Archive for the ‘The Corporate State’ Category.

The Non-Crony Pledge

Three cheers for Koch Industries:

“We oppose ALL subsidies, whether existing or proposed, including programs that benefit us, which are principally those that are embedded in our economy, such as mandates,” wrote Philip Ellender, president Koch’s government affairs division, in a Wednesday letter to members of Congress.

Ellender singled out the wind production tax credit as particularly deleterious. But unlike that provision, some of the tax breaks included in the House package benefit activities in which Koch and its subsidiaries are heavily invested.

Koch subsidiary George Pacific, for instance, qualifies for a tax break for the production of cellulosic biofuels. Another subsidiary, Flint Hills Resources, operates biofuel production facilities that could benefit from another of the provisions.

Those tax breaks could improve Koch’s bottom line, but the company sees federal tax preferences in general as economically harmful.

“Koch doesn’t view these as ‘benefits’ even if they are in industries we’re in,” explained a source familiar with the company’s public affairs strategy. “They are wasteful and market distorting, and allow other firms to run businesses that aren’t making money any other way.”

Government Accounting: The Report That Says Green Loan Program is Profitable is A Total Joke

The government claims to be making huge profits on its greentech loan program, despite losses at companies like Solyndra.

The U.S. government expects to earn $5 billion to $6 billion from the renewable-energy loan program that funded flops including Solyndra LLC, supporting President Barack Obama’s decision to back low-carbon technologies.

The Department of Energy has disbursed about half of $32.4 billion allocated to spur innovation, and the expected return will be detailed in a report due to be released as soon as tomorrow, according to an official who helped put together the data.

The results contradict the widely held view that the U.S. has wasted taxpayer money funding failures including Solyndra, which closed its doors in 2011 after receiving $528 million in government backing. That adds to Obama’s credibility as he seeks to make climate change a bigger priority after announcing a historic emissions deal with China.

Even Kevin Drum calls partial BS on this:

And yet....I'd still remain a bit cautious about the overall success of the program. Out of its $32 billion in approved loans, half represent loan guarantees to nuclear power plant developers and Ford Motor. These are not exactly risky, innovative startups. They're huge companies that could very easily have raised money without government help, and which represented virtually zero danger of default. If DOE is including returns from those loans in its forecast, color me unimpressed.

The genuinely risky half of the loan program is called Section 1705, and it includes everything that most of us think of as real renewable energy projects (wind, solar, biofuel, etc.). DOE hasn't broken that out separately.

I call further BS.  It turns out this program is actually losing money, not making money.

  1. This "study" is a classic case of assuming your conclusion. The reason the risky parts of the portfolio would lose money is if they don't pay off over the next 20 years or so they have to run. But all the study says is "The $5 billion to $6 billion figure was calculated based on the average rates and expected returns of funds dispersed so far, paid back over 20 to 25 years." In other words, if the loans turn out not to be risky, they won't be risky. LOL.
  2. I bet they are not accounting for things like Ivanpah, there the holders of the government loan are looking to pay off the government loan with .. a government subsidy. So if you squint, the loan to Ivanpah looks profitable, but no rational person would come to that conclusion about the program as a whole.
  3. Ivanpah is just a subset of a larger problem. Companies like Tesla get government subsidies (and their customers get subsidies as well) from dozens of sources. Is it really a win for taxpayers if they pay back their government loan with government money?
  4. They count the 37 basis points above treasury rates that they charge as "profit". This is crazy. I run a fairly large business. No business is getting Tbills +37 BP loans. Heck, since Tbills are at about 0%, this means they are loaning money to private concerns at less than 1%. This is a crazy large subsidy.  I could make money in over a 2-5 year period in just about anything if I could borrow at effectively 0%.
  5. Worst of all, they are not using present value.  Let's say their average spread from the Bloomberg article is 100 BP over treasuries.  That means that ignoring loan losses on a $32 billion portfolio they are making a spread of $320 million a year.  Over 20-25 years that is $6-7 billion.  Less some large loan losses that is $5-6 billion.  But notice I never discounted.  This is just adding up nominal interest spreads over 25 years.  This is insane.  Absolutely no private investor on the planet would think like this.  If you discounted the interest spread payments at any reasonable risk-adjusted rate**, then the net present value may already be less than losses in Solyndra and others and thus already in the hole, even without considering future losses.  This report is an embarrassing political exercise, not a serious economic analysis.

