do intergovernmental grants create ratchets in state and local taxes?
Bastiat: What is seen and not seen, and the broken window.

Cronyism is harmful to our standard of living

“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.”

An editorial in Wall Street Journal last year written 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.

Did you know that the Washington metropolitan area is one of the most prosperous? Here’s why:

Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers. … There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn’t ordinarily buy.

In the 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.

The role of business is to provide products and services that make people’s lives better — while using fewer resources — and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.

Only societies with a system of economic freedom create widespread prosperity. Studies show that the poorest people in the most-free societies are 10 times better off than the poorest in the least-free. Free societies also bring about greatly improved outcomes in life expectancy, literacy, health, the environment and other important dimensions.

Continue reading at The Wall Street Journal (subscription not required)

So far, no flood of Wichita water rebates

It’s not been in place for a real long time, but so far, the Wichita water-saving appliance rebate program isn’t experiencing a rush of rebates.

wichita-water-rebates-2013-07-22

According to a presentation on July 22, less than one percent of the available rebate money had been claimed. KSN News reports the bureaucratic explanation for what seems to be a tepid response by citizens:

“Part of the reason we wanted to do this rebate program in the last six months of this year is to get a feel for how the program would be received,” said Joe Pajor, Wichita Public Works Deputy Director.

Hmm: I thought the purpose of the program was to save water.

This low participation in the rebate program is potentially good news. The rebate program is a very expensive way to save a very small amount of water. The good news that might emerge would be if the city uses the money not spent on rebates to either reduce water rates or retire water system debt.

Wichita airfares, on the rise

Airplane

A survey by travel website CheapFlights.com shows that airfares in Wichita have both fallen and risen in recent years, even though the City of Wichita, Sedgwick County, and the State of Kansas collectively spend millions each year to keep airfares low.

The survey, according to a news release, ranks airports by “averaging the prices our users found during the month of June when searching for flights to popular domestic and international destinations like Miami, Honolulu, London and Cancun.”

The news release warns that “These rankings can shift dramatically from year to year and prices fluctuate frequently on specific routes.”

Since this is the fourth year for this survey, I thought it would be interesting to see how airfares in Wichita have fared over the timeframe of this survey. An interactive visualization is presented below.

wichita-airfares-compared-2013-07

Here is an illustration of Wichita airfares compared to the other airports included in the survey, which for 2013 included the 101 most popular airports. You can see that based on the data gathered for this study, the average airfare declined, but then rose. Wichita’s rank among airports rose, accordingly. (In the airfare rankings in this survey, a higher rank means higher airfares, relative to other airports.)

This data should inspire us to re-examine whether the taxpayer-funded effort to reduce airfares in Wichita has produced the desired result.

There have been other audits or studies which have questioned the efficacy of Wichita’s airport subsidy program. See Affordable Airfares audit embarrassing to Wichita for an example.

I’ve created an interactive visualization from this data. Use the visualization below, or click here to open the visualization in a new window, which may work better for some users. Click on an airport name to highlight its fares against other airports. Use Ctrl+click to add other airports.

Data is from CheapClights.com. Visualization created by myself using Tableau Public.

Local economic development incentives: The economic perspective

Recently Russell S. Sobel, Ph.D., who is Visiting Scholar in Entrepreneurship in the School of Business Administration at The Citadel spoke in Wichita on the topic “Economic Development Incentives: A Necessary Evil?” A video presentation of his talk follows.

Sobel is the author of many books and publications, including Unleashing Capitalism and the popular university textbook Economics: Private and Public Choice, 14th edition. Video production is by Paul Soutar.

Sedgwick County votes for harmful intervention

man-digging-coins

It’s harmful when citizens are not armed with information and research. But when government officials and bureaucrats with the power to tax and plan our economies are uninformed, people suffer as our economy becomes less prosperous than it could be.

Today, in the name of creating jobs, the Sedgwick County Commission voted in favor of granting an economic development incentive to an expanding Wichita manufacturing firm. Commissioners Karl Peterjohn and Richard Ranzau voted against the award.

The action taken today is in addition to an award by the State of Kansas, and another likely to be awarded by the Wichita City Council. See Why is business welfare necessary in Wichita? for more background.

