Coyote Blog

Forbes produces an annual list of the market value of various sports franchises.  If I were a grad student, a great study would be to try to figure out what percentage of these valuations came from public funds (free stadiums, tax abatements, direct subsidies, etc).  I bet the number would be high.

In the case of the Phoenix Coyote's hockey team, the percentage would actually be over 100%.   The team is worth barely $100 million, at best, but has received hundreds of millions in subsidies.  About 13 years ago the city of Glendale, AZ (pop: 250,000) built them a $300 million stadium.  Almost immediately after that, the team started to threaten to leave, and the pathetic city of Glendale city counsel voted subsidy after subsidy, paying the team $10 million a year in direct subsidies.  When the Goldwater Institute successfully sued to end this practices, the city found creative ways to hide the subsidy, for example giving the team a management contract for the stadium whose price was inflated by the amount of the subsidy (the contract was for $15 million a year but when it was finally competitively bid, it came in at $5 million).

After all that, the team apparently has no shame is coming back to the trough yet again:

The Arizona Coyotes and National Hockey League Commissioner Gary Bettman on Tuesday threatened to move the franchise out of Arizona if the Legislature does not approve $225 million in public financing for a new arena in downtown Phoenix or the East Valley.

Bettman sent a three-page letter to state Senate President Steve Yarbrough and House Speaker J.D. Mesnard encouraging them to push through a public-financing bill that is stalled in the Senate amid a lack of support from lawmakers. The struggling NHL franchise wants out of Glendale, saying it's not economically viable to play there even though that West Valley city financed its 13-year-old Gila River Arena specifically for the Coyotes.

"The Arizona Coyotes must have a new arena location to succeed," Bettman wrote. "The Coyotes cannot and will not remain in Glendale."

Good God, what brass!

Postscript:  I was immediately embarrassed to see that I had use maw's instead of maws.  I make stupid grammar mistakes but this generally is not one of them I make that often.  Unfortunately, on the road, I had no way to fix it. Fixed now.

I am always amazed that the media will credulously run stories against "corporate welfare" for oil companies (which usually mostly includes things like LIFO accounting and investment tax credits that are not oil industry specific) but then beg and plead for us taxpayers to subsidize movie producers.

I wish I understood the reason for the proliferation of government subsidies for film production.  Is it as simple as politicians wanting to hobnob with Hollywood types?  Our local papers often go into full sales mode for sports team subsidies, but that is understandable from a bottom-line perspective -- sports are about the only thing that sells dead-tree papers any more, and so more local sports has a direct benefit on local newspapers.  Is it the same reasoning for proposed subsidies for Hollywood moguls?

Whatever the reason, our local paper made yet another pitch for throwing tax dollars at movie producers

Notwithstanding a recent flurry of Super Bowl-related documentaries and commercials that got 2015 off to a good start, Arizona appears to be falling behind in a competitive and lucrative business. The entertainment industry pays well, supports considerable indirect employment and offers the chance for cities and states to shine on a global stage.

Seriously?  I am sure setting up the craft table pays better than catering a party at my home, but it is a job that lasts 2 months and is then gone.  Ditto everything else on the production.   And I am sick of the "shines on the world stage thing."  Who cares?  And is this really even true?  The movie Chicago was filmed in Toronto -- did everyone who watched Chicago suddenly want to go to Toronto?  The TV animated series Archer gets a big subsidy from the state of Georgia.  Have they even mentioned Georgia in the series?  Given the tone of the show, would they even want to be mentioned?

When government subsidizes an industry, it is explicitly saying that resources are better and more productively invested in the subsidized industry than in other industries in which the money would have been spent in a free market.  Does the author really have evidence that the money I would have spent to improve the campgrounds we operate in Arizona is better taken from me and spent to get a Hollywood movie shot here instead?  Which investment will still be here 6 months from now?

Arizona is one of 11 states that don't offer tax incentives, primarily in the form of income-tax credits, and that's the core of the problem. There's also no state film office to help out-of-state crews obtain filming permits, locate vendors, hire temporary staff and so on.

Arizona's tax incentives expired after 2010 and the film office closed in the wake of a recession that hit the state especially hard and necessitated tough spending choices. Although bills to revive those programs have been introduced, they're not given high odds of success in the current session as the governor and lawmakers struggle to close $1.5 billion in deficits over this year and next.

"Right now, there's nobody to call, the phone isn't being answered and nobody responds to e-mails," said Mike Kucharo, a local producer and director who serves as the state-government liaison for the Arizona Production Association, an entertainment trade and networking group. "We need a film office."

Yeah for us!  While all the lemmings in other states bid up the price of a few politicians being able to get their picture with Hollywood types on a production set, we have chosen not to play.  Good for us.  Only an industry insider clown with a straight face could say that we need a taxpayer-funded film office.  Really?  Do we need a taxpayer-funded florist office to attract flower sales?

Years ago I wrote an article calling sports team subsidies a prisoners dilemma game, where the only winning move was not to play.  The NFL has 32 teams, mostly in the largest cities.  Without subsidies the NFL would have ... 32 teams, mostly in the largest cities, and taxpayers would have saved billions of dollars.  The same is true for film:

Indeed, the number and size of incentives escalated from just two states offering $2 million in combined incentives in 2003 to 40 states offering $1.2 billion just six years later, according to the Tax Foundation.

So subsidies have gone up by over a billion dollars a year, and yet roughly the same films are being made.  This is one of the best examples I can think of where politicians are using taxpayer money to increase their personal prestige.  The AZ Republic should be embarrassed they are out front actively encouraging this behavior.

Postscript:  For all of its flaws in teaching real-world relevant business topics, the Harvard Business School was very good, at least when I was attending it, at teaching business strategy.  My memory may be fuzzy here, but I am pretty sure that "40 other groups have all jumped into this activity and have ramped up their spending by a factor of 50 in just six years and all 40 competitors are really focused on winning almost irregardless of the price they pay" is not a very good pitch for investing money in a new field.

