Voice For Liberty

Tag: Subsidy

  • AirTran Subsidy Remarks

    Following are remarks I am delivering to several groups, including the Wichita City Council, in April 2005.

    AirTran Subsidy is Moving in Wrong Direction

    We were persuaded to accept the AirTran subsidy in 2002 as a temporary measure, to allow AirTran to build a presence here, and that the subsidy would no longer be needed at some time. But now we see that the situation is moving in the opposite direction, as AirTran asks for even a larger subsidy.

    Economic Impact Overstated

    The argument that many Fair Fares supporters make is flawed. They are grossly — I would say even speciously — overstating the importance of the airport to our local economy.

    As an example, Mr. Troy Carlson, then Chairman of Fair Fares, wrote a letter that was published on September 16, 2004 in the Wichita Eagle. In that letter he claimed $2.4 billion economic benefit from the Fair Fares program ($4.8 billion for the entire state). I was curious about how these figures were derived. Through correspondence With Mr. Steve Flesher, air service development director for the city of Wichita, I learned that the basis for them is a study by the Center for Economic Development and Business Research at Wichita State University that estimates the economic impact of the airport at $1.6 billion annually. In this study, the salaries of the employees of Cessna and Bombardier, because these companies use the airport’s facilities, are counted as economic impact dollars that the airport is responsible for generating.

    To me, this accounting doesn’t make sense on several levels. For one thing, if we count the economic impact of the income of these employees as belonging to the airport, what then do we say about the economic impact of Cessna and Bombardier? We would have to count it as very little, because the impact of their employees’ earnings has been assigned to the airport.

    Or suppose that Cessna tires of being on the west side of town, so it moves east and starts using Jabara Airport. Would Cessna’s economic impact on Sedgwick County be any different? I think it wouldn’t. But its impact on the Wichita airport would now be zero. Similar reasoning would apply if Cessna built its own runway.

    Or it may be that someday Cessna or Bombardier will ask Sedgwick County for some type of economic subsidy, and they will use these same economic impact dollars in their justification. But these dollars will have already been used, as they were attributed to the airport.

    It is a convenient circumstance that these two manufacturers happen to be located near the airport. To credit the airport with the economic impact of these companies — as though the airport was involved in the actual manufacture of airplanes instead of providing an incidental (but important) service — is to grossly overstate the airport’s role and its economic importance.

    To its credit, the WSU CEDBR study does provide some figures with the manufacturing employees excluded. The impact without the manufacturing employees included is estimated at $183 million, or about 11 percent of the $1.6 billion claimed earlier.

    Structural Changes in Airfares

    In the past few months, most American airlines have simplified their fare structures. Notably they have dramatically cut last-minute walk-up fares, which are the type of high fares that AirTran was supposed to provide an alternative to. In light of these structural changes in airfares, we do not know what would happen to airfares in Wichita if AirTran left.

    Fares to the West May Hold Clue

    Since AirTran doesn’t fly to the west, it may be that looking at westbound fares could give us a clue as to what eastbound fares would be in AirTran’s absence. I took three eastern cities (all served by AirTran) and three western cities and compared airfares for a Tuesday through Thursday trip booked two days in advance. The westbound tickets averaged $74 higher than eastbound — an increase, but not anywhere near the magnitude that subsidy supporters claim fares would rise by if AirTran leaves. I would welcome someone with more experience than me researching this.

    Subsidies Distort Markets

    The subsidy distorts the market process through which individuals and businesses decide how to most productively allocate capital.

    Subsidies Create Dependence on Government

    When government pays a subsidy to one company or industry, it creates an environment where others expect a subsidy, too. For example, we shouldn’t expect any other airline to start service to Wichita unless they receive a subsidy like AirTran does.