Intervention in the economy such as this does more harm than good, as we’ll see in a moment. It’s important that we learn the facts about incentives like these, as the Wichita area has the potential to become even more dependent on incentives and subsidies as a way of economic development.

For example, the president of Greater Wichita Economic Development Coalition recently broadcast an email with the subject heading “Investor Alert: WBJ outlines Mars Deal Development Incentives as one example of Aggressive Competition.” The email read as follows:

Dear Investors,

You are well aware of the Mars deal in Topeka and you are likely aware that no city outside the greater Kansas City Metro Area was given the opportunity to bid this project.

In my mind the take away from this Wichita Business Journal article is that our competition — local, state and international — have enormous tools to ensure economic development success.

The Mars project has the potential to receive $9.1 million in local incentives over the next five years not including the property tax abatement estimated at $10.0M.

Tim Chase

Messages like this — that we don’t have enough tools to compete — are common in Wichita. Politicians like Wichita Mayor Carl Brewer call for devoted revenue streams to fund economic development incentives.

What, though, is the track record of incentives? Those who, like myself, call for an end to their use: Don’t we want people to have jobs?

We need to decide what to believe. Should we believe our own eyes — that is, what we can easily see or are being told by our leaders — or something else?

Here’s a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view. “Peer-reviewed” means these studies were stripped of identification of authorship and then subjected to critique by other economists, and were able to pass that review.

Ambrosius (1989). National study of development incentives, 1969 — 1985.
Finding: No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective.

Trogan (1999). National study of state economic growth and development programs, 1979 — 1995.
Finding: General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).

Gabe and Kraybill (2002). 366 Ohio firms, 1993 — 1995.
Finding: Small reduction in employment by businesses which received Ohio’s tax incentives.

Fox and Murray (2004). Panel study of impacts of entry by 109 large firms in the 1980s.
Finding: No evidence of large firm impacts on local economy.

Edmiston (2004). Panel study of large firm entrance in Georgia, 1984 — 1998
Finding: Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.

Hicks (2004). Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties).
Finding: No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries.

LaFaive and Hicks (2005). Panel study of Michigan’s MEGA tax incentives, 1995 — 2004.
Finding: Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.

Hicks (2007a). Panel study of California’s EDA grants to Wal-Mart in the 1990s.
Finding: The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall.

Hicks (2007b). Panel study of entry by large retailer (Cabela’s).
Finding: No permanent employment increase across a quasi-experimental panel of all Cabela’s stores from 1998 to 2003.

(Based on Figure 8.1: Empirical Studies of Large Firm Impacts and Tax Incentive Efficacy, in Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, Russell S. Sobel, editor. Available here.)

In discussing this research, the authors of Unleashing Capitalism explained:

Two important empirical questions are at the heart of the debate over targeted tax incentives. The first is whether or not tax incentives actually influence firms’ location choices. The second, and perhaps more important question, is whether, in combination with firms’ location decisions, tax incentives actually lead to improved local economic performance.

We begin by noting that businesses do, in fact, seem to be responsive to state and local economic development incentives. … All of the aforementioned studies, which find business location decisions to be favorably influenced by targeted tax incentives, also conclude that the benefits to the communities that offered them were less than their costs.

So yes, business firms are influenced by incentives. But the cost of the incentives is greater than the benefit. This research shows, over and over, that the cost-benefit ratio analysis that decision makers use is not meaningful or reliable.

So why do we use incentives? Why do so few in government or the public understand? Continuing from Unleashing Capitalism:

Given serious doubts about the efficacy of tax incentives, why are they so popular? The answer is that businesses looking to expand their plants or to move to new locations have strong incentives to lobby for tax breaks and other subsidies that add to owners’ profits and, moreover, encouraging a bidding war between two or more state or local governments promises to increase the value of the incentives they can extract from any one of them. Politicians interested in re-election, in turn, have strong incentives to respond to private firms’ self-serving subsidy demands in order to take credit for enticing a high-profile company to town or to avoid blame for the jobs that would be lost if an existing employer moved to another location. The politicians will be supported on the tax-incentive issue by other groups having immediate financial stakes in the process, including local real estate developers, investment bankers (who float public bond issues and arrange financing for the incoming firm), and economic development officials whose livelihoods depend on success in chasing after ornaments to add to the local or state economy.

