Tax Fairness for All Wichitans has an information sheet available to help Wichitans learn more about the February 28th election regarding the Ambassador Hotel guest tax rebate.
You can download a printable pdf version of the information sheet by clicking on Tax Fairness for All Wichitans Information Sheet. Or, view the document below. (Hint: Click on “Fullscreen” at the bottom of the document for a larger view.)
Last night Wichita Mayor Carl Brewer delivered his annual State of the City Address. The text of the address may be read at State of the City Address.
In his speech, Brewer several times criticized those who act on “partisan agendas.” This is quite a remarkable statement for the mayor to make. Partisan usually refers to following a party line or platform. The mayor didn’t mention who he was criticizing, but it’s likely he was referring to myself and others like John Todd, Susan Estes, and Clinton Coen, as we appear regularly before the city council, usually in disagreement with the mayor and his policies.
What’s remarkable is that the council, even though it has four Republican members, almost always votes uniformly with Democrat Brewer and the other two politically liberal members of the council. The only exception is Michael O’Donnell (district 4, south and southwest Wichita), who is often in a minority of one voting in opposition to the other six. The other Republican members — Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, southeast and south Wichita), and Jeff Longwell (district 5, west and northwest Wichita) — routinely vote in concert with the Democrats and liberals on the council.
Remarkable also are the many members of the business community who appeal to the council for subsidies, increased government intervention, and more central planning from city hall: many of these are Republicans. Conservative Republicans, many have personally told me.
This describes a lack of partisanship. Most of the mayor’s critics, such as myself, are more accurately characterized not as acting along party lines, but as acting on their belief in economic freedom, free markets, and limited government.
The mayor 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 miniscule number is dwarfed by the normal ebb and flow of other economic activity.
The mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.
The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.
But there are those who disagree, despite all evidence to the contrary. Sedgwick County Commissioner Dave Unruh — a conservative Republican, for those keeping track of partisanship — recently called for a “deal-closing” fund of $100 million. A funding source of this magnitude would undoubtedly require a new tax. There are many who feel there should be a new sales tax devoted to economic development and downtown Wichita development. We should not be surprised to see such a proposal emerge, and not be surprised that civic and business institutions will support it.
The mayor repeatedly said that the city has been “courageous.” In reality, Wichita does about the same as everyone else. But there is a way Wichita could distinguish itself among cities.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that Kansas needs to move away from the “active investor” approach to economic development. This is where government decides which companies will receive special treatment, be it in the form of tax abatements, tax credits, grants, tax increment financing, community improvement district special taxes, and other forms of subsidy. Being an “active investor” has been the approach of the City of Wichita, and according to the mayor’s vision, this plan is to be stepped up in the future.
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.”
Later, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and Kansas rely on for economic development: “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.”
We need business and political leaders in Wichita and Kansas who can see beyond the simplistic imagery of a groundbreaking ceremony and can assess the effect of our failing economic development policies on the entire community. Unfortunately, we don’t have many of these — and Mayor Brewer leads in the opposite direction.
In his speech, Brewer was critical of those who “spread misinformation.” He was not specific as to who he’s criticizing, and I wouldn’t expect him to name specific people in a speech like this.
But when the mayor criticizes people for being uninformed or misinformed, he needs to look first at himself. He and city staff also need to engage their critics and be responsive to requests for information.
As an example of misinformation, the mayor cited this evidence that city policies are working: “The proposed Ambassador Hotel with a 3-to-1 private to public investment ratio.”
The city arrived at this ratio by employing a very narrow definition of public investment. When tax credits from the State of Kansas and federal government as well as other sources of public subsidy are accounted for, the ratio drops to less than two to one.
It’s true that considering only the city’s artificially narrow definition of public funding, the ratio does reach three to one. But Wichitans also have to pay part of the costs of the tax credits and other subsidies.
The city has also been less than honest in its promotion of the cost-benefit ratio for the Ambassador Hotel project. The city officially cites a cost-benefit study produced by Wichita State University Center for Economic Development and Business Research. Part of that study produced a cost-benefit ratio of 2.63 to one, and that’s what the city uses as justification for its participation in the project.