Postscript #2:  All of this is a wonton violation of the AZ state Constitution, though of course big government advocates are really good at totally ignoring Constitutional limits on government power.  Here is what our Constitution says:

Section 7. Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.

Update:  From the Manhattan Institute, film tax breaks return 30 cents for every dollar spent

Similar to most targeted tax breaks, movie production incentives routinely fail to deliver on the economic promises made by their proponents. Supporters frequently claim movie incentives create jobs and lead to net gains in tax revenue. However, data from several states find movie production incentives generate less than 30 cents for every lost dollar in tax revenue.

Providing tax breaks specifically to the film industry is an example of government working to choose winners and losers in the marketplace. States could attract almost any industry if they paid for a quarter to a third of its expenditures, but such a policy would be fiscally unsustainable. A better system would be to lower state tax rates for everyone, encouraging economic growth.

Film is a particularly poor industry to subsidize because it does not create long-term employment and other lasting economic benefits for states. Even though a well-made film might boost tourism, productions only offer short-term employment and the workers are highly specialized. Production and workers can easily move from one location to wherever better deals are offered.

Update #2:  The AZ Free Enterprise Club was on this last month

In Halbig, the DC Circuit argued that the plain language of the PPACA should rule, and that subsidies should only apply to customers in state-run exchanges.  I am going to leave the legal stuff out of this post, and say that I think from a political point of view, Obamacare proponents made a mistake not sticking with the actual language in the bill.  The IRS was initially ready to deny subsidies to the Federal exchanges until Administration officials had them reverse themselves.  When the Obama Administration via the IRS changed the incipient IRS rule to allow subsidies to customers in Federal exchanges, I believe it panicked.  It saw states opting out and worried about the subsidies not applying to a large number of Americans on day 1, and that lowered participation rates would be used to mark the program as a failure.

But I think this was playing the short game.  In the long game, the Obama Administration would have gone along with just allowing subsidies to state-run exchanges.  Arizona, you don't want to build an exchange?  Fine, tell your people why they are not getting the fat subsidies others in California and New York are getting.  Living in Arizona, I have watched this redder than red state initially put its foot down and refuse to participate in the Medicaid expansion, and then slowly see that resolve weaken under political pressure. "Governor Brewer, why exactly did you turn down Federal Medicaid payments for AZ citizens?  Why are Arizonans paying taxes for Medicaid patients in New Jersey but not getting the benefit here?"

Don't get me wrong, I would like to see Obamacare go away, but I think Obama would be standing in much better shape right now had he limited subsidies to state exchanges because

1. The disastrous Federal exchange roll-out would not have been nearly so disastrous without the pressure of subsidies and the data integration subsidy checks require.  Also, less people would have likely enrolled, reducing loads on the system
2. Instead of the main story being about general dissatisfaction with Obamacare, there would at least be a competing story of rising political pressure in certain states that initially opted out to join the program and build an exchange.  It would certainly give Democrats in red and purple states a positive message to run on in 2014.

So after spending billions to subsidize the construction and operation of wind farms, Britain has discovered that their output variability is a problem and that they produce too much of their power at night (issues many of us predicted long before they were built).  So now England is facing the policy choice of either a) paying wind farm owners to NOT product power or b) paying factory owners to switch their operations to night time.  Seriously.  For most areas, wind is among the worst possible electricity source.

First, as many of you may have guessed, the "massive cuts" in food stamps over the next 10 years proposed by House Republicans are basically just a modest reduction in their rate of growth.  All attempts to slow the spending growth in any government program will always be treated by the media as Armageddon, which is why government spending seldom slows (see: Sequester).

But I have been amazed through this whole deal that Republicans want to extract a pound (actually probably just an ounce or so) of flesh out of the Food Stamp program but explicitly left the rest of the farm bill with all of its bloated subsidies alone.  Henry Olson asks the same question at NRO.

I will add one other observation about food stamps that is sure to have just about everyone disagreeing with me.  Of late, Republicans have released a number of reports on food stamp fraud, showing people converting food stamps to cash, presumably so they can buy things with the money that food stamps are allowed to be used for.

Once upon a time, maybe 30 years ago in my more Conservative days, I would get all worked up by the same things.  Look at those guys, we give them money for food and they buy booze with it!  It must be stopped.  Since that time, I suppose I never really revisited this point of view until I was watching the recent stories on food stamp fraud.

But what I began thinking about was this:  As a libertarian, I always say that the government needs to respect and keep its hands off the decision-making of individuals.  If people make bad choices, paraphrasing from the HBO show Deadwood, then let them go to hell however they choose.  And, more often than not, it turns out that when you really look, people are not necessarily making what from the outside looks like a bad choice -- they have information, incentives, pressures, and preferences we folks sitting in our tidy Washington offices, chauffeured to work every day, may not understand.

So if we are going to give people charity - money to survive on when poor and out of work - shouldn't we respect them and their choices?  Why attach a myriad of conditions and surveillance to the use of the funds?  Of course, this is an opinion that puts me way out of the mainstream.  Liberals will treat these folks as potential victims that must be guided paternally, and Conservatives will treat them as potential fraudsters who must be watched carefully.  I think either of these attitudes are insidious, and it is better to treat these folks as adults who need help.

It would be impossible to trace all the ways taxpayer money ends up in the coffers of solar manufacturers like First Solar.  Most of First Solar's money has been made selling panels in Germany to solar plants that, by law, can rape electricity customers with prices 10-15x higher than the market price for electricity.  First Solar also benefits more directly from direct subsidies, loan guarantees, "retraining" subsidies and even government Ex-Im Bank loans to sell panels to itself.  While First Solar vehemently denies it is a subsidy whore, it is telling that when Germany began to cut its solar feed-in tariffs, First Solar's stock price fell from over $300 to around $20.  Just watch day to day trading of First Solar stock, it does not move on news about its efficiency or productivity, it moves on rumors of changes in government subsidies.