All of this leaves out the inherent cronyism of the whole exercise.

 

** I would argue that in many of these loans, and despite interest rates charged in the 0-2% range, the government was taking an equity risk.  Worse than equity risks -- these are essentially venture capital investments risks with T-bill returns (note the one private comment on the returns in the Bloomberg article is from a venture capital investor in greentech).   The taxpayers are bearing all the risk but getting none of the returns.  Any discount rate for these risks under 15-20% is far too low.

The Graveyard of Cronyism

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.

GT-Advanced

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.

More Bipartisan Cronyism in Phoenix: Subsidizing Real Estate so that Future Transit Expenditures Can Be Justified

Yuk.  $14 million giveaway to developer

Last week, Phoenix City Council members approved a deal for the $82 million high-rise, mixed-use Phoenix Central Station. The development at Central Avenue and Van Buren Street will include about 475 apartments and 30,000 square feet of commercial space.

As part of the deal, Phoenix would give the developer, Smith Partners, a controversial tax-abatement incentive called a Government Property Lease Excise Tax for the tower portion of the project. The agreement allows developers to avoid paying certain taxes through deals that title their land or buildings to a government entity with an exclusive right to lease the property back.

In this case, the city already owns the land, but the developer will eventually take title over the building. The arrangement allows them to not pay property taxes for 25 years, which a city official estimates would be $600,000 to $900,000 per year based on conversations with the developer. However, the developer will make smaller lease payments back to the city, and, after eight years, pay taxes on those lease payments.

The agreement requires the developer to pay the city a portion of its revenue, which will net the city an estimated $4.4 million over the first 25 years

The difference from the $4.4 million they will actually pay and 25 years at $750,000 in property taxes is about $10 million (fudging concerns about present value and such).  I used to be OK with anything that reduced taxes for anyone, but now I have come to realize that discounting taxes for one preferred crony just raises taxes for the rest of us.  [Props to Republican Sal Deciccio for being one of two to vote against this]

Here is my guess as to what is going on here.  Phoenix paid a stupid amount of money to build a light rail line that costs orders of magnitude more money than running the same passengers in buses.  One of the justifications for this gross over-expenditure on the light rail boondoggle was that it would spur development along the line.  But it is not really doing so.  Ridership on light rail has been stagnant for years, as has been transit ridership (most of the light rail ridership gains simply cannibalized from bus service, shifting low-cost-to-serve bus riders to high-cost-to-serve train riders).

So they need to be able to show transit-related development to justify future light rail expansions.  Thus, this subsidized development along the rail line.

I will make a firm bet.  Within 5 years we will have Phoenix politicians touting this development as a result of the light rail investment with nary a mention of the $10 million additional taxpayer subsidy it received.

The Corporate State Is Winning

Successful businesses often seek to cement their position and block new competition by running to government for legislation that blocks new entrants and/or makes it harder to compete for smaller upstarts.  One only need to look at the taxi cartel trying to kill Uber and Lyft to see exactly how this operates.  It is working:

small-biz5-14

 

This is a strategy that works with both Republican and Democrat politicians, which may explain why both Occupy Wall Street and the Tea Party shared opposition to cronyism among their complaints.

Of course there are other factors than just powerful incumbents blocking new competitors.  In California, regulations that make it just debilitating to try to run a business are also driven by the tort bar, which has created a thriving business in extracting settlements from companies over miniscule rules violations.  And the California government obliges by shifting the rules constantly, so companies are both constantly vulnerable and have to pay other attorneys to strengthen their immune systems against these assaults.

Let's Not Paint the Toyota Move to Texas Too Much as A Drive For Free Markets

I totally understand why Toyota would want to leave California.   I often wonder why any manufacturing business would remain in California.  I actually have thought about whether there is a private equity opportunity to buy California manufacturers and make money by moving them to lower cost jurisdictions.