But the full story of the costs and benefits of this project are contained in these numbers from the WSU analysis:
ROI Cost-benefit ratio
City Fiscal Impacts General Fund 163.2% 2.63
City Fiscal Impacts Debt Service -17.2% 0.83
City Fiscal Impacts -9.8% 0.90
WSU evaluated the impact of the Ambassador Hotel on the City of Wichita’s finances in two areas: The impact on the city’s General Fund, and separately on the city’s Debt Service Fund. The two were combined to produce the total fiscal impact, which is the bottom line in this table.
The City of Wichita cites only the positive impact to the General Fund figure. But the impact on the Debt Service fund is negative, and the impact in total is negative.
It’s true that the ROI and cost-benefit ratio for the General Fund indicate a positive investment return. But the cost of the Ambassador Hotel subsidy program to the General Fund is $290,895, while the cost to the Debt Service Fund is $7,077,831 — a cost factor 23 times as large.
Citizens ought to ask: Who is spreading misinformation?
It is difficult to get a response from city hall regarding questions like these. So far city economic development director Allen Bell has not agreed to meet with representatives of Tax Fairness for All Wichitans, a group opposed to the subsidies for the Ambassador Hotel. (I am part of that group.) The city and its allied economic development groups will not send representatives to participate in a public forum on this matter.
The mayor criticized those who “provide simplistic answers to very complicated challenges.” He may be — we don’t really know — referring to those like myself who advocate for free market solutions to problems rather than reliance on government. Certainly the mayor believes that government must act — “courageously” he said — to confront our problems.
A problem with the mayor’s plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:
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.
Relying on free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power.
Mayor Brewer, five of six city council members, and the city hall bureaucracy do not believe in these values. Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty “simplistic.” Instead, his government prefers crony capitalism and corporate welfare. This is the troubling message that emerges from Brewer’s State of the City address.
The release of a forensics audit of the Kansas Bioscience Authority coupled with two days of joint committee hearings revealed an independent government agency out of control, an audit that draws conclusions described as sanitized of important details, and an agency and legislative supporters who believe that now, all is well at the KBA.
Defenders and supporters of KBA rely on two facts: First, the source of many problems — former CEO Tom Thornton — is no longer at KBA. He has been criticized for overspending and his managerial style, and the audit found that he deliberately deleted and scrubbed data from his personal laptop computer. Data is also missing from a protected section of a KBA server.
Second, the audit finds no major problems with KBA’s board of directors or its business policies, procedures, and controls.
Regarding Thornton, Kansas Secretary of Agriculture Dale A. Rodman, who oversaw the audit process on behalf of the Brownback Administration, was strongly critical of the KBA board’s oversight of Thornton. He told a joint committee that the KBA board had not done its job, and that a “golden opportunity” for Kansas has been lost.
As to policies and practices, it is apparent that the KBA board violated a Kansas statute governing the KBA that covers conflicts of interest and board members receiving financial benefits on behalf of companies they have ownership interests in. The audit, many times, says that board members may resolve a conflict of interest by disclosure and not voting.
But the case of KBA board member Bill Sanford is an example to the contrary. Rodman said that a company he partly owns received KBA grants totaling $674,996. There appear to be many similar examples involving other KBA personnel and companies.
These facts stand in contrast to conclusions drawn in the audit, which was conducted by BKD, LLP Forensics and Valuation Services on behalf of the KBA, although the Brownback administration, through Rodman, had some oversight. Senate Commerce Committee Chair Susan Wagle, a Wichita Republican who has been at the forefront of the KBA issue, has repeatedly described the audit’s conclusions as “sanitized.” I agree.
Rodman, in his testimony, revealed a troubling attitude towards ethics that we often see in Kansas. He told the committee that former Governor John Carlin told him that KBA could not do business in Kansas with strict ethic rules because everyone in Kansas knows each other. And last year Carlin, as chairman of the board of KBA, appeared before a Senate committee to give a strong defense of CEO Thornton.
Now we know differently. But Carlin — defender of Thornton, who is now widely recognized as a “bad apple” — still serves on the KBA board. The fact that there has been little turnover in the composition of the KBA board reveals that the board, along with KBA’s supporters, believe that little is left to be fixed, now that Thornton has left the building.
Kansans deserve something better, however. If KBA is to continue, all board members should resign, and immediately.
The audit and committee testimony also uncovered troubling facts about the performance of KBA in creating jobs. If we take away KBA’s largest success story, which accounts for half or more of the jobs KBA claims to be responsible for creating and which cost a small amount of KBA funds, we are left with the realization that the other jobs KBA created cost over $700,000 each.
