Voice For Liberty

Tag: Capitalism

  • Downtown Wichita Arena TIF District

    Remarks to Wichita City Council, August 5, 2008.

    When I’ve been talking to people in Wichita, I find there is great confusion about the way that TIF districts work. This confusion serves to obfuscate what really happens with TIF districts: the TIF developers get to use their own property taxes to pay for things that non-TIF developers have to pay for out-of-pocket, or through special tax assessments on top of their regular property taxes.

    It is really this simple. To deny this is to deny simple arithmetic.

    Then, do TIF districts perform as promised? One of the troubling things I learned from recent Wichita Eagle reporting is that in the past four years, assessed valuations in the downtown TIF areas have grown at 14.9 percent per year, just 1.4 times the rate of all commercial property. A few weeks ago I was assured by one council member that the taxes paid by property owners in TIF districts grows “exponentially.” But now we have evidence that the growth is quite modest.

    I was going to say that I have no doubt that the members of this council have good and noble intentions in wanting downtown Wichita and the area around the arena to succeed. But establishing this TIF district is not good for the arena district or the city as a whole.

    Entrepreneurs in Wichita, or anywhere for that matter, have a difficult enough job to do in predicting what consumers want. For government to step in and create special tax-favored districts adds another measure of uncertainty and risk. It distorts the market allocation of capital. Investment will be driven by government incentives rather than market considerations.

    This is also a blow to those who have invested elsewhere. It is the city telling them they made a mistake, that they invested in the wrong part of town.

    For the arena district to succeed, it needs to be because entrepreneurs, using their own capital, decide that it is a worthwhile place to invest.

  • Wichita and the Old Town Warren Theater Loan

    Remarks to be delivered to the Wichita City Council, July 1, 2008.

    Mr. Mayor and members of the Council, we are potentially beginning a journey down a road where there are two classes of businesses in Wichita.

    There are business owners who seek to earn their profit through market entrepreneurship, that is, by meeting the demands of their customers and the marketplace. That’s a difficult thing to do. An entrepreneur must sense customer demand and desires, and then commit resources to satisfying customers. If entrepreneurs are correct in their judgments and successful in their execution, they earn profits.

    There are other business owners who, through TIF districts, tax abatements, and outright subsidy as in the case of the proposed loan agreement before you today, earn their profits by pleasing politicians such as the members of this council. They practice political entrepreneurship. The people they must please are a majority of this council. Investments — to the extent that government spending can be called that — will be made based on political, rather than marketplace, considerations.

    We have a proud history of market entrepreneurs in Wichita; men whose names are known not only in Wichita, but across the world. There are many other men and women in Wichita who, although their names are not famous, successfully meet customers’ demands in the marketplace and have built successful businesses.

    Mr. Warren is, by all accounts, a talented entrepreneur who earns profits by pleasing customers at his theaters located on Wichita’s west and east sides and in other cities.

    The fact that this theater — operated by a person with great experience in running successful theaters — is not profitable tells us all we need to know about the wisdom of investment in this business. If Mr. Warren and his partners wish to run it as a hobby, let them do so with their own money. The citizens of Wichita, however, need to be able to make their own investments in ways that they believe will earn a profit — that profitability being the one sure test of the success of an investment. When government makes “investments” based on political calculation, the people of Wichita are less able to make their own private investments.

    The council made an unwise decision some years ago when it established the TIF district for this theater. While the city is bound to pay to retire the bonds that were issued, that is the only obligation we have. The fact that a bad decision was made in the past should have no bearing on the decision to be made today. This is especially true as a decision to make this loan steers Wichita firmly towards the path of less private entrepreneurship and more government control of investment in Wichita.

  • Everything you love you owe to capitalism

    This is an excellent article by Llewellyn H. Rockwell, Jr., president of the Ludwig von Mises Institute. An excerpt:

    I’m convinced that Mises was right: the most important step economists or economic institutions can take is in the direction of public education in economic logic.

    There is another important factor here. The state thrives on an economically ignorant public. This is the only way it can get away with blaming inflation or recession on consumers, or claiming that the government’s fiscal problems are due to our paying too little in taxes. It is economic ignorance that permits the regulatory agencies to claim that they are protecting us as versus denying us choice. It is only by keeping us all in the dark that it can continue to start war after war — violating rights abroad and smashing liberties at home — in the name of spreading freedom.