I am particularly sympathetic this year.  We have four or five campground opportunities where we could be making money this year by making investments in these facilities.  But these initiatives would all take my time, and my time has been 110% devoted to catching up on regulatory compliance issues, particularly in California.   Every state has stupid compliance requirements, but California stands out for two reasons

  1. It has a lot, lot more of these requirements
  2. The cost of non-compliance is way higher than in other states.  You don't just get an order to clean up your act in 60 days, you get slammed with tens of thousands of dollars of legal fees from predatory law firms that have been given a hunting license by the state legislature to seek out and reward themselves when they find non-compliance minutia (e.g. numbers on the paycheck in the wrong font size).

So  I totally understand why Toyota is coming to Texas.  But also note that the state of Texas handed Toyota tens of millions of dollars in taxpayer money for the move, money for which smaller and less politically-connected companies don't qualify.  This corporate relocation incentive game is one of the worst uses of tax money, as it produces no new economic activity, but simply shifts it across arbitrary lines on the map.

Tesla: The Dr. Jekyll and Mr. Hyde of Cronyism

On the one hand, Tesla feasts on government subsidies and giveaways, e.g. here.

On the other hand, Tesla fights against crony protections of incumbent businesses, e.g. here.

The World's Most Famous Investor Is Now Investing in...

...government access.  Clearly Warren Buffet saw the writing on the wall in 2009, that the way to make money in the US was no longer to build products and factories but to invest in lobbying to get crony advantages and giveaways.

click to enlarge

This Administration and Senate makes all kinds of progressive noises, but all the while they are running perhaps the greatest expansion of cronyism in US history.  And the smart money knows it.

 

A Small Bit of Good News -- DC Circuits Slaps Down the IRS

The creeping regulatory / corporate state gets a setback

Faulting the IRS for attempting to “unilaterally expand its authority,” the D.C. Circuit today affirmed a district court decision tossing out the agency’s tax-preparer licensing program. Under the program, all paid tax-return preparers, hitherto unregulated, were required to pass a certification exam, pay annual fees to the agency, and complete 15 hours of continuing education each year.

The program, of course, had been backed by the major national tax-return preparers, chiefly as a way of driving up compliance costs for smaller rivals and pushing home-based “kitchen table” preparers out of business. Dan Alban of the Institute for Justice, lead counsel to the tax preparers challenging the program,called the decision “a major victory for tax preparers—and taxpayers—nationwide.”

The licensing program was not only a classic example of corporate cronyism, but also of agency overreach. IRS relied on an 1884 statute empowering it to “regulate the practice of representatives or persons before [it].” Prior to 2011, IRS had never claimed that the statute gave it authority to regulate preparers. Indeed, in 2005, an IRS official testified that preparers fell outside of the law’s reach.

Perhaps a first indication that the Obama Administration strategy to pack the DC Circuit with Obama appointees may not necessarily protect his executive overreach.

PS - you gotta love the IJ.

PPS - The IRS justified its actions under "an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses"

Who's To Blame for the Corporate State?

It's a topic we have discussed many times on this blog -- are politicians at fault for handing out taxpayer money, or are corporations at fault for taking it?  Are businesses at fault for asking for special favors or politicians at fault for granting them.  This article from the Federalist discusses this conundrum in the context of sports stadium subsidies.

Its a chicken and egg problem that I see more and more, and my general answer is everyone.  The real answer is that the fault lies with having given government these powers in the first place.  If the government has the power to transfer wealth and regulate by decree, then some businesses are going to access that power to squash their competitors and politicians are going to use that power to get reelected.

The classic retort that "if we only had the right people in office..." wears thin.  There are no right people.  Good people are naturally corrupted by the incentives of the office.   Further, they are increasingly weeded out of the political process -- when wielding power to aid political cronies is a prerequisite for winning office, then it is hard to fathom how we possibly could ever get people in power who will not ... wield power to aid political cronies.   According to the Left, this Administration was to be, finally, the perfect group that would wield power as it was meant to be wielded.  And the corporate state is worse than ever.

Government Regulation and Incumbent Business Protection

Scratch "consumer" protection laws and you will almost always find the laws are really aimed a protecting incumbent businesses and traditional business models.  This time from France:

To the surprise of virtually everyone in France, the government has just passed a law requiring car services like Uber to wait 15 minutes before picking up passengers. The bill is designed to help regular taxi drivers, who feel threatened by recently-introduced companies like Uber, SnapCar and LeCab. Cabbies in the Gallic nation require formidable time and expense to get their permits and see the new services -- which lack such onerous requirements -- as direct competitors.