    Companies in other industries see local government as a source of subsidy, so they ask for subsidies to locate to Wichita. Even local established companies threaten to leave Wichita unless they receive subsidies. This creates an environment where, year after year, local governments make investment decisions for us instead of relying on the collective judgment of free market allocation of resources. This corporate welfare — which is what the AirTran subsidy is, plain and simple — is very harmful.

    Other Articles

    “The Downside of Being the Air Cap” by Harry R. Clements at wichitaliberty.org/wichita-government/the-downside-of-being-the-air-cap/. Mr. Clements’s article makes a striking conclusion as to why airfares in Wichita were so high.
    “Stretching Figures Strains Credibility” at wichitaliberty.org/wichita-news-media/stretching-figures-strains-credibility/. This article contains a link to the WSU CEDBR study.
    “Letter to County Commissioners Regarding AirTran Subsidy” at wichitaliberty.org/sedgwick-county-government/letter-to-county-commissioners-regarding-airtran-subsidy/
    “End Corporate Welfare, Starting with Industrial Revenue Bonds” at wichitaliberty.org/role-of-government/end-corporate-welfare-starting-with-industrial-revenue-bonds/

  • The downside of Being the Air Cap

    Harry R. Clements of Wichita contributed this article, which is a summary of a larger study he performed. Click here to read the full study in pdf format.

    Mr. Clements’s article makes a striking conclusion as to why airfares in Wichita were so high. I would be curious as to whether any of our government leaders have read the study. We should also ask why our government leaders are not performing research like this when they propose to spend large sums of taxpayer money.

    Wichita State’s Center for Economic Development and Business Research recently placed a guest article of mine on their website. It concerns a statistical study based on the level of air travel generated at Wichita’s Mid-Continent Airport compared to five other cities in the region, in which the data shows Wichita is ranked dead last, and an attempt to figure out why we do so poorly in this type of “competition.” It further questions whether our city’s substantial airline subsidy is worth the money spent. Since the article was written for consumption by professionals and is based on what might be considered obscure econometric techniques, it isn’t very suitable for reading by the lay readers of this paper. But I think the results are important enough that they should be seen by our town’s citizens, the decision making politicians that represent them, and the local media that should air such issues.

    The cities compared are Des Moines, Oklahoma City, Kansas City, Omaha, Tulsa and our own, over a recent six year period. The important factors affecting airline traffic generation were determined by slimming down a list obtained from the airline industry’s primary trade organization, the Airline Transport Association, with a couple of additions that together with theirs explain the greatest part of the differences in passenger results among these cities. These most important factors are population and per capita income (the more the better for these two) and a novel one, the number of pilots in the city’s population (in this case the lower the better). Wichita not only ranks next to last in population and income among the six — not favorable — but has an astounding more than twice the number of pilots, per capita, than the other cities’ which is really unfavorable. If Wichita were, so to speak, more like these other cities we could expect our airline passenger traffic to double. This is certainly a reason why other cities in our region do not have to rely on subsidies to generate their traffic.

    Wichita’s effort to maintain its aircraft industry and attract other high income new businesses — for instance bio-technology, but not call centers and specialty retailers — will tend to increase per capita income, and population, but is it possible for an airline subsidy to overcome that which comes with being the Air Capital of the World — a high concentration of pilots, with charter and corporate fleets available, able to fly people wherever they need to go? Should we, if we could figure out how, have a policy to decrease the number of pilots? That problem is the downside of being the Air Cap.

  • Letter to County Commissioners Regarding AirTran Subsidy

    March 18, 2005

    Board of Sedgwick County Commissioners

    Dear Commissioner:

    I am writing to explain my opposition to Sedgwick County funding the AirTran subsidy.

    My primary reason for opposing this subsidy is that it distorts the market process through which individuals and businesses decide how to most productively allocate capital.

    Aside from that, it seems to me that the argument that many Fair Fares supporters make is flawed. They are grossly — I would say even speciously — overstating the importance of the airport to our local economy.