KBA defends itself by noting that it focuses on long-term nurturing of the bioscience industry in Kansas, and less on creating jobs in the near term. Long-term goals, however, are not the forte of government, and that may be why KBA was created as an independent agency with its own revenue stream not subject to annual legislative or executive branch appropriations.
But that leads to another problem: Arrogance and indomitability. That is much in evidence at KBA. Furthermore, we can’t really say that KBA “invests,” as it is not subject to the same constraints that govern when businesses or individuals invest. These private actors can’t conscript their capital from the people of Kansas, as does KBA. Neither does KBA have to accept responsibility for losses.
It would not be surprising to see legislation emerge to provide legislative or executive branch oversight and control over KBA. While that may improve KBA, we will still be left with the issue of the incompatible roles of government and private sector.
It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.
The latest evidence we have is the construction of a downtown parking garage that benefits Douglas Place, especially the Ambassador Hotel, a renovation of a historic building now underway.
The flow of tax dollars Wichita city leaders had planned for Douglas Place called for taxpayer funds to be routed to a politically-connected construction firm. And unlike the real world, where developers have an incentive to build economically, the city created incentives for Douglas Place developers to spend lavishly in a parking garage, at no cost to themselves. In fact, the wasteful spending would result in profit for them.
The original plan for Douglas Place as specified in a letter of intent that the city council voted to support, called for a parking garage and urban park to cost $6,800,000. Details provided at the August 9th meeting of the Wichita City Council gave the cost for the garage alone as $6,000,000. The garage would be paid for by capital improvement program (CIP) funds and tax increment financing (TIF). The CIP is Wichita’s long-term plan for building public infrastructure. TIF is different, as we’ll see in a moment.
At the August 9th meeting it was also revealed that Key Construction of Wichita would be the contractor for the garage. The city’s plan was that Key would not have to bid for the contract, even though the garage is being paid for with taxpayer funds. Council Member Michael O’Donnell (district 4, south and southwest Wichita) expressed concern about the no-bid contract. As a result, the contract was put out for competitive bid.
Now a winning bid has been determined, according to sources in city hall, and the amount is nearly $1.3 million less than the council was willing to spend on the garage. This is money that otherwise would have gone into the pockets of Key Construction. Because of the way the garage is being paid for, that money would not have been a cost to Douglas Place’s developers. Instead, it would have been a giant ripoff of Wichita taxpayers. This scheme was approved by Mayor Carl Brewer and all city council members except O’Donnell.
Even worse, the Douglas Place developers have no incentive to economize on the cost of the garage. In fact, they have incentives to make it cost even more.
Recall that the garage is being paid for through two means. One is CIP, which is a cost to Wichita taxpayers. It doesn’t cost the Douglas Place developers anything except for their small quotal share of Wichita’s overall tax burden. In exchange for that, they get part of a parking garage paid for.
But the tax increment financing, or TIF, is different. Under TIF, the increased property taxes that Douglas Place will pay as the project is completed won’t go to fund the general operations of government. Instead, these taxes will go to pay back bonds that the city will issue to pay for part of the garage — a garage that benefits Douglas Place, and one that would not be built but for the Douglas Place plans.
Under TIF, the more the parking garage costs, the more Douglas Place property taxes are funneled back to it — taxes, remember, it has to pay anyway. (Since Douglas Place won’t own the garage, it doesn’t have to pay taxes on the value of the garage, so it’s not concerned about the taxable value of the garage increasing its tax bill.)
Most people and businesses have their property taxes go towards paying for public services like police protection, firemen, and schools. But TIF allows these property taxes to be used for a developer’s exclusive benefit. That leads to distortions.
Why would Douglas Place be interested in an expensive parking garage? Here are two reasons:
First, the more the garage costs, the more the hotel benefits from a fancier and nicer garage for its guests to park in. Remember, since the garage is paid for by property taxes on the hotel — taxes Douglas Place must pay in any case — there’s an incentive for the hotel to see these taxes used for its own benefit rather than used to pay for firemen, police officers, and schools.
Second, consider Key Construction, the planned builder of the garage under a no-bid contract. The more expensive the garage, the higher the profit for Key.
Now add in the fact that one of the partners in the Douglas Place project is a business entity known as Summit Holdings LLC, which is composed of David Wells, Kenneth Wells, Richard McCafferty, John Walker Jr., and Larry Gourley. All of these people are either owners of Key Construction or its executives. The more the garage costs, the higher the profit for these people. Remember, they’re not paying for the garage. City taxpayers are.