This is the interesting political ground where the Occupy Wall Street movement and the Tea Party have a lot of overlap.  That is why the Chamber of Commerce, which represents all these incumbent businesses, is working with both parties to keep the cozy corporatists in power against challenges from the Left and Right.  If you are a business owner, eschew the Chamber and join the NFIB and support the IJ.

Is Cronyism Private Enterprise's Fault or the Government's?

Oddly enough, this is perhaps the most frequent argument I have with people on the Left in cocktail party conversations.

It begins this way -- some abuse of "private enterprise" is cited.  Almost every time, I have to point out that the abuse in question could not occur if private companies were not availing themselves of government's coercive power to [fill in the blank: step on competitors, limit choice, keep prices high, rake in subsidies, etc.] Michael Moore's Capitalism: A Love Story is very much in this mold, blaming bad outcomes that result in government interventions on free market capitalism.

Kevin Drum has a great example of this.  Asthma inhalers are expensive because certain companies used the government to ban less expensive competitive products.

Nick Baumann picks up the story from there:

The pharma consortium transformed from primarily an R&D outfit searching for substitutes for CFC-based inhalers into a lobbying group intent on eliminating the old inhalers. It set up shop in the K Street offices of Drinker Biddle, a major DC law firm. Between 2005 and 2010, it spent $520,000 on lobbying. (It probably spent even more; as a trade group, it's not required to disclose all of its advocacy spending.) Meanwhile, IPAC lobbied for other countries to enact similar bans, arguing that CFC-based inhalers should be eliminated for environmental reasons and replaced with the new, HFC-based inhalers.

The lobbying paid off. In 2005, the Food and Drug Administration (FDA) approved an outright ban on many CFC-based inhalers starting in 2009. This June, the agency's ban on Aerobid, an inhaler used for acute asthma, took effect. Combivent, another popular treatment, will be phased out by the end of 2013.

In other words, pharmaceutical companies didn't just take advantage of this situation, they actively worked to create this situation. Given the minuscule impact of CFC-based inhalers on the ozone layer, it's likely that an exception could have been agreed to if pharmaceutical companies hadn't lobbied so hard to get rid of them. The result is lower-quality inhalers and fantastically higher profits for Big Pharma.

Rosenthal has a lot more detail in her piece about how the vagaries of patent law make this all even worse, and it's worth reading. But she misses the biggest story of all: none of this would matter if drug companies hadn't worked hard to make sure the old, cheap inhalers were banned. How's your blood doing now, Dr. Saunders?

No one has more disdain than I for companies that attempt to use the coercive power of the government as a competitive weapon in their favor.  Heck, I have barely gone 2 hours since the last time I bashed an industry for doing so.

But the implication that this is all the fault of corporations is just wrong, as is the the inevitable Progressive conclusion that somehow more government regulation and powers are necessary to combat this.

The Left has been the prime cheerleader over the past decades in creating the Federal behemoth that not only allows this to happen, but actively facilitates it.   We have created a government whose primary purpose is to redistribute spoils from one group to another.

Just look at the example he uses.  These drug manufacturers could have protected their markets and products the free market way, by investing tens of millions in more research, manufacturing cost reduction, and customer marketing.   But instead, we have a system where - entirely legally - a company can spend a fraction of this (the chump change amount of half a million dollars) to market to a few dozen people in DC and get the same benefits as investing tens of millions in satisfying customers.    The wonder is not that losers like these drug companies go this route, but that anybody at all still has enough sense of honor to actually invest in the customer rather than in DC bureaucrats.

I put it this way - "invest in customers rather than DC bureaucrats" - because every new regulation, every new government power over commerce is essentially a dis-empowerment of consumers in the marketplace.  Nowhere is this more true than in pharmaceuticals, where the government tells consumers what they can and cannot buy.

In a free market, accountability is enforced by consumers defending their own best interests and new competitors seeking fortunes by striving to serve consumers better than market incumbents.  Every government intervention is essentially saying to consumers that the government is going to make yet another decision for them.  So, having taken over so many decisions of consumers in those huge office buildings in DC, is it any wonder that companies go to DC to market to bureaucrats rather than bother marketing to consumers?