Let's look at one subsidy.  In 2010, the Obama administration gave First Solar a subsidy of $16.3 million, ostensibly to help open a new plant in Ohio.  But it is interesting that this private company, which apparently could only raise the $16.3 million it needed by taking it by force from taxpayers, had plenty of money to pay its CEO.  In the 13 months leading up to its $16.3 million taken from taxpayers, First Solar paid its new CEO $29.85 million!  

Rob Gillette, the ousted CEO of First Solar Inc., earned more than $32 million in compensation from the struggling company for his two years of service, according to a regulatory filing Wednesday.

Gillette came to First Solar from Phoenix-based Honeywell Aerospace in October 2009 and was fired by the Tempe-based solar company's board of directors in October 2011....

Most of his compensation came in the three months of 2009 that he worked, when his total compensation, including salary, bonus, stock and options awards and other perks, reached $16.55 million. In 2010 his total compensation was $13.3 million, and last year he earned $2.46 million, which consisted of $763,000 in base salary and a $1.7 million severance.

Yep, they can't scrape up $16.3 million of their own money for a factory but they can find $30 million to give to an unproven CEO they eventually had to ride out on a rail.

By the way, I don't know Mr. Gillette, but I was once an executive at Honeywell Aerospace for several years.  I can tell you that it's a great place to find an executive who is focused on process to manage large complex organizations in a relatively stable business where manufacturing, logistics, and schmoozing large buyers is important.  It is a terrible, awful place to seek an executive for a fast growing business that needs to rapidly shift business strategies and where grinding through the process gets the wrong answer 12 months too late.

When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries.   They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them.  But then I see this chart at Kevin Drum's site

Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes?  Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry?   In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry.  So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.

In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments.  Typically, politicians of both parties have advocated for the current rules to encourage investment.  Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas.  I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow.  I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions.  But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.

This is really weak.  Not to mention flawed.  Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made.  LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling).  Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.

By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.

Via the Thin Green Line

The number of farmers markets in the United States has skyrocketed from a measly 340 at the outset of the 1970s to more than 7,000 today, and, according to the USDA, sales of agricultural products directly from farmer to consumer brought in a whopping $1.2 billion in 2007.  [ed- this is a trivial portion of the US agricultural market, and hardly "whopping."]

But even though many markets have started accepting food stamps, critics still charge that they are only affordable for the haves, who are much more likely to have access to other fresh foods.

A new report from the Union of Concerned Scientists puts some holes in that theory. It says that modest public funding for a couple hundred otherwise-unsuccessful farmers markets could generate to 13,500 jobs over a five-year period.

I really do not have much time, so we will have to leave aside how government-forced reallocation of capital from current productive uses to subsidizing small and failing farmers markets will be a net source of employment.

I have another point - as it turns out, we already have highly efficient farmers markets that source produce from the world's agricultural regions best suited to a particular crop and bring them in a very efficient and low-cost way to consumers, taking advantage of scale economies where they exist.  They are called "supermarkets."   If you want crops that don't take advantage of our best chemical and genetic technology, that are grown locally rather than in optimal soils and climates, and are retailed in inefficient, undersized and often unprofessionally managed part-time markets, they are going to cost more.

As is typical, this has nothing to do with helping the poor.  This is about government subsidy of a particular set of lifestyle choices of aging middle class hipsters.

I have argued many times that publicly-funded stadiums are a huge part of sports profits and team valuations.  For example, here in Glendale AZ, the town's stadium subsidies represent over a third of the value of the Cardinals and almost 200% of the value of the Coyotes.

As some of you may know, the NBA is heading into a protracted labor negotiation, with both parties acknowledging that the economics of the game have turned against owners.  Henry Abbot at ESPN argues that a large part of that economic change has been increasing taxpayer reluctance to subsidize sweetheart stadium deals for teams

Public money for stadiums has become scarce, and I have to believe that's part of the owners' pleas for financial relief from players. Huge moneymaking buildings for free or cheap have been no small part of what makes owning a team a no-brainer. Now teams in need of stadiums -- like the Kings and whatever team may one day relocate to Seattle -- face tough economics. Getting either deal done requires some kind of miracle. And in that context, if you ever fantasized about a world where taxpayers didn't contribute so much to buildings -- even if it meant players earned a little less -- well, your time is now.

To his latter point, I hope he is right.

Spend a few nights listening to the news on TV, and you will quickly discover the one of the bedrock logical fallacies of political discourse:

If it's good, the government should subsidize it.  If it's bad, the government should ban it.  If outcomes are in any way perceived by any group to be sub-optimal, then the government should regulate it.  Anyone who opposes these bans, subsidies, and regulations must therefore be a supporter of bad outcomes, hate poor people, want people to get sick and die, etc.

Just last night, I was watching the local news (something I almost never do) and saw a story of one of those kids' bouncy houses that blew out of someone's backyard into a road.  There was a girl inside who was scared but unhurt  (after all, she was surrounded on six sides by giant airbags).   Of course the conclusion of the story was a call for more government regulation of tie downs for private backyard bouncy houses.  And those of us who think it's absurd for the government to micro-regulate such things, particularly after a single freak accident when no one was hurt -- we just want to see children die, of course.

Which brings me to this little gem in a local blog, which reflects a feeling held by many area sports fans.  Remember that I have supported the Goldwater Institute in their opposition to the city of Glendale giving a rich guy $200 million to buy our NHL ice hockey team and keep it here.    My (and I presume Goldwater's) motivation has been opposition to a huge government subsidy that equates to nearly $1000 for every man, woman, and child in Glendale.  This subsidy appears illegal under the Arizona Constitution.  But that is not how political discourse works.  We are not defending the Constitution, we just hate hockey (emphasis added)

If you believe Canadian newspapers, tonight's game against the Detroit Red Wings will be the Phoenix Coyotes last game in the desert.