    As an example, Mr. Troy Carlson, then Chairman of Fair Fares, wrote a letter that was published on September 16, 2004 in the Wichita Eagle. In that letter he claimed $2.4 billion economic benefit from the Fair Fares program ($4.8 billion for the entire state). I was curious about how these figures were derived. Through correspondence With Mr. Steve Flesher, air service development director for the city of Wichita, I learned that the basis for them is a study by the Center for Economic Development and Business Research at Wichita State University that estimates the economic impact of the airport at $1.6 billion annually. In this study, the salaries of the employees of Cessna and Bombardier, because these companies use the airport’s facilities, are counted as economic impact dollars that the airport is responsible for generating.

    To me, this accounting doesn’t make sense on several levels. For one thing, if we count the economic impact of the income of these employees as belonging to the airport, what then do we say about the economic impact of Cessna and Bombardier? We would have to count it as very little, because the impact of their employees’ earnings has been assigned to the airport.

    Or it may be that someday Cessna or Bombardier will ask Sedgwick County for some type of economic subsidy, and they will use these same economic impact dollars in their justification. But these dollars will have already been used, as they were attributed to the airport.

    Or suppose that Cessna tires of being on the west side of town, so it moves east and starts using Jabara Airport. Would Cessna’s economic impact on Sedgwick County be any different? I think it wouldn’t. But its impact on the Wichita airport would now be zero. Similar reasoning would apply if Cessna built its own runway.

    An article I wrote titled Stretching Figures Strains Credibility provides more information, including a link to the Center for Economic Development and Business Research study.

    I would be happy to speak to the County Commission as a group if you think they would be interested.

    I thank you for your time and consideration.

    Sincerely,

    Bob Weeks

  • Open letter to Wichita City Council regarding AirTran subsidy

    January 24, 2005

    Dear Councilmember:

    I am writing to express my concern about the upcoming renewal of the subsidy being paid to AirTran Airways. You may recall that I appeared before the Council last May and spoke in opposition to the subsidy. Since then I have learned more about the Fair Fares program.

    As an example, Mr. Troy Carlson, then Chairman of Fair Fares, wrote a letter that was published on September 16, 2004 in the Wichita Eagle. In that letter he claimed $2.4 billion economic benefit from the Fair Fares program ($4.8 billion for the entire state). I was curious about how these figures were derived. I learned that the basis for them is a study by the Center for Economic Development and Business Research at Wichita State University that estimates the economic impact of the airport at $1.6 billion annually. In this study, the salaries of the employees of Cessna and Bombardier, because these companies use the airport’s facilities, are counted as economic impact dollars that the airport is responsible for generating.

    To me, this accounting doesn’t make sense on several levels. For one thing, if we count the economic impact of the income of these employees as belonging to the airport, what then do we say about the economic impact of Cessna and Bombardier? We would have to count it as very little, because the impact of their employees’ earnings has been assigned to the airport.

    Or it may be that someday Cessna or Bombardier will ask the City of Wichita for some type of economic subsidy, and they will use these same economic impact dollars in their justification. But these dollars will have already been used, as they were attributed to the airport.

    My primary opposition to the AirTran subsidy is based on the superiority of free markets to government subsidies. But I believe that if the Council should consider a subsidy, it should have sensible information at its disposal. The arguments the Fair Fares supporters make seem to be based on an overextended assessment of the airport’s economic impact.

    I have written more about this in on my website “Voice for Liberty in Wichita” at wichitaliberty.org.