The problem, then, is not that some corporations avail themselves of legal shortcuts to profits.  The problem is that these legal shortcuts exist at all.  The problem is the coercive power of government to intervene in markets, chill competition through incensing, subsidize one competitor over another, etc.  These kinds of stories are going to proliferate endlessly until  that power is scaled back.

The Progressives I argue with come back with one of two answers.

This is a crock, and is the worst bit of enablement for a bad system ever invented.   The folks in government are not bad people -- they are normal people with bad information and bad incentives, and that is never going to change.  After all, something that Drum glosses over here, the agency in hid example went along and did the industry's bidding.  I know why the industry was doing what it did, but why did the agency roll over?  The whole theory is that these are public spirited people without commercial incentives.  Yet they rolled over none-the-less.  And it's not like these government employees are Rothbardian libertarians.  I work with the government all the time.  Their employees are there because they believe in public solutions over private ones.  In outlook and biases and beliefs they look a lot more like Kevin Drum than myself.  So why do they get a pass?  Of the two people here -- the drug company guy and the regulator guy -- which one is not doing his job right for his constituents?  So why does the drug company get the blame?

Response 2:  We just need to ban lobbying and contact with the regulated industry.  The whole theory of regulation is that the regulators are totally knowledgeable about the industry, but they have different incentives so they can work in the public interest.  But how are they going to be totally knowledgeable about the industry without frequent contact?  Or even experience in the industry?  And as to lobbying, lobbying is just speech.  It would be Constitutionally impossible to ban lobbying, and wrong anyway.  Think of it this way-- let's say you ran a restaurant but had to get a government agency's permission for each change in your menu (just as drug companies have to get permission for each change in their product offering).  Would you be happy with a situation in which the government made decisions on your menu without consulting you?  You would want to explain your desired changes and the logic behind them, right?   That's called lobbying, and you would not be happy to see it banned.

Government-Paid Lobbyists for Incumbent Hotel Interests in New York

In New York, the local hotel industry is freaking out.  Hotels, in a wearyingly familiar pattern, want the city to ban competitors using new business models (in this case companies like Airbnb).  Of course, they can't say that they are demanding government action to block competition.  So they come up with other BS.   This statement is right out of the corporate state paybook

NYC & Company, the city’s official tourism agency, issued a statement saying, “This illegal practice takes away much needed hotel tax revenue from city coffers with no consumer protections against fire- and health-code violations.” Neither city officials nor hotel organizations would estimate how much revenue hotels and the city might be losing.

The tax argument is absurd.  There is no reason that the city could not apply lodging or some sort of new tax to the rentals if that were their real concern.  The part about fire and health regulations is equally absurd.  New York apartment and building owners would be very surprised to learn that they are suddenly somehow unregulated.  Is the implication really that New York hotels are safe but New York apartments are Triangle Shirtwaist fires waiting to happen?

This is a great example of industry capture.  A true city tourism agency should be saying "It is great that this city is developing even more options for visitors.  A diversity of lodging experiences and price levels can only help spur tourism in New York.  There may be a few regulatory tweaks that are needed to accommodate this model, but we welcome this new lodging model with open arms."  Instead, though, they are acting as government paid lobbyists for existing hotel interests.

Is Arpaio Running a Protection Racket?

This weekend the Feds raided the Phoenix-area's largest car wash chain "Danny's" for a variety of unspecified immigration issues, and carried a number of folks off to jail or away for deportation.   This is a very high profile and upscale business (I am looking at one outside my office window).  These are not your father's car washes -- they are large and well-appointed and tailored to an upscale crowd.

Given that this is easily the highest profile car wash chain in town and each location is staffed with scores of folks of Hispanic origin**, my first thought on reading this story was to wonder why Sheriff Joe Arpaio had not conducted the raid.  After all, he has practically made a career of immigration raids on car washes (here is just one raid, note by the way the horrific comments saying things like "God bless Arpaio" just under a video of normal, regular human beings being hauled off in handcuffs for ... working.)

Well, other folks in the Phoenix area wondered the same thing, and have observed that by some odd coincidence, the most obvious immigration target not raided by Sheriff Arpaio is also the largest donor to Arpaio's Sheriff's charities, and its founder can often be seen palling around with Arpaio at public events.   Note Danny's prominently displayed on Arpaio's web site.