The special interests of subsidy-seeking private firms dominate the political process because voter-taxpayers are only weakly motivated to become informed about the costs of tax incentive programs and to organize in opposition to them. They see the jobs “created” at a new plant; they do not see the jobs that are lost elsewhere in the economy as a result of the higher tax burden imposed on other businesses and as a result of the economic resources reallocated from productive activities toward lobbying government to obtain these favors. Nor can they readily see the higher future tax bill they themselves will be required to pay in order to amortize and service the public debt issued to finance the subsidies diverted into the pockets of the owners of politically influential private companies.

“Politicians interested in re-election.” This describes almost all elected officials.

“Economic development officials whose livelihoods depend on success in chasing after ornaments.” This is Tim Chase and the other members of the economic development regime in Wichita.

Today, in explaining his vote in favor of granting a target economic development incentive, Sedgwick County Commissioner Dave Unruh recognized a “certain pragmatism that is required here.” He said we’re really concerned about jobs, and that jobs is the number one priority. Sometimes creating jobs requires us, he said, to compete in the practical world. It would be better if there were no incentives, he said. “But the truth of the matter is that we have to sometimes provide incentives, subsidies, abatements, whatever category it falls in, in order to compete and secure the jobs and company that we’re trying to win.”

This is the standard argument, even of politically liberal members of commissions and councils. Jobs, jobs, jobs. We don’t like to use incentives — they all say this, especially conservatives — but we learned that we must use incentives if we want jobs. This embrace of pragmatism is called “maturing in office.”

But I would ask these officials like Unruh this question: What about all the research that says incentives do more harm to jobs than good?

What do Commissioners Unruh, Skelton, and Norton believe phrases like these mean?

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. I do not deny that jobs are created at firms that receive incentives, at least most of the time. But these jobs are easy to see, and government makes sure we see them. We’re going to endure the groundbreaking and ribbon-cutting ceremonies. 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 uncontroverted evidences tells us this is true: These incentives, along with other forms of government interventionism, do more harm than good.

We can understand the average citizen being susceptible to arguments make by the likes of GWEDC’s Chase and the three Sedgwick county commissioners that voted for this incentive. Citizens generally don’t have the education, the time, and the initiative to evaluate these matters.

But for economic development professionals and elected officials with the power to tax and spend? Not knowing this research is inexcusable, and ignoring it is deplorable.

Business tax credits more desired than zero tax rates

Economic development

A Kansas business welfare program is more attractive and valuable than elimination of the Kansas corporate income tax, at least for some influential corporations in Kansas. The program is High Performance Incentive Program (HPIP), which grants tax credits in exchange for capital investment.

In April Dr. Art Hall of the Center for Applied Economics at the Kansas University School of Business delivered a presentation on Kansas tax reform, and he explained the situation (video here):

There is something called an HPIP investment tax credit. It stands for High Performance Incentive Program. This is a very valuable tax credit to corporations. But, you don’t get it automatically. You have to apply to the state. Only about 100 or 125 of these credits are given out each year. It’s about $50 to $60 million per year. It’s a very large number. Back in 2011, … the plan was to get rid of all of these special deals, especially this one credit, and we’re going to reduce all the rates.

The corporate sector — some very influential people in the corporate sector — did not want that at all. They went to the mat, hard. … The point is, there was an effort to reduce corporate income tax. The corporations, at least a very strong constituent sector, didn’t want it. They wanted their credit.

In other words, the business welfare benefits these corporations — many thought to be in the aerospace industry — receive from the state is greater than the Kansas income tax they pay. That’s the only conclusion we can draw from their choice of favoring the HPIP credits over elimination of their Kansas income tax.

A table from Hall’s paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy holds calculations that reveal this effect.

hpip-credits-example-2013-07

The 11.92% that is highlighted in yellow shows the deformation of the business investment and tax landscape that causes some corporations to prefer HPIP tax credits over zero tax rates. Each row in the table represents a different scenario, one being retaining the HPIP credit. Columns represent various amounts of investment. It is in the column for the largest amount of investment that HPIP is most valuable, based on expected rate of return for the investment. HPIP is also more valuable than the strategy in any other row, considering the large investment column. HPIP, we can see, favors large corporations over small, as it is most valuable when making large investments.