    Sincerely,

    Bob Weeks

  • End Corporate Welfare, Starting with Industrial Revenue Bonds

    “While corporate welfare has attracted critics from both the left and the right, there is no uniform definition. By TIME’s definition, it is this: any action by local, state or federal government that gives a corporation or an entire industry a benefit not offered to others. It can be an outright subsidy, a grant, real estate, a low-interest loan or a government service. It can also be a tax break — a credit, exemption, deferral or deduction, or a tax rate lower than the one others pay.” (Time Magazine, Nov. 9, 1998)

    States and localities aggressively compete with each other to see which can put together the grandest package of benefits to induce companies to locate there. Or, as becoming increasingly common, a company threatens to move away from a city or state unless it receives incentives. Often these incentives are given in the form of industrial revenue bonds. IRB supporters are quick to remind citizens that the local government is merely helping the company to borrow the money — it is not giving the bond money to the company. Therefore, it doesn’t really cost the taxpayers to offer these IRBs.

    In fact, issuing IRBs does cost local taxpayers. Here’s some information about IRBs in the City of Wichita. Quoting from the City of Wichita’s IRB Overview web page, located at http://www.wichitagov.org/Business/EconomicDevelopment/IRB/IRBOverview.htm:

    “IRB’s [sic] require a governmental entity to act as the ‘Issuer’ of the bonds, who will hold an ownership interest in the property for as long as the IRBs are outstanding. The Issuer leases the property to the business ‘Tenant’ on a triple-net basis for a term that matches the term of the IRBs, with lease payments which are sufficient to pay the principal and interest payments on the IRBs.”

    In my analysis, it is the City of Wichita that owns the financed property for the duration of the bond lifetime. What if the business fails? It appears that the city owns the property then, and is responsible for paying the remainder of the bond balance. So, the taxpayers of the city assume credit risk.

    Continuing from the same page: “The issuer can provide property tax abatement for up to ten years for property financed with IRBs.” The city, county, and state don’t receive property taxes from the business, yet they must provide services such as police and fire protection to the business. The cost of these services is born by the rest of the taxpayers.

    Continuing further: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.” Again, the government does not receive tax revenue it would otherwise have received, if not for the IRBs. The remainder of the taxpayers must make up the difference.

    It appears, then, that issuing IRBs costs everyone but the firm that receives the benefits.

    There are other issues with IRBs and other forms of corporate welfare, importantly involving the disruption of the free market allocation of resources. When governments instead of markets act to allocate resources, resources are allocated unproductively. These points come from “Ending Corporate Welfare As We Know It,” a Cato Institute Policy Analysis by by Stephen Moore and Dean Stansel, May 12, 1995, available at this url http://www.cato.org/pubs/pas/pa225.html:

    1. Government is not good at picking winners and losers. “The function of private capital markets is to direct billions of dollars of capital to industries and firms that offer the highest potential rate of return. The capital markets, in effect, are in the business of selecting corporate winners and losers. The underlying premise of federal business subsidies is that the government can direct the limited pool of capital funds more effectively than can venture capitalists and private money managers. But decades of experience prove that government agencies have a much less successful track record than do private money managers of correctly selecting winners.”

    2. Corporate welfare is very expensive considering the few benefits it produces. “Corporate welfare is supposed to offer a positive long-term economic return for taxpayers. But the evidence shows that government “investments” have a low or negative rate of return.”

    3. Corporate welfare rewards those companies who look to government for help, rather than concentrating on satisfying market needs. “Business subsidies, which are often said to be justified because they correct distortions in the marketplace, create huge market distortions of their own. The major effect of corporate subsidies is to divert credit and capital to politically well-connected firms at the expense of their politically less influential competitors. Those subsidies are thus inherently unfair.”

    4. “Corporate welfare fosters an incestuous relationship between business and government.”

    5. Many corporate welfare programs increase the costs to consumers. Trade restrictions do this. Subsidy programs may reduce the cost to a small few at the cost of everyone else. Tax breaks increase the tax burden for those who don’t receive the breaks.

    6. “The most efficient way to promote business in America is to reduce the overall cost and regulatory burden of government. Corporate welfare is predicated on the misguided notion that the best way to enhance business profitability in America is to do so one firm at a time. But a much more effective way to enhance the competitiveness and productivity of American industry is to create a level playing field, which minimizes government interference in the marketplace and substantially reduces tax rates and regulatory burdens.”

