Coyote Blog

Phoenix businesses add hundreds of jobs every week.  However, the only jobs that every get subsidized are in sexy businesses.  That is because the subsidies themselves make zero sense, from an economic or public policy standpoint.   The point is not to create jobs, but to create press releases and talking points for politicians and their re-election campaigns.

And there is little that is sexier to politicians spending taxpayer money to get themselves re-elected than solar and Apple computer.  Which brings us to this plant in Mesa (a suburb of Phoenix), which I am calling the Graveyard of Cronyism.

This plant was built by First Solar to build solar panels.  I would have to quit my day job and work full-time to figure out all the ways this plant was subsidized by taxpayers -- special feed-in tariffs for First Solar customers, government tax breaks for solar panel purchases, direct government subsidies and grant programs for solar panel purchases, the DOE loan guarantee program for solar... etc.  In addition, the City of Mesa committed $10 million in infrastructure improvements to lure First Solar to the site.  I can't find what economic development incentives there were but there must have been tax abatements.  In addition, the company was promised a further $20 million in economic development funds from the County, but fortunately (unlike most such deals) the funds were tied to hitting employment milestones and were never paid.  First Solar never produced a single panel at the plant before it realized it had no need for it.

More recently, Apple and sapphire glass manufacturer GT Advanced bought the empty plant from First Solar.  And again there was much rejoicing among politicians locally.  Think of it -- Two great press release opportunities for politicians in just three years for the same plant!  I never feel like we get the whole story on the development deals offered for these things but this is what we know:

Brewer and the Arizona Legislature approved tax breaks related to sales taxes on energy at manufacturing plants. The state also put the Apple/GT plant into a special tax zone that pays a 5 percent commercial property tax rate. Most Arizona companies pay a 19 percent rate this year and an 18.5 percent next.

[In addition,] Apple was slated to received [sic] $10 million from the Arizona Competes Fund for the Mesa factory. The Arizona Commerce Authority — the privatized state economic development agency which administers the $25 million sweeten-the-deal fund along with Gov. Jan Brewer — said neither Apple nor GT Advanced (Nasdaq: GTAT) have received any money.

Well, it turns out that artificial sapphire sounds really cool (a pre-requisite for crony deals) but it is not so great for cell phones.  Apple went another way and did not use the technology on iPhone 6 -- not just for timing reasons but because there are real issues with its performance.

So a second crony buys the plant and does not even move in.

What's next?  I am thinking the best third tenant at the sexy-crony nexus would be an EV battery plant, or even better yet Tesla.  It is too bad Fiskar motors went out of business so soon or they would be the perfect next crony fail for this site.

When I read this in our local paper, alarm bells immediately went off:

A friendship cemented while working together on the state’s economic development efforts has led to a new partnership linking Roy Vallee, the former Avnet Inc. chairman and chief executive officer, with private developer Don Cardon.

Great, two folks who have focused on bringing crony corporatist benefits to selected local businesses and business relocations are going into business together.  I don't know these guys, I am sure they are fine folks, but my first thought was a business that leveraged their connections with government to create private profits.

Reading further, this seems like a good guess:

The two metro Phoenix business leaders say they will collaborate on large commercial developments, including those with a special public-interest focus and those with special complexities....

Cardon spent three years at the Arizona Commerce Authority, a public-private partnership, and the predecessor Arizona Commerce Department. Aside from that, he perhaps is best-known as a driving force behind CityScape, the three-block, $1.2 billion mixed-use development in downtown Phoenix. He cites as a strength his ability to bring private and public interests together on a project.

Yep, I definitely think I am on to something:

The firm will strive to encourage a “collective vision” and “make sure projects are worthy of investment and will be successful,” Cardon said. “Everything we do will involve public value, enriching the quality of life.”

You know the type of project -- the ones where the city / state / Feds justify investing millions of taxpayer money into private projects because "they create jobs" (like those at Solyndra).  In fact, the two partners are already polishing up this mantra, which I am sure we will hear over and over:

Deals typically will exceed $100 million and will create hundreds of jobs, both in the development stage and when complete, he said. The company , however, will maintain a fairly lean staff.

“We’re not a big employer, but we’ll be a job creator,” he said.

I want to make a couple of quick points:

• Investments whose primary return is "jobs" are not investments, because jobs are a cost, not an income stream.  Investing public money to create jobs means that one is investing money now so that it incurs costs later. 
• All successful capitalist enterprises that make  a profit by definition create "public value" and "enrich the quality of life."  Otherwise no one would buy their product or service and they would fail.  In fact, only publicly-funded projects can evade this sort of accountability.  When it is said that these projects deliver "public value," what is meant is that they deliver benefits that a few self-selected people have defined as somehow interesting to the public, but which it turns out the public (when given a choice) is unwilling to pay for.  Which is how we get the local town of Glendale continuing to subsidize an ice hockey team for $25 million or so a year.