Canadians like hockey. Judging by attendance at Coyotes games, Phoenicians don't (at least not enough to drive to west side), which is why Canadians are so optimistic that their beloved Winnipeg Jets will be returning to our overly polite neighbors to the north.

The Coyotes ended the season with the second worst attendance in the NHL. That, coupled with the Goldwater Institute's crusade to drive the team out of the Valley, is not helping the city of Glendale's attempt to keep the team.

A few facts to remember:

• As the article states, local residents have already voted with their feet, since the team has nearly the lowest attendance in the league despite going to the playoffs both last year and this year.  They have trouble selling out playoff games.
• The team has lost money every year it has been here.  It lost something like $40 million this year
• The team is worth $100 million here in Phoenix.  That is the going rate for warm-market teams.  The buyer is willing to pay $100 million of his own money for the team.   So why is a subsidy needed?  The NHL insists on selling the team for $200 million or more.  Though it piously claims to want to keep hockey in Arizona, it is selling the team for price than can only be paid by buyers who want to move the team.
• The City of Glendale appears to have lied outright in selling this deal to the public.  In particular, it claimed the $100 million was not a giveaway, but a payment for the team's rights to charge for parking.  But many insiders say the City always retained this right, and it strains credulity that while losing money for seven years, the team would not have exercised this right if it really owned it.
• Glendale has only itself to blame, confounding an already difficult marketing task (ice hockey in the desert) by putting the stadium on the far end of a sprawling city.   The location is roughly the equivalent in terms of distance and relationship to the metropolitan area of moving the Chicago Blackhawks or Bulls stadium to Gary, Indiana.  The stadium ended up in Glendale because neither Tempe, Scottsdale, nor Phoenix was willing to make a $200 million, 30-year taxpayer-funded bet on the profitability of ice hockey.

Several days ago, I wrote how our local paper, the Arizona Republic, was engaging in a coordinated campaign to get the city of Glendale to subsidize the private purchase of our professional hockey team with a $200 million bond issue.  The logic of this is mainly to save the previous $180 million bond issue the city unwisely issued several years ago to build an arena for this same hockey time as well as the sweetheart commercial real estate deals it has cut adjacent to the stadium.   All in all, the city proposes to spend a cumulative $380 million of public money to hold on to an asset valued by third parties at $ 116 million.  And through all of this spending, taxpayers will end up with not a dime of equity in this asset.

At the time, I thought the campaign had been relentless, going on day after day with both editorials and news articles making cases to subsidize the team, and hammering the Goldwater Institute for actually questioning the legality of transaction.  I mean God forbid anyone would actually interpret the Arizona Constitution "gift clause" that says governments in the state cannot give money to private businesses as potentially barring Glendale from giving money to a private investor so he can buy the hockey team.

But when I called the campaign relentless, little did I know it would continue day after day through the rest of the week.  Every day we get a new article that is basically an editorial in disguise, with the opposing position, if included, down around paragraph 25.   Today's is just a masterpiece of such yellow journalism, which includes no opposing viewpoint at all, and includes this classic gem that is almost a caricature of itself:

Rick Myers and his wife have worked as part-time ticket-takers since 2004, the year after Jobing.com Arena opened and they visited for the first time.

"This arena is not brick and mortar, ice and air-conditioning. This arena is a family," he said.

Craig Van Kessel, a disabled military veteran, agreed.

He said six months after getting a job with the team, when he had major surgery, his co-workers called, sent cards and offered help. The team also donates prizes each year for a Western Amputee Golf Association tournament that Kessel helps organize.

If the team leaves, he said, it affects "us little people."

John Minor, a guest services employee, said he counts friendships among the fans he meets at the arena, while Kyle Olson, director of arena events, said he's taught his toddler to howl like a coyote.

Can I barf now?  Seriously, if you were doing a caricature of bad anecdotal arguments for a typical concentrated-benefits-diffuse-costs government program, could you do any better than this?  We are talking about $200 freaking million dollars here.

Nowhere in any of its editorials or news articles acting as thinly veiled editorials does the AZ Republic reveal that it is an enormously interested party to the transaction.  The Sports Section sells papers, and the presence of an additional major league franchise adds a hard to measure but most definite contribution to the paper's bottom line.

Postscript: The key issue that spurred this is that the city's bond issue is facing higher than expected interest costs.  The city and the AZ Republic are trying to lay the blame on this on Goldwater for stirring up bad karma.  But in fact there are at least six factors for why bond interest rates might be higher:

• The major bond ratings agencies recently put the city of Glendale on a credit watch list
• Sales tax revenues that pay for the bonds are way down in AZ and Glendale
• The city is investing $200 million in a $116 million dollar asset without getting any equity
• The city has a history of failed bond issues, as evidenced by the previous $180 bond issue they are trying to bail out with this one
• There is a general sense of wariness nationwide in government finances being overdrawn that may be spilling over into the bond market
• A local think tank has raised legal questions about the deal — legal questions that turned out to be correct in a parallel case.

Incredibly, our paper has spend over a week harping on just one of these, which to my mind seems the most trivial.

Postscript #2: And by the way, this team is in bankruptcy.  Where is the plan for how that will be avoided in the future?  Won't we be in the same spot five years from now, just with twice as much bond debt?

I return to an old favorite topic of mine this week, government subsidies for business relocation, in my column at Forbes.com.  An excerpt:

To see this clearer, lets take the example of Major League Baseball (MLB).  We all know that cities and states have for years been massively subsidizing new baseball stadiums for billionaire team owners.  Let’s 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.  Would baseball 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.  But would baseball be in the same cities?  Well, without subsidies, baseball would likely 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 might 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.