The sum of all this is a mechanism to funnel taxpayer funds, via tax increment financing, to Key Construction. The more the garage costs, the better for Douglas Place and Key Construction — and the worse for Wichita taxpayers.
It’s no wonder Key Construction principals contributed $16,500 to Wichita Mayor Carl Brewer and five city council members during their most recent campaigns. Council Member Jeff Longwell (district 5, west and northwest Wichita) alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.
This scheme — of which few people must be aware as it has not been reported anywhere but here — is a reason why Wichita and Kansas need pay-to-play laws. These laws impose restrictions on the activities of elected officials and the awarding of contracts.
An example is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
This project also shows why complicated financing schemes like tax increment financing need to be eliminated. Government intervention schemes like this turn the usual economic incentives upside down, and at taxpayer expense.
Remarks delivered to the Wichita City Council, December 6, 2011, regarding the formation of a new tax increment financing (TIF) district in south Wichita. The measure passed with all members except Michael O’Donnell (district 4, south and southwest Wichita) voting in favor of creating the TIF district.
Mayor, members of the council,
No matter how much spin is put on this by its supporters and this council, TIF turns over taxation to private interests. To the extent we must have taxation, it should be for public purposes, to pay for things that everyone benefits from.
What this council is considering today is turning over this public function to the benefit of one person. Some on this council believe that TIF is not really a benefit to the applicant, as they are going to pay property taxes in any case.
That’s true — so far. But to properly represent the interests of this city, we need to look farther. We need to look at “stage two,” or “what happens next.” And when we look, we see that under TIF, the vast majority of the taxes paid are redirected away from the public treasury and back to one person’s interest.
Some will bring up the “but-for” argument, which is to say that none of this will happen unless the TIF district is created. It’s easy to create scenarios that show government assistance is necessary. But we’ve seen examples lately where applicants stood before this council and told you that they must have some form of assistance, that it is impossible to proceed without it. But after being denied assistance, the projects proceeded. In fact, the current applicant made such a claim to this council regarding special property tax treatment through industrial revenue bonds. This council declined to offer the assistance, but the project moved ahead anyway.
Now if TIF provided a benefit, that would be one thing. But compelling research that no one on this council has controverted tells us two things.
First, one study concludes this: “We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” So if we are concerned about the level of development in the entire city, we should reject TIF.
Second, another tells of the impact of retail TIF districts on jobs. “TIF districts supporting retail development have a negative effect on municipal employment.” So if we are concerned about jobs for everyone, we should reject retail TIF districts.
We might also look to a state that is perhaps the leader in the application of TIF, although they’re called redevelopment districts there: California Governor Jerry Brown is working to eliminate the use of TIF districts and close down those that exist. His reason: The state can’t afford them.
We also need to look at the characteristics of this applicant. The Wichita Business Journal reported this regarding a company Mr. Maxwell owned: “Pixius proposes to repay, over a 10-year period, $1.3 million of a $6.4 million loan from the U.S. Department of Agriculture’s Rural Utilities Service, according to court documents. The loan was part of a 2002 Farm Bill pilot program that loaned more than $180 million to ISPs to expand Internet service to rural areas. ‘To my memory … Pixius is the only one (to receive a loan) that’s had to file bankruptcy to work out of its situation,’ says Claiborn Crain, USDA spokesman.”
I would also note that at least one member of this council has accepted campaign contributions from Mr. Maxwell and his wife. Some jurisdictions have “pay-to-play” laws, which prohibit officeholders who have accepted campaign contributions from voting on measures that would enrich the contributor. We don’t have these laws in Wichita, although I hope that we will. But there’s no reason that this council can’t act as through such laws are in place.
