Coyote Blog

I have written many times about my frustration with cronyist business relocation incentives handed out by most local and state governments.  I have always considered these government incentives to be insanely unproductive spending, often taking taxpayer money to move a company as little as a few miles to get it over some artificial border.  One issue I have not considered in these critiques is whether the sorts of companies selected for relocation are really in the long-term interest of the local community at all.

Almost by definition, most relocation subsidies go to large, well-known companies.  This is for a couple of reasons.  First, large companies have the clout to lobby and demand such subsidies, clout smaller businesses do not have.  Second, politicians are handing out these subsidies in order to get re-elected.  The actual product of these subsidies is a press release and a blurb on the politician's campaign website.  A press release saying that your faithful governor has gotten Joe Smith's Widgets to move to Arizona is a lot less powerful than saying he got a branch of General Electric to move to Arizona.  In fact, the sexier the name the better, which is why politicians fall all over themselves to get Google and Apple and Tesla to come to town (despite the fact that in my observation, it is the staid old companies like Honeywell and Wells Fargo and such that tend to invest a lot more in their local communities).   We have a plant in the Phoenix area that has already had two subsidized sexy companies in it (First Solar and an Apple screen manufacturing partner) and now is empty yet again waiting for the next sexy crony.  Apparently, the state has agreed to subsidize Apple again to use it for a data center, though the move-in may be delayed as there was a large fire at the building when the solar panels on the roof caught fire.  Three sexy press releases for Arizona politicians for the same building!

Anyway, I was thinking about this when I read the piece below from Scott Sumner

This reminded me of a very interesting study that compared two cities in Michigan, Flint and Grand Rapids:

In 1946, sociologist C. Wright Mills and economist Melville Ulmer concluded the fortunes of two of Michigan's largest cities, Flint and Grand Rapids, were headed in opposite directions.Seventy years later, their predictions are getting new notice from academics.

The researchers warned Flint was overly dependent on its big employers even though its workers made 37 percent more than the national average at the time.

The warning seemed out of place. By 1950, Flint was labeled "the happiest city in Michigan" and the "epicenter of the American Dream," thanks to its thriving auto industry.

Grand Rapids, whose economy was defined by its numerous small businesses, was less flashy. But it offered its citizens more mobility and opportunity for its middle class that would help it survive tough times, the researchers concluded.

Flint was still booming in the late 1960s, so it looked like this 1946 prediction was wrong. But then the prediction suddenly came true. Flint's metro population fell from 445,589 in 1970 to 410,849 in 2015. In contrast, Grand Rapids has been booming, with its metro population soaring from 539,225 in 1970 to 1,038,583 in 2015. And both of these places are in the rustbelt state of Michigan.

How the recent "fairness" tax bill became a vehicle for subsidizing connected corporations.

Baucus' Finance Committee passed a bill in August extending 50 expiring deductions and credits for favored industries. At Obama's insistence, the Baucus bill was cut and pasted word for word into the cliff legislation. Set aside for a moment how this contradicts Obama's talk about "fair shares" and the need to diminish the influence of lobbyists, and look at what this raft of tax favors shows us about the Baucus Machine.

Pick any one of the special-interest tax breaks extended by the cliff deal, and you're likely to find a former Baucus aide who lobbied for it on behalf of a large corporation or industry organization.

General Electric may have been the biggest winner from the cliff deal. GE makes more wind turbines than any other U.S. company, and it lobbied hard for extension of the wind production tax credit. But more important for the multinational conglomerate was an arcane-sounding provision that became Section 222 of Baucus' bill and then Section 322 of the cliff bill: "Extension of subpart F exception for active financing income."

In short, this provision allows multinationals to move profits to offshore financial subsidiaries and thus avoid paying U.S. corporate income taxes. This is a windfall for GE: The exception played a central role in GE paying $0 in U.S. corporate income tax in 2011 when it made $5.1 billion in U.S. profits.

Peter Prowitt, formerly Baucus' chief of staff, is now an in-house lobbyist and VP at GE. GE filings show Prowitt on the lobbying teams that won wind-tax credits, electric-vehicle tax credits, and "Extension of Subpart F Deferral for Financial Services."

The examples in the article go on and on.  The best way to get rich in America is not to have a great idea or work hard but to hire an ex-staffer from Senator Baucus's office.

This is just nuts.

Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.

The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.

General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.

Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.

Kentucky, where I have operated for over 10 years, seems to be the originator of this silliness.  I have always wondered why there is not an equal protection issue with such subsidies given to a chosen few companies but not to others.