Next week I am on a panel talking about alternative energy.  These guys have already told me they don't want to re-fight the global warming science battle at this venue, and my guess is that there will be a lot of pragmatist corporate types who won't really care about individual liberty or role-of-government issues  -- they will only care if there is money to be made, even if it is by rent-seeking.  My best bet, I think, will be to discuss why alternative energy is a bad investment.  My sense is that it is a bubble investment, like goofy Internet stocks in the 1990's or housing in the 2000's.  Already, I think we see the crash in the corn ethanol business.

My two assumptions are

• I can't think of any industries that were initially heavily subsidized that eventually found their way to competing successfully and growing without subsidies.
• With the exception of agriculture, the public's tolerance for growing subsidies to a single industry eventually wanes.

I would love for commenters or emailers to send me contra-examples if they have them to either of these assumptions.  In particular, can you think of an industry that could not have grown initially without subsidies eventually prospering without subsidies.

To the second point, I looked at the numbers two ways.

1. In Germany, which is often held up as the model, feed-in tariff subsidies are between $0.06 (wind) and $0.50 (solar) a Kwh.  If the US reached a goal of 20% of its production in wind and solar (total production today is about 4000 billion KWh) then the subsidy would be between $50 billion and $400 billion a year.  It is hard to imagine these remaining popular for any period of time.  (lots of German numbers here and in the linked PDF)
2. Venture capitalists and investors are expecting the growth stocks they invest in to grow at, say, 30% a year.   Let's assume alternative energy companies grow at 30% a year and the number of companies, attracted to the growth and subsidies, doubles every two years.  In this scenario, assuming unrealistically that the supply curve for alternative energy is flat rather than upward sloping, the amount of subsidies to support this growth would have to nearly double every year.  They would increase 21-fold in five years and 440-fold in 10 years.   In fact, given the shape of real supply curves, new more expensive capacity at the margin is replacing cheaper and cheaper alternatives, resulting in the need to grow subsidies even faster to keep up.   Never has happened, never will.  Once the industry outgrows the government's willingness to grow subsidies, the whole thing crashes.

(PS - the subsidy could also be in the form of taxes that increase the cost of alternatives, or production and/or import restrictions on the alternatives).

Any help along these lines in the comments is appreciated.

Update: This seems relevant:

First Solar shares skidded 8% Friday to close at $116 after the company issued a murky business outlook beyond June. Until then, however, "orders look very strong," First Solar CEO Robert Gillette said in a post-earnings conference call.

This commentary, along with price pressure and expected subsidy cuts solar panel makers get from the German government is making investors a bit more wary of First Solar, whose shares have been on a bumpy ride the past 18 months....

First Solar, helped by government tax credits extended to businesses for using solar power, has rewarded its investors since going public in November 2006 at $20 a share. The stock peaked at $317 in May 2008. But the shares have been skittish ever since.

Germany, the world's biggest solar market, is weighing a 15% cut on so-called solar feed-in-tariffs. This could make solar installations less attractive.

First Solar projects 60% of its 2010 sales from German-related contracts, according to Wedbush Securities analyst Christine Hersey.

Remember from above, the German feed-in tariff for solar is around $0.58 per KwH, or fully $0.50 above the price paid for the fossil fuel base load.  At this subsidy level, the US would be paying $400 billion a year in subsidies and/or higher prices.

First Solar has grown at over 150% per year for the last 3 years so the 30% assumption above is conservative, as is the assumption about the number of competitors doubling every two years.

Another interesting note - First Solar makes a pre-tax margin around 33% of sales, which is over 6x larger than health insurance companies make (and are excoriated for).  Is it any wonder Germany no longer wants to keep subsidizing First Solar's bottom line to levels far above most equipment manufacturing companies.

Apparently our state government has been in another subsidy bidding war over a plant relocation, and fortunately it lost.  Why the state government pulls together Defcon 5 activity levels to bring 80 jobs to a town of 4 million is just beyond me.  But beyond my usual problems with subsidizing business relocation, which haven't changed from this post way back when I talked about relocation subsidies in the context of the prisoner's dilemma, I have three issues specific to our state's efforts to attract solar manufacturers:

1. I am constantly amazed at the strategic planning that says Arizona residents should pay more taxes to promote a solar manufacturing industry because, uh, we have a lot of sun.  That's roughly as logical as saying an FM radio maker should manufacture in NY City because they have a lot of radio stations.  I suppose you could argue it would reduce shipping costs to solar using areas, but I can't believe that shipping costs dominate since most of the panels we buy in this country originated in Japan or Germany.
2. Companies and industries that seek subsidies are like hot money in the investment world.  Even if you attract it today, they will jump next week to another location that offers them more.  We see it in this case, as AZ bought Kyocera's presence at one facility but can't afford the price to get them to build this new facility.
3. The state's approach defies all business strategy, and is making a typical novice investment approach.  Specifically, they are chasing the hot industry.  Everyone is bidding for solar plants, so the price goes way up.  This is why we have bubbles in housing and Internet, because people all pile into the same investment like lemmings.  If I were to run a government business relocation strategy (which I most certainly would never do) I would be focusing on boring stuff no one subsidizes.  We offered nearly 100% property tax abatement plus investment tax credits and can't get a solar plant.  Instead we should be up in business hostile states like CA and NY getting rubber stamp makers and garage door manufacturers.  Surely we could get 70 jobs a lot cheaper.

For a variety of reasons that have a lot more to do with subsidizing preferred business interests than energy or environmental policy, Congress has fallen in love with biofuel subsidies and mandates.  We've talked quite a bit on this site about ethanol.  Here is another example, via Mark Perry:

It sounded like a good idea: Provide a little government money to convert wood shavings and plant waste into renewable energy.