Standing up for fundamental liberties. A particularly troubling objection that those who advocate for liberty face is that we want to deny freedom and liberty to others — as if the quantity of liberty is fixed, and I can have more only if you have less. This is the type of false accusation that leftists make against Wichita-based Koch Industries. In this excerpt from the company’s Koch Facts page, the work that Koch does to advance liberty for everyone is explained: “Throughout Koch’s long-standing record of public advocacy, we have been strong and steadfast supporters of individual liberties and freedoms. These values permeate all that we do as a company and every part of our public outreach. We help fund public and school-based educational programs across the country in an effort to increase citizens’ understanding of the relationship between economic liberty and democracy. We support voter registration efforts in the communities where we live and work, and for our tens of thousands of employees. We support civil rights programs through numerous organizations. We also help build entrepreneurial initiatives that foster the fundamental reality that economic freedom creates prosperity for everyone, especially the poor, in our society. … For many years, we have directly contributed to Urban League, Andrew Young Foundation, Martin Luther King Center, Latin American Association, 100 Black Men, Morehouse College, United Negro College Fund, and dozens of other worthy organizations pursuing similar civic missions. We founded and continue to support Youth Entrepreneurs in schools throughout Kansas, Missouri and Atlanta. This year-long course teaches high school students from all walks of life the business and entrepreneurial skills needed to help them prosper and become contributing members of society. … Many of the attacks against Koch in recent months are cynical posturing at best and deliberate falsehoods divorced from reality at worst. For proof, look no further than the false claim from groups like SEIU that we are somehow trying to suppress the right to vote. … Our freedom as individual Americans relies on the ability to hold the government accountable through the direct exercise of voting rights and the exercise of other individual liberties. We are unwavering in our commitment to these rights and we stand firmly behind our track record in defending them.”
Private property saved the Pilgrims. At Thanksgiving time, the Economic Freedom Project reminds us how an early American experiment with socialism failed miserably, and how private property rights and free enterprise saved the day. See So, Is That My Corn or Yours?
Did Grover Norquist derail the Supercommittee? To hear some analysts, you’d think that Grover Norquist of Americans for Tax Reform is responsible for no deal emerging from the United States Congress Joint Select Committee on Deficit Reduction (the “Supercommittee”). It’s ATR’s pledge to not increase taxes that is blamed, so they say. All members of the Kansas Congressional Delegation except Kevin Yoder signed the pledge. Paul Jacob is thankful for Norquist and that a tax increase was averted.
Drive-through petition signing. From Americans for Prosperity, Kansas: The Wichita area chapter of the free-market grassroots group Americans for Prosperity (AFP) and other local groups have been working to collect signatures for a petition to put the hotel guest tax ordinance to a public vote. Volunteers will be collecting signatures this weekend during a “drive-thru” petition signing Friday, Saturday and Sunday at two Wichita hotels. Wichita activists are continuing their efforts to collect signatures for a petition to put the hotel guest tax ordinance to a public vote. Registered voters simply drive up to the listed locations and volunteers will bring a petition out to them. The times are from 9:00 am to 5:00 pm Friday and Saturday (Nov. 25 and 26), and 12:00 noon to 5:00 pm Sunday (Nov. 27). The locations are Wichita Inn East (8220 E. Kellogg Dr.) and Best Western Airport Inn (6815 W. Kellogg/US-54).
Job creation. Governments often fall prey to the job creation trap — that the goal of economic development is to create jobs. We say this today in Wichita where several labor union leaders appeared before the Sedgwick County Commission to encourage the county to grant a subsidy to Bombardier Learjet. The labor leaders, naturally, pleaded for jobs. To them, and to most of our political and bureaucratic leaders, the more jobs created, the better. Our business leaders don’t do any better understanding the difference between capitalism and business. In his introduction to the recently-published book The Morality of Capitalism, Tom G. Palmer writes: “Capitalism is not just about building stuff , in the way that socialist dictators used to exhort their slaves to ‘Build the Future!’ Capitalism is about creating value, not merely working hard or making sacrifices or being busy. Those who fail to understand capitalism are quick to support ‘job creation’ programs to create work. They have misunderstood the point of work, much less the point of capitalism. In a much-quoted story, the economist Milton Friedman was shown the construction on a massive new canal in Asia. When he noted that it was odd that the workers were moving huge amounts of earth and rock with small shovels, rather than earth moving equipment, he was told ‘You don’t understand; this is a jobs program.’ His response: ‘Oh, I thought you were trying to build a canal. If you’re seeking to create jobs, why didn’t you issue them spoons, rather than shovels?” … After describing crony capitalism — the type practiced in Wichita, Sedgwick County, and Kansas, with deals like the complete funding by taxpayers of the Bombardier LearJet facility, Palmer explains: “Such corrupt cronyism shouldn’t be confused with ‘free-market capitalism,’ which refers to a system of production and exchange that is based on the rule of law, on equality of rights for all, on the freedom to choose, on the freedom to trade, on the freedom to innovate, on the guiding discipline of profits and losses, and on the right to enjoy the fruits of one’s labors, of one’s savings, of one’s investments, without fearing confiscation or restriction from those who have invested, not in production of wealth, but in political power.”