A problem, as Hall told the audience in the video, is that the HPIP is not given automatically to all companies that make capital investments. The credit must be applied for, various conditions must be met, and approval received.

This system of selecting which companies receive targeted economic development investment in Kansas is contrary to market principals. The state, rather than markets, is making investment decisions. It’s also contrary to Hall’s economic dynamism concept explained in the paper referenced above. In this idea, the goal of the state is to encourage a large number of business startups each year, and then nurture conditions where all have a chance to thrive. Many will not survive, but some will. We don’t know which firms will thrive, so it’s important to treat all firms equally and give all a chance.

Programs like HPIP are contrary to this philosophy, and instead concentrate the state’s investments in existing, often large, companies — the companies that make the large capital investments for which HPIP returns the most favorable financial results. This is also an illustration of the difference between a business-friendly environment and capitalism.

Why is business welfare necessary in Wichita?

A company in Wichita requires business welfare in order to capture a new business opportunity. What’s wrong with this picture?

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Our local and state economic development regime wanted Sedgwick county commissioners to approve a grant to a company without the commissioners knowing the entire spectrum of benefits the company will receive. Wichita city council members likely would have found themselves in the same position.

But we now know the details of economic development incentives approved and proposed for Triumph Aerospace Systems in Wichita. Press releases from Kansas Department of Commerce and Greater Wichita Economic Development Coalition didn’t give specifics. But based on the agreement between the Department of Commerce and Triumph, the state will give Triumph $100,000 immediately, and then $25,000 at the end of each of the next two years if job creation targets are met.

This $150,000 is in addition to two forgivable loans of $78,000 each expected to be granted by Sedgwick County and the City of Wichita. (Forgivable loans are like conditional grants. The loan is not repaid as long as targets are met.) That’s a total of $306,000.

This type of economic development action is routine in Wichita and Kansas. But, as measured in a variety of ways, Wichita economic growth and job creation is slow. So we ought to ask a few questions before proceeding.

First, what is wrong with Wichita’s business environment that in order for a company to expand, it must receive business welfare? I realize that “business welfare” is a harsh term. But how else do we describe these grants paid for through taxation?

Second: If there is no problem with Wichita’s business environment, and if these incentives are not necessary for the company to expand, why are we granting them?

Third, how were these amounts determined? Why $306,000? Why not $206,000 or $406,000? If we gave the company a bigger grant, could it hire more people?

Fourth: An analysis performed for Sedgwick County indicates a benefit-cost ratio of 1.31, meaning that for every $1.00 the county invests in this forgivable loan, it expects to receive $1.31. This inspires a question: If we really believe in this benefit to the county (and similar benefits to the city and state), why is the county investing only $78,000? And why doesn’t the county make more investments like this? Surely there are other worthy companies that need capital for expansion. If it really is so easy to induce economic growth and job creation, we should be doing things like this at every county commission meeting. Several times each meeting, I would say.

Fifth: Not all companies that expand receive incentives. How are other companies in Wichita able to expand or start without the aid of incentives?

Finally: A continuing goal in Wichita is to diversify our economy, to reduce the proportion of jobs and income earned in aviation and aerospace. Triumph, the company expanding, is in that industry. It’s not bad that the company is expanding. But the costs of these incentives are a burden to other companies that are starting and trying to establish themselves. Instead of diversifying our economy, this action further concentrates our economic base in a way that is deemed undesirable. Was this considered when evaluating this incentive opportunity versus others?

I’m just asking.

What to do, and not to do

Politicians and bureaucrats promote programs like these grants 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 for the awarding of incentives. This “active investor” approach to economic development is what has led to companies receiving grants or escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.

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.

Where is the downtown Wichita tax base?

There’s been much investment in downtown Wichita, we’re told, but the goal of increasing the tax base is farther away rather than closer.

Wichita city leaders have promoted public investment in downtown Wichita as wise because it will increase the tax base.