    There is only one force that can put an end to the successes of the state, and that is an economically and morally informed public. Otherwise, the state can continue to spread its malicious and destructive policies.

    The full article is here: Everything You Love You Owe to Capitalism.

  • The Entrepreneur As American Hero

    This is an excerpt of a speech given by Walter E. Williams on February 6, 2005 at Hillsdale College. The complete speech, titled “The Entrepreneur As American Hero,” can be read here: http://www.hillsdale.edu/imprimis/2005/03/.

    At this juncture let me say a few words about the modern push for corporate social responsibility. Do corporations have a social responsibility? Yes, and Nobel Laureate Professor Milton Friedman put it best in 1970 when he said that in a free society “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

    It is only people, not businesses, who have responsibilities. A CEO is an employee, an employee of shareholders and customers. The failure of the corporate executive community to recognize this, and its willingness to engage in activities unrelated to the pursuit of profits, means national wealth will be lower, product prices will be higher and the return on investment lower.

    If we care about people’s wants, rather than beating up on profit-making enterprises, we should pay more attention to government-owned non-profit organizations. A good example are government schools. Many squander resources and produce a shoddy product while administrators, teachers and staff earn higher pay and perks, and customers (taxpayers) are increasingly burdened. Unlike other producers, educationists don’t face the rigors of the profit discipline, and hence they’re not as accountable. Ditto the U.S. Postal Service. It often provides shoddy and surly services, but its managers and workers receive increasingly higher wages while customers pay higher and higher prices. Again, wishes of customers can be safely ignored because there’s no bottom line discipline of profits.

    Here’s Williams’ law: Whenever the profit incentive is missing, the probability that people’s wants can be safely ignored is the greatest. If a poll were taken asking people which services they are most satisfied with and which they are most dissatisfied with, for-profit organizations (supermarkets, computer companies and video stores) would dominate the first list while non-profit organizations (schools, offices of motor vehicle registration) would dominate the latter. In a free economy, the pursuit of profits and serving people are one and the same. No one argues that the free enterprise system is perfect, but it’s the closest we’ll come here on Earth.

  • I, Pencil: A Most Important Story

    I, Pencil is one of the most important and influential writings that explain the necessity for limited government. A simple object that we may not give much throught to, the story of the pencil illustrates the importance of markets, and the impossibility of centralized economic planning.

    From the afterword to I, Pencil by Milton Friedman:

    Leonard E. Read’s delightful story, “I, Pencil,” has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith’s invisible hand — the possibility of cooperation without coercion — and Friedrich Hayek’s emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that “will make the individuals do the desirable things without anyone having to tell them what to do.”

    Link to a pdf of I, Pencil: http://www.fee.org/pdf/books/I,%20Pencil%202006.pdf

    Link to Leonard E. Read reading I, Pencil: http://www.fee.org/events/detail.asp?id=6239

  • The Value of the Businessman

    An outstanding feature of the open market is the businessman, whose success or failure depends entirely on his ability to “focus on consumer needs” and so combine existing and potential factors of production to serve consumers most efficiently. The only constructive role government can play under the free market method of overcoming poverty is to see that the participation of individuals is strictly voluntary–that none is permitted to steal from or cheat or enslave another. In the free and open society, the organized force of government is to be used only if necessary to protect the lives and property of peaceful individuals. In other words, the proper function of government is to protect against robbery rather than practice it.

    — Paul L. Poirot

  • The Mystery of Capital

    The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
    Hernando De Soto
    Basic Books, 2000

    The problem with most third world countries, Mr. De Soto tells us, is not that there is no capital, it’s that the capital is dead. Dead in the sense that it can’t be used to its full economic potential. It can’t be mortgaged, it can’t be divided into shares, and it simply can’t be used in the same way we make productive use of our assets in the West.

    What is the difference between the West and the third world? The answer is formal property systems that allow the economic potential stored in property to be put to work. Until these poor countries develop the type of formal property systems that Western countries did, mostly during the 19th century, they are destined to remain poor.