I wrote years ago about such relocation subsidies being a prisoners dilemma game:

I hope you can see the parallel to subsidizing business relocations (replace prisoner with "governor" and confess with "subsidize").  In a libertarian world where politicians all just say no to subsidizing businesses, then businesses would end up reasonably evenly distributed across the country (due to labor markets, distribution requirements, etc.) and taxpayers would not be paying any subsidies.  However, because politicians fear that their community will lose if they don’t play the subsidy game like everyone else (the equivalent of staying silent while your partner is ratting you out in prison) what we end up with is still having businesses reasonably evenly distributed across the country, but with massive subsidies in place.

To see this clearer, lets take the example of Major League Baseball (MLB).  We all know that cities and states have been massively subsidizing new baseball stadiums for billionaire team owners.  Lets for a minute say this never happened – that somehow, the mayors of the 50 largest cities got together in 1960 and made a no-stadium-subsidy pledge.  First, would MLB still exist?  Sure!  Teams like the Giants have proven that baseball can work financially in a private park, and baseball thrived for years with private parks.  OK, would baseball be in the same cities?  Well, without subsidies, baseball would be in the largest cities, like New York and LA and Chicago, which is exactly where they are now.  The odd city here or there might be different, e.g. Tampa Bay might never have gotten a team, but that would in retrospect have been a good thing.

The net effect in baseball is the same as it is in every other industry:  Relocation subsidies, when everyone is playing the game, do nothing to substantially affect the location of jobs and businesses, but rather just transfer taxpayer money to business owners and workers.

The arch-corporate-statist  -- and official manufacturing company of the Obama Administration is feeding at the trough again.  Apparently a perfectly profitable company cannot buy assets from another profitable company without a large subsidized loan from taxpayers.  In this case, the Obama Administration is funding the KCS in its purchase of 30 new locomotives from GE.  The Obama Administration has recently doubled-down on its backing of the US Ex-Im bank, which has been helping to fund Boeing aircraft sales to foreign airlines (each of which, surprise!, has a couple of GE engines on it).

GE knows how this political game is played, with resources allocated based on quid pro quo.  Just the other day, GE announced that it would help bail out Obama and Government Motors buy mandating that all its company vehicles be Chevy Volts, in effect committing to buy more Volts than Chevy sold to consumers all last year.  Of course, the circle has no end, so in turn GE will be rewarded with $90,000,000 in government subsidies for its 12,000 Chevy Volts, a number that could increase to $120 million if Obama's proposal to increase the per car subsidy is accepted.

By the way, the Obama Administration has criticized oil companies like Exxon-Mobil for earning excessive profits and getting overly large tax breaks.  In 2010, Exxon paid a whopping 40.7% of its income in taxes ($21.6 billion in taxes on $53 billion in profits).   In the same year, Obama subsidiary General Electric paid 7.4% of profits in taxes.

This is the kind of story I always thought typical of corporate states like France. It is sad to see this happening so frequently in the US

Recently, President Obama selected General Electric CEO Jeffrey Immelt to chair his Economic Advisory Board. GE is awash in windmills waiting to be subsidized so they can provide unreliable, expensive power.

Consequently, and soon after his appointment, Immelt announced that GE will buy 50,000 Volts in the next two years, or half the total produced. Assuming the corporation qualifies for the same tax credit, we (you and me) just shelled out $375,000,000 to a company to buy cars that no one else wants so that GM will not tank and produce even more cars that no one wants. And this guy is the chair of Obama's Economic Advisory Board?

This is the classic kind of cozy relationship between large industrial corporations and government that has been a feature of European states for years.

This story is from the WSJ, and gets extra bonus points for including the poster-boy of the corporate state, Jeffrey Immelt

Treasury and OMB singled out an 845-megawatt wind farm that the Energy Department had guaranteed in Oregon called Shepherds Flat, a $1.9 billion installation of 338 General Electric turbines. Combining the stimulus and other federal and state subsidies, the total taxpayer cost is about $1.2 billion, while sponsors GE and Caithness Energy LLC had invested equity of merely about 11%. The memo also notes the wind farm could sell power at "above-market rates" because of Oregon's renewable portfolio standard mandate, which requires utilities to buy a certain annual amount of wind, solar, etc.

But then GE said it was considering "going to the private market for financing out of frustration with the review process." Anything but that. The memo dryly observes that "the alternative of private financing would not make the project financially non-viable."

Oh, and while Shepherds Flat might result in about 18 million fewer tons of carbon through 2033, "reductions would have to be valued at nearly $130 per ton CO2 for the climate benefits to equal the subsidies (more than 6 times the primary estimate used by the government in evaluating rules)."