In his State of the City Address for 2013, Wichita Mayor Carl Brewer told the audience (based on his prepared remarks):

As you know, revitalizing downtown has been a key part of growing our community in recent years, recognizing that a healthy and thriving downtown improves our ability to attract new business, keep our young people here, and expand our tax base. With $100 million in completed downtown projects in 2012 and another $115 million starting this year, we’ve made extraordinary progress toward having the downtown that Wichitans have dreamed of. … As development continues downtown, we are closer to reaching our goals of increased pride, an increased tax base, and bringing more businesses and jobs to Wichita.

ssmid-investment-quote-2013

In its report on the economics of downtown Wichita redevelopment, the Wichita Downtown Development Corporation says:

The Downtown SSMID (Self Supported Municipal Improvement District — shown above) has seen a ten-year total amount of $396,850,538 in public investment and $564,776,159 in private investment. SSMID property values have increased over $300 million in the last ten years.

The Wichita Downtown Development Corporation sold the planning process to Wichitans by making the argument that “it will grow existing tax base revenues.”

Wichita downtown self-supporting municipal improvement district (SSMID) boundary map

To evaluate the success of the city’s efforts, we might look at the change in assessed property valuation in downtown Wichita over past years. A way to do that is to look at the valuations for property in the Wichita downtown self-supporting municipal improvement district (SSMID). This is a region of the city that pays an additional property tax to fund the activities of the Wichita Downtown Development Corporation. Its boundaries are roughly the Arkansas River east to Washington, and Kellogg north to Central.

Assessed valuation is the basis for levying property tax. The process starts with an appraised value, which is targeted to be fair market value for the property. Then, that is multiplied by 25 percent for commercial property, or by 11.5 percent for residential property. This produces the assessed value. Multiply that by the sum of the several mill levy rates that apply to the property, and you have the total property tax for that property.

With all the new projects coming online in downtown Wichita, we should expect that the assessed valuation is rising. As someone converts an old, dilapidated property into something more valuable, appraised and assessed values should rise. As new buildings are built, new appraised and assessed value is created where before there was none (or very little). This process is the success story that Mayor Brewer and boosters of public investment in downtown trumpet, as the mayor did twice in one paragraph in his State of the City Address.

So what has happened to the assessed valuation of property in downtown Wichita, using the SSMID as a surrogate?

The answer is that after a period of increasing values, the assessed value of property in downtown has has been declining. The peak was in 2008. The nearby table holds the figures.

This is the opposite of what we’ve been promised. We’ve been told that public investment in downtown Wichita builds up the tax base.

Some might excuse this performance by noting there’s been a recession. That’s true. But according to presentations, there has been much activity in downtown Wichita. Hundreds of millions of dollars in worth, we are told.

So why isn’t the assessed valuation rising? Why is it falling during the time of huge successes?

Wichita downtown self-supporting municipal improvement district (SSMID) assessed property valuation

Data can be viewed here.

Wichita flight count continues decline

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
– Frederic Bastiat

A program designed to bring low air fares to Wichita appears to meet that goal, but the unintended and inevitable consequences of the program are not being recognized. In particular, the number of flights available at the Wichita airport continues to decline.

Of particular note is that over the past two or three years, the trend of flights nationally is level, while the trend of flights available in Wichita is declining. The gap between Wichita and the nation is increasing.

According to Regional Economic Area Partnership, the goal of the Kansas Affordable Airfares Program (KAAP) is “to provide more air flight options, more competition for air travel, and affordable airfares for Kansas.”

Is the Affordable Airfares program meeting its goals? If we look at “air flight options,” and if we consider the number of monthly departing flights as a measurement, Wichita isn’t doing well compared to the nation. The chart at the end of this article illustrates.

In its Kansas Affordable Airfares Program Fiscal Year 2011 Report, REAP addresses the goal of “more air flight options” and reports:

“Air service through Wichita Mid-Continent Airport addresses the statutory objective of more flight options, as follows: A total of 11 airlines provide service from Wichita to seven nonstop destinations with connecting service and four nonstop destinations with no connecting service. Overall, there are on average 38 daily (with 40 on weekdays) nonstop or one-stop flights by commercial air carriers, providing access to 4,989 U.S. and international destinations.”

This statement simply addresses the current situation. But the goal is more flight options. Which is better evidence of meeting the statutory goal: A simple recitation of what’s available today, or looking at the trend, especially comparing Wichita to the nation? REAP’s statement provides very little information as to whether the program is meeting its stated goals, or whether the program is desirable. We should ask that REAP recognize the data and its implications.