Experts. David Freedman and John Stossel discuss experts, our reliance on them, the political advocacy that’s often involved, and how often experts are wrong.
Many people remember that President Barack Obama promised that the unemployment rate would not top eight percent if the stimulus was passed. The actual rate has been around nine percent or higher for the past two years, reaching 10.1 percent in October 2009.
What’s really telling about the ineffective Obama stimulus — in fact, the futility of his entire economic program — is that unemployment has been worse than what his administration predicted it would be if the stimulus had not been passed.
The following chart from e21 illustrates, showing the predicted path of the unemployment rate with and without the stimulus, and what actually happened. The accompanying article is Revisiting unemployment projections.
Energy bill to be introduced today. According to a press release, U.S. Representative Mike Pompeo of Wichita will introduce the “Energy Freedom and Economic Prosperity Act.” This bill would eliminate all tax credits related to energy production. For more, see Pompeo to introduce ‘Energy Freedom and Economic Prosperity Act.’
Crony capitalism disputed. At yesterday’s meeting of the Sedgwick County Commission, chair Dave Unruh objected to my use of the term “crony capitalism” on the basis of the term having a pejorative connotation. A dictionary definition of “crony” is a “close friend especially of long standing.” Applied to government, the implication is that jobs or favoritism is given based on friendship or patronage. But when talking about capitalism, the term “crony capitalism” the definition is “Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay.” This is the description given by Charles G. Koch in his Wall Street Journal piece Why Koch Industries Is Speaking Out: Crony capitalism and bloated government prevent entrepreneurs from producing the products and services that make people’s lives better. It precisely describes what happened when the county granted a forgivable loan to Johnson Controls. More about this issue is available here.
Kansans For No Income Tax. The new group Kansans for No Income Tax is, according to its website, “a nonprofit working to educate Kansas taxpayers about the benefits of eliminating the state income tax.” The problem, as the group sees it: “Kansas has the 19th highest state and local tax burden in the country and our economic outlook is ranked 37th in the nation. With this economic environment, it is no surprise that Kansas continues to lose businesses, revenue and its citizens. We cannot continue down the path of reckless spending and policy that includes one year fixes to get us by. We must instead focus on a long-term path to prosperity for our state. This path includes the regulation of our tax base with less volatile taxes paired with a more business friendly regulation environment.” … The groups is conducting a bus trip across Kansas this Friday and Saturday. More information, including locations and times, is in this press release.
Misguided efforts to improve capitalism. From Eamonn Butler: Ludwig von Mises — A Primer on how efforts by government to intervene in markets fail: Indeed, our efforts to manipulate the market economy, and make it conform to a particular vision, are invariably damaging. Capitalism is superbly good at boosting the general standard of living by encouraging people to specialise and build up the capital goods that raise the productivity of human effort. But when we tax or regulate this system, and make it less worthwhile to invest in and own capital goods, then capitalism can falter. But that is not a “crisis of capitalism,” explains Mises. It is a crisis of interventionism: a failure of policies that are intended to “improve” capitalism but in fact strangle it. One common political ideal, for example, is “economic democracy” — the idea that everyone should count in the production and allocation of economic goods, not just a few capitalist producers. But according to Mises, we already have economic democracy. In competitive markets, producers are necessarily ruled by the wishes of consumers. Unless they satisfy the demands of consumers, they will lose trade and go out of business. If we interfere in this popular choice, we will end up satisfying only the agenda of some particular political group. A more modest notion is that producers’ profits should be taxed so that they can be distributed more widely throughout the population. But while this shares out the rewards of success, says Mises, it leaves business burdened with the whole cost of failure. That is an imbalance that can only depress people’s willingness to take business risks and must thereby depress economic life itself.
Markets: exploitation or empowerment? Do markets lead to a centralization of political and economic power, or do markets decentralize and disseminate wealth? In an eight-minute video from LearnLiberty.org, a project of Institute for Humane Studies, Antony Davies presents evidence and concludes that markets and free trade empower individuals rather than exploit them.
Tomorrow the Sedgwick County Commission will consider making a forgivable loan in the amount of $42,500 to Johnson Controls.