So here we have the government already paying for 65% of a project that doesn't even meet its normal cost-benefit test, and then the White House has to referee when one of the largest corporations in the world (GE) importunes the Administration to move faster by threatening to find a private financial substitute like any other business. Remind us again why taxpayers should pay for this kind of corporate welfare?

First, the moment GE said that this could be financed privately, the Feds should have said "then what the f*ck are you talking to us for? Get out of here."  By the way, privately probably does not mean privately -- it probably means going to private banks or investors who in turn access many of the same taxpayer funds.

Second, its amazing that the threat to finance this privately rather than sponging off taxpayer funds is treated as a threat by the Obama Administration.  They desperately want to "take credit" for the project and can only do so by spending our money  (this is the same impulse that propels politicians who have never given a dime to charity to want to spend taxpayer money in order to be called "caring.")

The reaction by the left to the Supreme Court decision yesterday overturning speech limitations on corporations seems tremendously hypocritical.  No one seems to complain on the left when certain groups/corporations (call them "assembly of individuals") get special access to the government and policy making.  Jeffrey Immelt and GE, Goldman Sachs, the SEIU, and the UAW all get special direct access to shape legislation in ways that may give special privileges to their organization -- access I and my company will never have.

Deneen Borelli wrote, in response to Keith Olberman's fevered denunciations of free speech for corporations

"It also seems as if the pot is calling the kettle black. MSNBC is currently owned by General Electric. GE Capital was bailed out by the taxpayers. GE CEO Jeff Immelt is a close advisor to President Obama, and GE would profit from Obama policies such as cap-and-trade. Olbermann has served as a cheerleader for all of this. Are Immelt and Olbermann simply afraid to allow others to possibly gain the attention and influence GE has had all along?"

Here is an example -- has the health care bill considered my company's situation, where we have 400 seasonal workers, almost all of whom are over 70 and on Medicare already?  How, in these circumstances, do we offer health care plans?  Are we relieved of the penalty for not offering a plan if they are on Medicare or a retirement health plan already?  The legislation does not address these issues (see Hayek) and I am sure numerous others, but I will never be able to cut a special deal for my workers or my industry as GE or the UAW have.

Further, corporate paid speech is alive and well in this administration, you and I just can't see it.  Lobbyists are all having record, banner, unbelievable revenues, in large part because the government is putting such a large chunk of the economy in play for forced redistribution and everyone who can afford it is paying to influence the process.

But nothing in any of the good government reforms have (rightly) ever put any kind of restrictions on this kind of speech directly to legislators.  The only speech they limit is speech to the public at large.  In effect, McCain-Feingold said that it is just fine to spend gobs of money speaking directly to us government folks, but try to go over our heads and talk directly to the unwashed masses, well, we have to make that illegal.  Far from tilting the balance of power to a few rich elite firms, the recent Supreme Court decision gives new power to the rest of us who don't have privileged access.

Update: Speaking of hypocrisy, the NY Times Corporation is outraged other corporations have been given the same rights it has had all along.  In a sense, the Times is lamenting their loss of a monopoly.

Update #2: Ilya Somin:  Corporate speech is actually an equalizer for far worse inequalities of political influence and access that already exist.

Just the other day, I made the point that just because regulated corporations support a regulation does not mean that said regulation is sensible or good for the economy.  Often, incumbents are beneficiaries of industry regulation, which tends to give them certain advantages over new entrants.  I showed an example with General Electric and the new energy bill regulating light bulbs:

we see that GE has a product sitting on the shelf ready for release
that fits perfectly with the new mandate.  Assuming competitors don't
have such a technology yet, the energy bill is then NOT a regulation of
GE's product that they reluctantly bow to, but a mandate that allows GE
to keep doing business but trashes their competition.  It is a market
share acquisition law for GE.

Marlo Lewis makes a similar point, this time in relation to cap and trade systems:

I can't count how many times I've heard that line of
chatter"”and from people who usually assume anything corporations are
for must be bad!

 

There are many reasons some corporations
support cap-and-trade, or at least say nice things about it in public.
Some companies seek the PR value from looking green....

 

But in the case of energy companies, many who support
cap-and-trade do so in the expectation that they'll get a boatload of
carbon permits from the government"”for free!

 

Permits represent an artificial, government-created
scarcity in the right to produce energy. The right to produce energy is
very valuable, especially where government restricts it. The tighter
the cap, the more valuable each permit traded under the cap.