But as laudable as that goal sounds, it could end up causing more economic damage than good -- driving up the price of raw timber, undermining an industry that has long used sawdust and wood shavings to make affordable cabinetry, and highlighting the many challenges involved in decreasing the nation's dependence on oil by using organic materials to create biofuels.

In a matter of months, the Biomass Crop Assistance Program -- a small provision tucked into the 2008 farm bill -- has mushroomed into a half-a-billion dollar subsidy that is funneling taxpayer dollars to sawmills and lumber wholesalers, encouraging them to sell their waste to be converted into high-tech biofuels. In doing so, it is shutting off the supply of cheap timber byproducts to the nation's composite wood manufacturers, who make panels for home entertainment centers and kitchen cabinets.

The federal government can provide up to $45 a ton in matching payments to businesses that collect, harvest, store and transport biomass waste to an authorized energy facility. That means sawdust or wood shavings may be twice as valuable if a lumber mill sells them to a biomass energy company instead of to a traditional buyer.

This is bad news for the composite panel industry, which turns these materials into particleboard and medium-density fiberboard, and outranks the U.S. biomass industry in terms of employees and economic impact, with 21,000 employees and annual sales of $7.9 billion, according to 2006 U.S. Census data.

The article poses this as a dueling jobs situation, but the result not only leaves us worse off economically, it leaves us worse off environmentally.   And the explanation is all Hayek and the limits on information possessed by a few individuals in Congress vs. 300 million market actors.  It is pretty clear to me that, to whatever extent Congress even thought at all about this legislation, they must have assumed that wood shavings were "waste."  What happened, most likely, is some entrepreneur and his VC backers came to Congress saying that all this sawdust is just wasted and if you give us a fat subsidy, we can build a valuable business burning it for power.

But in fact, businesses (no matter how much environmentalists believe otherwise) abhor waste.    When a tenth of a percent on margins is important, a lot of people have financial incentives to either reduce the waste or do something productive with it.  Which is why there is a whole industry using sawdust and chips already to make various building products.  And I won't go into the math, but trust me that this kind of use for waste is far more efficient, both economically and environmentally, for the waste than just burning it.

For years in Arizona we have been told by the state government that we need to subsidize science.  I have never really figured out why my life would be better if scientists lived in Arizona instead of California, but apparently when governors get together and compare their states' penis lengths, this is one of the key topics that come up.  Why we need to subsidize, for example, bio-science in Arizona to keep up with California but folks in Kansas don't need to subsidize, say, awesome golf resorts to keep up with Arizona has always escaped me.  I have always felt that if we just keep taxes low and wait long enough, California is going to blow up and we will collect a lot of the best and brightest with no extra effort.

Well, I am starting to understand why we needed to subsidize bio-science with our Arizona taxes.  We apparently need to do so to ... attract large grants for Federal tax money.  So by subsidizing this sector locally, we built it up enough to attract Federal subsidies.  Great.  Actually we probably did not build up the sector per se, we just built a quality private bureaucracy that had the skills and incentives to write lots of successful grant applications.  Apparently there is still work left to do, though, as other states have invested in even larger grant-magnets:

States with strong science bases such as California, Massachusetts and New York, each landed more than 1,000 grants.

Twenty states secured fewer grants than Arizona's haul of 101 awards.

Arizona scientists will study things such as predicting asthma in babies, prostate cancer and the behavioral responses of kissing bugs, which are blood-sucking insects linked to a blood-borne disease that afflicts 11 million to 13 million people in Mexico and Latin America.

Arizona scientists say the batch of stimulus dollars through the NIH is a welcome change from years of stagnant federal funding for scientific research.

"There was no increase in federal funding for cancer research for five years - that was devastating," said Dr. David Alberts, director of the Arizona Cancer Center in Tucson. "Now, I'm encouraged."

Wow - thus we see why government spending grows so much faster than inflation.  Flat spending = devastating.

If I were in academia, the study I would like to do is to try to assess the total value destroyed by state and local governments merely in trying to move businesses and facilities from one part of the country to another.

As an update on my rail subsidy post, I saw a relevant post from the Thin Green Line yesterday.  At least, I suppose, transit supporters are honest:

When I talked to Dave Snyder earlier this month about a fix for mass transit in the Bay Area, he told me, "Somehow or another we've got to get more money from driving."

However, I thought this was a hilarious lack of perspective:

...one side effect of the green revolution has been a growing awareness of how much roads cost. I imagine you'd be surprised to learn that building a road"”not maintaining it, just building it"”costs more than $16 per square foot.

I have no doubt that this person, who is a strong light rail supporter, honestly thinks this is a lot of money.  But I did the math in my comments on his post:

$16 per square foot for highway should be considered a bargain. This means that a twenty foot wide two-lane highway is $320 per linear foot.

The Phoenix light rail system cost $1.4 billion (thats building it, not maintaining it) for 20 miles, which at 34,000 boardings per week day is carrying somewhat less traffic than the capacity of a two lane highway. However, it cost $13,258 per linear foot, or 41 times your highway numbers. Which is why highway users easily pay the full cost of their transportation infrastructure through their gas taxes, but transit users don't even come close.

In Phoenix, light rail fare revenues cover only 7% of its operating and capital costs. Which always has me scratching my head when people say light rail is somehow more "sustainable." If running trains requires, as you suggest, draining resources from millions of people just to move thousands, how is it sustainable?

During and after the Obama proposal for lots more government spending on long-distance rail lines no one will ride, there was a lot of discussion about how European railroads make money with high speed lines.  This sounded like BS to me, from my experience.  Years ago I consulted briefly with the SNCF, the state railroad of France.  Just as one example, we found they had something like 100,000 freight cars and 125,000 freight car mechanics.  I tongue-in-cheek suggested they could assign each guy his own car to ride with full time and fix if necessary and still cut staff by 20%.