This trend is an example of unintended consequences of government intervention and regulation. The Affordable Airfares program imposes a rough form of price control on airfares in Wichita. If the program didn’t do that — and it appears it succeeds at this goal — then there would be no point in having the program.

The inevitable effect of price controls is that less is supplied, compared to what would have been supplied. This economic phenomenon is reliable and predictable.

While travelers prefer low air fares to high, this is not the only consideration. For those who need to travel on short notice, the availability of flights is very important, and on this measure, Wichita is doing much worse than the nation.

Data is through March 2013, from Bureau of Transportation Statistics. Since this data is highly seasonal, I present a 12-month moving average, so that each point plotted is the average of the previous 12 months data. Also, I index January 2000 to 100.

Monthly flights, Wichita Airport and nationally.

The candlemakers’ petition

candle

The arguments presented in the following essay by Frederic Bastiat, written in 1845, are still in use in city halls, county courthouses, school district boardrooms, state capitals, and probably most prominently and with the greatest harm, Washington.

A PETITION

From the Manufacturers of Candles, Tapers, Lanterns, Sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.
Open letter to the French Parliament, originally published in 1845

Gentlemen:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for your — what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice — your practice without theory and without principle.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation.

This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture?Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and
the principle behind all your policy.

Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?

We have our answer ready:

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.

“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.” Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.

Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.

Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Frédéric Bastiat (1801-1850), Sophismes économiques, 1845

How to grow the Kansas economy

In this 14 minute video from April, Art Hall, who is Director of Center for Applied Economics at Kansas University, talks about how to grow the Kansas economy.

An important takeaway is that our targeted economic development strategies can’t handle the volume needed to create a lot of jobs in Kansas. We need policies that apply uniformly, so that we can generate as many business start-ups as possible. Of these start-ups, some will grow rapidly, but we don’t know the identities of these companies in advance.

For more about these ideas, see Hall’s paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy.

Westar rate increase contains business welfare

electric-meters

The rate increase that Westar Energy has applied for contains a large dose of discretionary business welfare spending. Westar, in conjunction with out current economic development machinery, will be allowed to grant discounts on electricity to new businesses. A current program exists, but Westar says it doesn’t offer the flexibility Westar needs.

Following is an excerpt from testimony Westar submitted to the Kansas Corporation Commission. I’ve added emphasis:

Q. HOW WILL THE FIRST COMPONENT OF PROMOTE KANSAS WORK?
A. The economic development portion of the proposal would permit Westar, at its option, to provide economic development assistance in the form of discounted electric service to new customers and existing customers with planned expansions if three conditions are met: (1) the customer adds new jobs to its work force, (2) the customer brings new capital equipment and plant to a new or expanded facility and (3) the economic development effort is supported and backed by a state organization such as the Kansas Department of Commerce or a local economic development organization.

Q. HOW WILL PROMOTE KANSAS PROVIDE WESTAR WITH FLEXIBILITY TO ADDRESS ECONOMIC DEVELOPMENT NEEDS ON A CASE-BY-CASE BASIS?
A. If approved, Promote Kansas will allow Westar to adjust the economic incentive — in the form of reduced electric rates — provided to a customer based on the circumstances involved. This is a change from Westar’s existing EDR, which provides for a fixed percentage discount of 25 percent to the customer’s electric bill in the first year. The incentive credit declines by five percent per year over a mandatory five year period. After the fifth year of service, the customer pays the full cost of their electric service. Westar has no flexibility to adjust the amount of the incentive credit level or duration under the current EDA.

We believe that the fixed percentage under the existing EDA is too rigid. In some situations, the customer may not require the entire 25 percent reduction in its electric bill, or a full five years of reduced electric rates, in order to move forward with an expansion or relocation to Kansas. In these cases, the rigidity of the existing EDA tariff results in either contributing more than needed to attract the new customer or encourage the expansion, or not offering the incentive at all. The current EDA tariff was developed over a quarter century ago, tailored to specific circumstances that no longer exist. It was based on past exigencies, and it is time to revise it to meet today’s priorities and business environment.

Promote Kansas would contain a variable incentive credit. If Westar decides to provide the incentive credit to a customer, it would range from five percent to 25 percent the first year and would then decline over no more than a five-year period. This will allow Westar flexibility to determine how much incentive is necessary to attract the new customer or the expansion. Westar will be able to actively participate in negotiations with potential new businesses along with other economic development organizations in order to develop the best package of benefits for the customer’s specific situation.