    7. “Corporate welfare is anti-capitalist. Corporate welfare converts the American businessman from a capitalist into a lobbyist.” What a sad waste of time and effort — courting politicians instead of developing products and services the market wants.

    I disagree with the Cato analysis on one point. The analysis states: “Nonetheless, we reject the notion that allowing a company to keep its earnings and pay less in taxes is somehow a ‘subsidy.’” I, however, contend that reducing a company’s taxes is the same as giving them money outright, as the impact on the bottom line is the same. I do agree with Cato that it is better if firms and individuals pay less taxes rather than more. But often corporate welfare measures like industrial revenue bonds are given to one company at the exclusion of its competitors. This, whether it is giving money to a company or reducing its taxes, is unfair to the company’s competitors. It is a distortion of the free market allocation of resources.

    Supporters of corporate welfare claim that we in the United States must subsidize our corporations because other countries subsidize theirs. But the more corporate welfare we have, the more we have a socialized economy, and the more we become like European economies. This we do not want.

    Other corporate welfare supporters claim that without incentives, businesses will not invest and create jobs. First, if taxpayers did not have to bear the cost of providing incentives, we would have more money to spend and invest ourselves as we see fit, not as politicians desire. Second, and most important, if a company does not believe in itself strongly enough to invest its own capital in itself, or if the capital markets have decided not to invest in a company, why should the taxpayers then have to invest in the company? It would seem like the taxpayers get to make only the most unproductive investments.

    Finally, if we in Wichita or Kansas were to stop issuing IRBs and other forms of incentives, we would place ourselves at a disadvantage in competing with other states and cities. Therefore, I believe that the leadership to stop these types of corporate welfare incentives must start in Washington, so that it is ended nationwide. Then, localities can compete for jobs in meaningful ways.

  • Remarks to City Council, May 11, 2004, Regarding AirTran Airways Subsidy

    I delivered these remarks to the Wichita City Council as they were preparing to vote on extending AirTran Airway’s subsidy for another two years. The extension passed with only one dissenting vote.

    Mr. Mayor, Members of the Council:

    I speak today in opposition to the continuation of the subsidy the City is paying to AirTran Airways.

    There are several reasons why I believe this subsidy should not be continued. The primary reason is that the subsidy, since it is paid to one company and one company only, is not fair to the other companies. Yes, it is true that fares are lower. But is that a legitimate reason to enrich one company at the expense of others?

    If creating an environment of unfair competition is good and correct, why should we not do this in other markets?

    If we feel that gasoline prices are too high, why not select a chain of gasoline stations and pay it a subsidy so that it could lower its prices?

    If we feel that a chain of grocery stores has too much market power and their prices are too high, why not create and subsidize stores to compete with them?

    If we feel that the commissions that real estate companies charge are too high, why not pay one of Wichita’s major firms a subsidy so that they could reduce their commissions?

    Let us all hope, then, that we do not find ourselves running, or being an employee of, a business whose prices the City believes are too high.

    But the situation is even worse. Through the Fair Fares program, the City has organized the potential customers of the subsidized business to ensure that they purchase from it. For the companies that pledged to Fair Fares: How would they feel if the government started a public body for the purpose of organizing their customers, and then used its powers of persuasion to compel them to buy from a competitor at the same time the City is subsidizing the competitor?

    All of this is in direct opposition to the American principles of limited government, individual liberty, and fair markets.

    The distortion of the market that the subsidy creates has another aspect: By creating an environment of unfair competition, we make it unlikely that any airline will consider starting service to Wichita unless they too receive a subsidy.

    If the Council feels that we must subsidize an airline, consider this alternative: why not subsidize one of the other established airlines, one that that flies to many destinations? Or, why not rotate the subsidy every year to a different airline? After all, if fares can be lowered if any airline reduces their fares, it shouldn’t matter which airline does it.