Anyway, it turns out the profitability claim is BS.  The Antiplanner links to this study by the Amtrak inspector general.   Here is the key chart, with the green the "reported" profits.  But it turns out they book subsidies as revenue.  The subsidies (including indirect subsidies like taking railroad pensions into the national system and off the railroad's books) are in red.

Postscript: I have always been amazed that greens get all misty-eyed at European rail.  Sure, its cool to ride a fast train, but the cost of having an extensive passenger rail system is that most of Europe's freight pounds along highways, rather than via rail.  In the US, the mix is opposite, with few passengers on trains but much more of our freight moving by rail.  I would have thought that preferentially moving freight over rail rather than passengers was a much greener approach.

The AZ Republic has an article today entitled, "Interest grows for solar plant at city landfill."  It is telling who is interested:

It's a sign of the growing interest in Arizona's renewable-energy market, as solar manufacturers, civil engineers, investors and attorneys showed enthusiasm for the $1 billion project

I am quite sure that a number of solar engineering firms and parts manufacturers are interested feeding off a billion dollar project.  Now, the article tries to anticipate my concern about this being a government pork-fest by saying the project "would be financed and built by the private sector."  This is an odd statement given this note a couple of paragraphs later:

That would help the solar company meet a strict deadline to apply for hundreds of millions of dollars in federal stimulus funds....

the economic-stimulus package provides grants of up to 30 percent of construction costs if companies can break ground by December 2010, said Brian Rasmussen of California-based BrightSource Energy Inc., a potential bidder.

So the billion dollars is privately financed, except for the real estate provided by the city and the $300 million in federal government funds and a gauranteed above-market subsidized purchase price for the power from the public utility plus any number of other government subsidies and incentives to be named later (such as government municipal bond financing).

If you move solar panels out of the Arizona desert, they are going to produce less electricity.  You almost don't have to tell me where they are going -- if they are currently close to the optimal spot for maximum solar energy production, then moving them is bound to reduce their output.

Seems obvious, huh?  So why is it so difficult to understand that when the government moves capital and other resources away from the industries where the forces of market optimization have put it, output is going to go down.

Subsidizing renewable energy in the U.S. may destroy two jobs for every one created if Spain's experience with windmills and solar farms is any guide.

For every new position that depends on energy price supports, at least 2.2 jobs in other industries will disappear, according to a study from King Juan Carlos University in Madrid.

U.S. President Barack Obama's 2010 budget proposal contains about $20 billion in tax incentives for clean-energy programs. In Spain, where wind turbines provided 11 percent of power demand last year, generators earn rates as much as 11 times more for renewable energy compared with burning fossil fuels.

The premiums paid for solar, biomass, wave and wind power - - which are charged to consumers in their bills -- translated into a $774,000 cost for each Spanish "green job" created since 2000, said Gabriel Calzada, an economics professor at the university and author of the report.

"The loss of jobs could be greater if you account for the amount of lost industry that moves out of the country due to higher energy prices," he said in an interview.

We all know from reading the media that the Obama administration is 1) full of brilliant people way smarter than the rest of us and 2) driven by science.  So this insightful exchange between a reporter and White House spokesman Robert GIbbs vis a vis this Spanish study should come as no surprise:

Q: Back on the President's speech today, a Spanish professor, Gabriel [Calzada] Álvarez, says after conducting a study, that in his country, creating green jobs has actually cost more jobs than it has led to: 2.2 jobs lost, he says, for every job created. And he has issued a report that specifically warns the President not to try and follow Spain's example.

MR. GIBBS: It seems weird that we're importing wind turbine parts from Spain in order to build "” to meet renewable energy demand here if that were even remotely the case.

Q Is that a suggestion that his study is simply flat wrong?

MR. GIBBS: I haven't read the study, but I think, yes.

Q Well, then. (Laughter.)

In two sentences, Mr. Gibbs demonstrates that 1) He is an idiot and 2) He has no respect for science.  The correct, intelligent response would be "I can't comment, I have not read the study yet."  Mr. Gibbs does deserve credit for being an apparent master of the non-sequitur.  I have been trying to think of an eqivilent formulation.  The best I can come up with is to suppose someone said that "publicly funded sports stadiums generate no new economic activity and are just a taxpayer subsidy of sports owners, players, and ticket holders" and getting the response that  "how can this be when people still go to the games?"

I was afraid that all this braininess in the White House was going to eliminate the humor from Administration pronouncements but I see that won't be the case.

The (flawed) theory of government stimulus plans is that in certain economic under-capacity situations, government spending can have a multiplier effect.

The Anti-planner shows that, as far as government spending on mass-transit is concerned, $9,150 of taxpayer subsides per rider generate about $6,100 in average savings per rider.  Every dollar of public transit spending destroys about 30 cents of value, which I guess makes it the anti-stimulus.

Update:  Yeah, I know, transit supposedly eliminates all those externalities.  But most rail transit plans typically reduce congestion by fractions of a percent, even by their builder's estimates, while energy savings is wildly over-estimated.

Phoenix's agreement to give a $100 million handout to a shopping mall development in north Phoenix was struck down as illegal.

A major economic-development agreement between Phoenix and the CityNorth development has been ruled unconstitutional, meaning the project may not grow into the once-envisioned second downtown on the city's north side.

The Arizona Court of Appeals said Tuesday that the $97.4 million agreement violates the gift clause of the Arizona Constitution, which prohibits governments from granting money or credit to private entities in most cases.

In 2007, the city agreed to give the developer half the sales-tax revenue from the site. The developer, among other provisions, agreed to denser construction and to provide free parking and special spaces for park-and-ride use.