A forgivable loan means that the county immediately pays the loan principle to the company. Then, if performance goals are met over the next five years in this case, the county forgives a portion of the loan each year. At the end of five years the company will owe the county nothing, if the criteria are met.
Economically, the forgivable loan is equivalent to a grant of money subject to meeting performance criteria. In this case, the criteria consists of maintaining a certain level of employment.
Johnson is a very large company, with 137,000 worldwide employees and a profit of $1,540,000,000. So this is not a small company, or a startup company, or a company that lacks for money, or a company that isn’t successful. Its stock has far outperformed leading market indexes over the past ten years. The City of Wichita approved a forgivable loan for the same amount.
The harm of economic development programs like this is that when the city, county, and state make them available, companies will take advantage of them. Evidently companies find it’s easy to persuade this state and this commission to grant them money.
At least easier than it is to raise equity, where you have to trade shares of ownership for money. Or in debt markets, where you have to pay interest and principal.
This behavior creates a self-fulfilling feedback loop. Company A sees what Companies B, C, D, E, F (and so on …) have received from the city, county, and state, and they want it too. Soon we may find ourselves in the situation where few companies will consider Wichita and Sedgwick County without some form of handout.
But the real harm that these programs do is the destruction of civil society. By that I mean a society that respects individuals and property rights, and where people trade harmoniously with others through markets. This includes companies attempting to raise investment capital, like the applicant company today.
Instead, we replace a civil society and market entrepreneurship with political entrepreneurship, and with all the negatives that accompany that.
If we in Sedgwick County are looking to distinguish ourselves, let’s start today by rejecting crony capitalism as our economic development tool.
The proposal document delivered to Johnson Controls by the Kansas Department of Commerce was written by a business consultant in Hoffman Estates, Illinois. This naturally leads to the question: can’t someone in Kansas do this work? A Department of Commerce official explained that the department has several consultants “on the ground in the markets they serve” to better work with clients in their markets. The Department believes this work can be done at lower cost and with greater flexibility this way.
Second, the Department of Commerce document includes as part of the incentive package an item labeled “Personal Property Tax Exemption” with a value of $1,143,563. Other incentives are valued at $1,168,000, for a total of $2,311,563.
Interestingly, when this proposal came before the Wichita City Council, the value of the state incentives was given as $1,168,000. In its presentation, Wichita officials didn’t include the personal property tax exemption in the value of the deal.
There’s good reason for that. The $1,168,000 represents incentives crafted specifically for Johnson. But the personal property tax exemption is available to anyone, as the porposal document later explains. Kansas hasn’t taxed this type of property since 2006.
So whether to include the value of this tax savings as an incentive is open to question. The Department of Commerce says that since not all states offer this tax exemption, it is an advantage that Kansas can offer. It’s the type of advantage that Kansas ought to create more of, as it is something that applies equally to all companies, not just to those who apply and fit into state-developed criteria. This represents the state acting as a caretaker of a level competitive playing field, rather than as an active investor in specific companies. (The other incentives, the $1,168,000 is the state acting as active investor.)
What is most troubling about this forgivable loan and the state incentive package is that it isn’t necessary in this case. Commissioner Richard Ranzau participated in a tour of the Johnson facility, and he says that company officials said the jobs were coming to Wichita no matter what, in Ranzau’s assessment.
And in response to a question by Commissioner and Chair Dave Unruh as to where else the jobs could go, Ranzau reported the answer was that Wichita is the only place that made sense.
So the obvious question is: Why are we spending money on these subsidies when the company already has planned to move the equipment and jobs to Wichita?
Another issue involving the proposed forgivable loan to Johnson is the fact that, according to Ranzau, Commissioner Jim Skelton’s brother works for Johnson.
Under Kansas law, this fact alone does not establish a conflict of interest. Sedgwick County, apparently, does not have a code of ethics that covers situations like this.
CityEthics.org has a model ethics code that cities and counties might adopt. It states: “An official or employee may not use his or her official position or office, or take or fail to take any action, or influence others to take or fail to take any action, in a manner which he or she knows, or has reason to believe, may result in a personal or financial benefit, not shared with a substantial segment of the city’s population, for any of the following persons or entities …”
The code goes on to define sibling as a member of the class of persons to which this code applies.
If the county had a code of ethics like this, Commissioner Skelton would not be able to participate or vote on this matter. So while Kansas law does not require Skelton to step aside for this item, he certainly could do so on his own initiative, and he should.