No, not the Affordable Care Act, though we need to get rid of that, too.  In this case I am talking about the Arizona Commerce Authority.  This is one of those ubiquitous local / state "development" efforts that mainly consists of handing out corporate welfare to a few well-connected companies who threaten to leave or build their new plant somewhere else.

Dru Stevenson at the Privatization blog has been nice enough to invite me to blog from time to time over at his place, despite the fact that we do not always agree.  But we are in total agreement on this effort:

Even from a conservative, free-market perspective, government subsidies for businesses distort markets, foster monopolies, undermine competition, and reduce efficiency.  The same complaints that business advocates make about the welfare system apply to government programs to help businesses - the vicious cycle of dependence, the lack of incentive to work hard or face difficult choices, the inevitable favoritism (some businesses get taxpayer subsidies, others miss out, and those that do have an unfair advantage over competitors who might otherwise win in a free marketplace).  It has a chilling effect on market-driven innovation, improvements in efficiency, or "creative destruction." The subsidies can cause inflation as the local market prices correct for the infusion of unearned money. The inherent risks in entrepreneurship get externalized onto taxpayers rather than internalized by those who hope to reap the profits if they get lucky.  The conflict-of-interest problem is not just that the businessmen will engage in whitewashed embezzlement, diverting funds to their own businesses or friend's businesses (or to their suppliers, in hopes of getting discounted inputs).

The problem is also that other firms - firms that might be more efficient, providing better goods and services at lower cost - face higher entry barriers when the existing holders of market share are bolstered by government handouts.  In other words, I see little difference in the morality of handouts for poor individuals/families and handouts for businesses.  There is a spiritual virtue in helping the poor, of course, but also a virtue in helping those who are hard-working and who have made sacrifices to become successful.  The problem for me is the unintended consequences of government subsidies for entities that are supposed to compete and succeed in a free market.

I encourage you to check it all out.

The reason this made his privatization blog is that Arizona has actually privatized this function to an independent business group.  Though an advocate of privatization in many realms, this makes me queasy for a couple of reasons:

• I can't get excited about privatizing an activity that should not be occurring, or is, as Stevenson so ably explains, actually detrimental
• I am comfortable privatizing operational things -- landscaping, running buildings, cleaning bathrooms, etc -- but privatizing the handing out of political patronage is an odd one for me and I don't really know how to think about it.  On the one hand, this is essentially what the PPACA (Obamacare, the other ACA) is doing with difficult decisions like determining which procedures should be on the must-cover list for insurers by putting them in the hands of independent groups.  But I have criticized those provisions of the PPACA for lack of accountability, and I believe the same arguments apply here

The only quibble I have with the criticism of the Arizona group is that, like many criticisms of privatization, it does not actually make a comparison to government-run efforts.  Sometimes even mistake-riddled private efforts can be better than disasterous public management.  For example this criticism:

According to Arizona PIRG's report, only two of the 13 incentive programs even track how many jobs or other benefits they generate -- and none disclose that information publicly. For all its business-savvy rhetoric, the ACA can't demonstrate performance if it doesn't track results. Only one program publicly discloses what companies promise to deliver for their subsidies. Worse still, only 4 of the 13 programs even disclose which companies received subsidies or how much. And when companies that receive subsidies fail to deliver on promised economic development benefits, the ACA can reclaim taxpayer subsidies for only one program, and there is no way for the public to see if this ever happens.

None of this is good, but note that for most similar state-run development programs, the number of programs that track their results is usually less than 2 in 13, the number is usually none.  And the fact that there is some sort of clawback provision on funds is better than exists in most state relocation and other subsidy programs.  In fact, most third-party reviews of state-run corporate relocation and plant location subsidy awards show that they universally fall well short of their pr0mised benefits, though this analysis is really hard to do because there is so little transparency in state activities of this sort.

My quibble, then, is that I am not sure the bad results here are a function of privatization or just the activity itself, as state-run efforts seem to do no better.

Update:  I have written before about government corporate subsidies and attempts at venture capital investment in the context of the "big shot" effect.  Many times I have come to suspect the biggest beneficiary of these programs is to the administrators themselves, who have no money of their own and wouldn't ever be trusted to manage a private portfolio but get to act as "big shots" with other peoples' money.  They get the psychic benefit of being little junior Donald Trumps.  This seems especially evident to me with Glendale, AZ, but seems to be an element of all these schemes.