    The obstacles in the way of development of formal property systems are many, including social, political, and legal issues. One interesting fact is that third world countries do have property systems, in the sense that it is possible to know who “owns” property, but that knowledge is extralegal and local. It isn’t as valuable as the knowledge contained in formal property systems, but it is there nonetheless.

    We see advocates for poor people in third world countries constantly calling for more aid or debt relief for these countries. It is sadly true that many people are hungry and in poor health, and formal property system that unlock capital won’t help these people tomorrow. But until poor countries start the process of developing formal property systems, they are unlikely to change and develop economies that can support themselves.

    Unfortunately, everyone does not hold capital and private property rights in high regard. In 1992 Libya burned all land titles. Former socialist states are reverting to their former ways. In America, not all people agree that capitalism is good.

    This book contains some interesting history of how private property systems developed in the United States.

  • Tax increment financing in Iowa

    Writing from Cedar Rapids, Iowa

    Readers of The Voice For Liberty in Wichita are well aware that I believe that when the government provides subsidies to businesses — either in the form of cash payments or preferential tax treatment — we create a corrosive business environment. Government picks winners and losers for political reasons, rather than letting the market decide which companies are doing a good job. Government also spends money inefficiently. Instead of letting the market decide where to best allocate capital, government chooses who receives capital taken from the people through taxation according to the whims of politicians spending other peoples’ money.

    It is no wonder that government-favored enterprises rarely do well. Capital markets are quite efficient, and if there is an unmet need, capital usually flows to fill the need. The fact that capital is not flowing to fill a need strongly suggests that the need is not real. Yet, governments may feel that a need is not being met, and they will allocate taxpayers’ capital to fill it, even though taxpayers on their own do not select to invest in the subject project.

    This practice is not limited to the State of Kansas. There is a paper titled “Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth?” written by two economics professors at Iowa State University. (The paper may be read at http://www.econ.iastate.edu/research/webpapers/paper_4094_N0138.pdf.) This paper shows that despite the claims of politicians and the very obvious benefit to the companies that receive the TIF financing, there is no benefit to the state as a whole.

    Following are some quotes from the paper’s conclusion:

    “There are several issues to consider about TIF ordinances and TIF outcomes in Iowa. From our research here and from our larger study of the topic, it seems apparent that the ease with which TIF district designation can be done in Iowa, along with the multiplicity of uses that TIF districts can be put, that the law now has become a de facto entitlement for new industry and housing development in much of the state with little to no evidence of overall public benefit or meaningful discussion of the mean costs of the practice. It also seems apparent that given the ease with which these districts can be developed that many cities may be preemptively capturing new valuation and tax revenues in the name of economic development, but that in the main, this preemption is likely yielding much more collective fiscal harm across taxing districts in the long run than good.”

    “City officials believe that the TIF action was instrumental in job growth in their town and in their region. How could it not be? We have an investment, and we have a firm with jobs. On net, however, except for the increment to manufacturing jobs, there is no evidence of economy wide benefits (trade, all nonfarm jobs), fiscal benefits, or population gains. There is indirect statistical evidence that this profligate practice is resulting in a direct transfer of resources from existing tax payers to new firms without yielding region-wide economic and social gains to justify the public’s investment.”

    “This analysis suggests that the enabling legislation for tax based incentives deserves revisiting. Though the TIF programs is highly popular among city government officials, and why wouldn’t it be given the growth in property tax yield over the years, there is virtually no evidence of broad economic or social benefits in light of the costs.”

  • I, Pencil

    I, Pencil
    Leonard E. Read (Click here to read the article.)

    Do you think there exists a single person who knows how to make a lead pencil? In this article, Mr. Read shows us how there is no one who knows even a small fraction of what is necessary to produce even this simple, everyday item.

    How, then, does a lead pencil come to be manufactured? Through the uncoordinated actions of many people, each exchanging their own small amount of knowledge for something else they want.

    The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

    Later on we read this:

    the configuration of creative human energies–millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

    It is free expression of creative human energy that makes economies work at their maximum potential. Attempts by governments to interfere are bound to fail, as even the coordination of the production of a simple lead pencil is beyond the comprehension of any single person, agency, or computer program.