We need to be concerned with this part of Westar’s application. This language — at its option … based on the circumstances involved … variable incentive credit … this will allow Westar flexibility — gives huge discretion to Westar to decide how much customers will pay for electricity.

Westar is not a government agency, but as a tightly regulated entity, it’s almost like government. It exercises the type of monopoly power that few outside of government do: It holds a near-monopoly on the delivery of a product that almost everyone wants and needs. With few exceptions, households and business firms can’t negotiate with Westar on their electric rates.

Therefore, when Westar offers — at its discretion — lower electric rates to some customers, others must necessarily pay more. Testimony to this effect was offered by Westar.

If we could be certain that the goals of this program would be realized, that would be one thing. But as a quasi-governmental entity, Westar suffers from the same knowledge problem as does government, especially regarding targeted investment programs like that proposed in this new rate structure. These actors believe that they have the ability to select which companies are worthy of public investment, and which are not. Really, it’s even a larger decision, as all other Westar customers have to pay for the investment decisions that will be made.

This rate plan implements a form of centralized planning by the state that shapes the future direction of the Kansas economy. We have to decide who is in the best position to make these decisions: Regulators and utility company executives, or the diverse market where thousands of business firms freely compete for voluntary investments to be made.

Arnold Kling has written about the ability of government experts to decide what investments should be made with public funds. There’s a problem with knowledge and power:

As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

Despite this knowledge problem, the Kansas Corporation Commission is considering giving Westar the very type of power that ought to be left to markets. For this reason, KCC should reject Westar’s rate increase application until this program, and the program it is intended to replace, are eliminated.

The full rate application is available at Docket 13-WSEE-629-RTS: Application of Westar Energy and Kansas Gas and Electric Company Charges for Electric Service. A public hearing is scheduled tonight in Wichita; see Westar electricity rate hikes.

Visioneering asks for money. Let’s ask these questions.

Sedgwick County Kansas seal

When Visioneering Wichita asks the Sedgwick County Commission for funds this week, commissioners may want to ask a few questions about how well the Wichita-area economy has performed, compared to the peers that Visioneering has selected.

Here’s some data that merits consideration and begs a few questions: Compensation paid. In the nearby chart (click on it for a larger version) I present this data divided into four data series: Wichita vs. its peers as selected by Visioneering, and private sector vs. government. (Data is from U.S. Bureau of Economic Analysis. Visualization created by myself using Tableau Public.)

Compensation, Wichita and Visioneering Peers

What conclusions should we draw from this data? First, compensation paid to government employees (left chart) has risen faster than that paid to private sector employees. Much faster.

Second, when looking at government employment compensation, Wichita tracks almost exactly the same path as the average of our Visioneering peers.

Third, and this is what is most important: Wichita lags far behind our Visioneering peers in private sector compensation.

There’s other data that tells a similar story. In the article Wichita job growth and Visioneering peers, we can see that Wichita has set ambitious goals in job growth, but it doesn’t seem that the Visioneering program has produced results. But apparently Wichita government officials are satisfied. (For coverage of council members’ reactions, see Wichita city council reacts to Visioneering presentation.)

In Wichita and peer GDP growth: we find that compared to its peers, the government sector in Wichita is growing fairly quickly, but the private sector is growing slowly.

In Wichita personal income growth benchmark we see more of the same. Private sector growth in Wichita is slow, compared to our peers.

When Visioneering asks the Sedgwick County Commission for funds, commissioners might want to take a moment and inquire about these issues:

Is Visioneering satisfied with the performance of Wichita, as measured by these benchmarks?

Is Wichita’s trend in these benchmarks moving in the right direction, or is Wichita falling farther behind?

Are these the correct benchmarks we should be using?

Is it possible that Visioneering is making the Wichita economy better than it would be without Visioneering? Or is it making it worse, or is there no difference?

Does Visioneering need additional resources to fulfill its mission?

Visioneering News, captured June 5, 2013

On the Visioneering website, why are no future events listed? Are none planned?

On the Visioneering website, under the “News” section, is it true that there has been no news to post since August 2011 or September 2012 (there are two streams of news)?