Excellent news.  This handout was engineered in a fairly smart bit of rent-seeking on the developer's part.  There are two competing shopping mall development sites about a mile apart in a wealthy area along highway 101.  The two sites are close, but on different sides of the Scottsdale-Phoenix border, so the developers managed to get Phoenix to pony up tons of taxpayer swag out of fear that stores like Nordstrom would move to the Scottsdale development (more here).  The parking subsidy came in at around $30,000 per parking space, and the only public benefit was supposedly that other locals could use the lot, though there are no other structures not within this particular development in walking distance of the proposed lot.  Here is the enormous downside that Phoenix now faces for not being able to hand $100 million to the developers:

Representatives of the Thomas J. Klutznick Co. declined interviews but issued a prepared statement saying that, without the agreement, they will be forced to cut the density of the project.

Less density would mean fewer shops, restaurants, hotels and offices and fewer jobs, the statement said.

The company said a "less capital-intensive design" would include surface parking lots covering more than half the development. It also warned that the project will face delays.

Uh, okay.  I think I will survive.   Their problem is they wanted the taxpayer-funded garage so that they could convert surface lots in their plan to more buildings they could rent or sell.  Boohoo.  Either it makes economic sense, and they can pony up their own money, or not.  Speaking personally, fighting Christmas shopping traffic, I am just fine with lower density shopping.

A week or so ago, I discussed federal energy subsidies and hypothesized, without a lot of facts, that a lot of them go to failing alternative energy projects rather than to oil company shareholders.  I asked readers if they had any more information, and the discussion is here.

But ask and ye shall receive, and the WSJ has an article today on federal energy subsidies and where they go.  The answer is:  in bulk dollars, a lot of them go nuclear, hydro, and traditional fossil fuel production.  However, it is interesting to look at them on an output basis:

For electricity generation, the EIA concludes that
solar energy is subsidized to the tune of $24.34 per megawatt hour,
wind $23.37 and "clean coal" $29.81. By contrast, normal coal receives
44 cents, natural gas a mere quarter, hydroelectric about 67 cents and
nuclear power $1.59.

The wind and solar lobbies are currently moaning that
they don't get their fair share of the subsidy pie. They also argue
that subsidies per unit of energy are always higher at an early stage
of development, before innovation makes large-scale production
possible. But wind and solar have been on the subsidy take for years,
and they still account for less than 1% of total net electricity
generation. Would it make any difference if the federal subsidy for
wind were $50 per megawatt hour, or even $100? Almost certainly not
without a technological breakthrough.

By contrast, nuclear power provides 20% of U.S. base
electricity production, yet it is subsidized about 15 times less than
wind. We prefer an energy policy that lets markets determine which
energy source dominates. But if you believe in subsidies, then nuclear
power gets a lot more power for the buck than other "alternatives."

The same study also looked at federal subsidies for
non-electrical energy production, such as for fuel. It found that
ethanol and biofuels receive $5.72 per British thermal unit of energy
produced. That compares to $2.82 for solar and $1.35 for refined coal,
but only three cents per BTU for natural gas and other petroleum
liquids.

I will repeat what I said in my earlier post, just so no one is confused about my position:

I personally don't care where [the subsidies go]. I am all for eliminating all
of this subsidy mess, equally, whether it's for oil exploration or
energy-from-donkey-poop or for CEO salary enhancement.

Kevin Drum and Alex Knapp write that there appears to be $20-$50 billion in federal energy subsidies each year going to the oil industry, and that this should be a target for elimination before any windfall profits tax.  I wrote in the comments:

I agree 100%.  Let's cut all the subsidies.

However, before you get too excited, my guess is that most of the
money marked as "oil company subsidies" really in fact goes to non-oil
projects like alternative energy. In the same way that a huge portion
of federal "highway" funds don't go to highways but to silly
politically correct failing transit projects, my guess is that,
similarly, "oil industry" subsidies go for a lot of silly alternative
energy projects.

I personally don't care where it goes. I am all for eliminating all
of this subsidy mess, equally, whether it's for oil exploration or
energy-from-donkey-poop or for CEO salary enhancement. But recognize
before you make this the liberal rallying cry, much of this subsidy
money may well be going to liberal pet projects.

Anyone have any better idea where this money goes that they are referring to?

OK, I was mad at the waste of tax dollars for ethanol programs that do nothing for the environment or to reduce net fossil fuel consumption.  I was mad that a technology that in no way reduces CO2 production but does introduce radical new land-use-related environmental problems could be sold as an environmental panacea, rather than the corporate welfare it truly is.  I was mad we have decided it is more important to subsidize corn farmers than to continue to provide the world's poor with cheap food.  And I was flabbergasted that Congress could call for production of more corn-based ethanol than is physically possible with our entire corn crop.

But I really am mad now that ethanol subsidies are making craft beers rarer and more expensive to make:

A global shortage of hops, combined with a run-up in barley prices, is
sending a chill through Arizona's craft-beer industry.

The hops shortage threatens to boost prices, cut into profits and close
down brewpubs. It could change the taste and consistency of treasured
local ales.

In Bisbee, "hop heads" already are weaning themselves from Electric
Dave's India Pale Ale. Dave Harvan closed his 7-year-old Electric
Brewing Co. in November, citing the scarcity and high cost of
ingredients.

So why aren't as many farmers growing hops and barley?  Because the government is paying them ridiculous jack to grow corn so we can burn food into our cars:

Papazian attributed the barley prices to ethanol subsidies that have
raised the price of corn, the main ingredient in the alternative fuel.
As a result, farmers have switched to barley for livestock feed, which
has pushed up prices.

The hops situation is more complex. Years of overproduction and low
prices led farmers to replace hops fields with more profitable crops.
Add to that corn subsidies that have caused farmers to replace hops
fields with corn, a drought in Australia that affected yields and heavy
rains in Europe that ruined much of this year's crop.