From our local sheriff all the way up to the President, we are increasingly a country of arbitrary laws and special crony exemptions.  If you are not friends with Wesley Mouch, good luck to you.

 

** Not trying to profile here, just trying to think like the Sheriff

An Infrastructure Proposal Where Everyone Gets it Wrong

Since I am on the topic of infrastructure today, let me discuss a project close to home

A major interstate highway must be built between Phoenix and Las Vegas to keep up with the region’s rapid population growth and to facilitate global trade, says a report released jointly Friday by transportation officials in Arizona and Nevada.

The 105-page report offered justification for constructing an Interstate 11, a multibillion dollar project to improve the link between the two metropolitan areas.

The report sets the stage for preliminary route, design and environmental studies ahead of any decision to build I-11, the nation’s most ambitious interstate project in a generation.

As envisioned, the project would convert U.S. 93 into a four-lane divided highway from Las Vegas to Wickenburg, taking advantage of the new Hoover Dam Bypass bridge.

I drive this road all the time, and I have never encountered any congestion.  A lot of it is already four lane divided, and the portions that are not move quite fast.  There is one town (1) between Las Vegas and Wickenburg on the two-lane section that requires one to slow down and has, I think, one stoplight.   I consistently average 75 miles an hour on the road.  Sure, it would be nice if it were an interstate all the way, but the only real problem is the congestion in the outskirts of Phoenix, and that is already being addressed with a new loop freeway.

How can you confirm this makes no sense?  Because neither AZ nor NV are spending their own money on this.  This is basically a marketing proposal to obtain federal funds.  If we actually had to spend our own state money on our own highway, I can't imagine anyone making it a priority over other local demands.  But if the Feds will spend money.....

And as dumb as this idea is, the opposition quoted in the article is even dumber, which is probably why this kind of project actually gets approved.  One group of geniuses, not identified, oppose the plan because they want a bullet train instead.  Yeah, that's the ticket -- there is not enough traffic to fill a two-lane highway and Southwest offers hour long flights for $95, so let's build a dedicated high speed rail line.  This is the eternal Las Vegas fantasy, that someone will spend billions to build high speed rail to whisk folks to their casinos.

Finally, there is the environmental argument:

Environmental advocates like the Sierra Club object to paving hundreds of miles of virgin desert. The area west of the White Tanks is largely open space, with a few isolated communities. Planners say the area could swell in population to 2.5 million, with the help of the freeway.

“We still think it’s a bad idea,” said Sandy Bahr, director of the Sierra Club in Arizona. “The freeway is not needed. It‘s time to look at other ways to look at our transportation needs.”

Opponents say I-11 will promote sprawl at a time when Arizonans are driving less.

I don't think widening of a road from 2-4 lanes is really "paving hundreds of miles of virgin desert", though it is funny to me that the same people who said this likely support enormous solar projects that do just that.  Further, anyone concerned with sprawl being promoted along the route have probably never driven on it.  The definition of "sprawl" is almost impossible to pin down, but I don't see people suddenly building suburbs around Wikieup (home of the single traffic light referenced earlier).  This is a freaking deserted road and people are no more likely to move here because the road is wider than they are to live along I-40 between Flagstaff and Albuquerque (converted to an Interstate from 2-lane Route 66 years ago) .  If you do drive to Vegas, look for someone to offer a prop bet on the population swelling to 2.5 million and take the under.

Seriously, why can't anyone say in print the real problem here -- it is an expensive waste of money to upgrade a highway that has no congestion problems whatsoever and is simply a bid by state government employees to grab some federal highway funds to keep ADOT administrators and engineers employed.

I am driving this highway a week from Monday.   I will try to take some pictures of all the congestion.

Update:  I did the 299 miles from my house to the hotel on the strip in exactly 4.5 hours.  This includes a 15 minutes stop for gas and snacks as well as navigating from my home to the freeway in Phoenix and through Las Vegas traffic around the strip.  I averaged 66 miles per hour, including the stops and traffic and neighborhood streets.

The Problem with Infrastructure

Obama, accompanied by the usual chorus on the Left including Kevin Drum, is yet again trumpeting infrastructure spending as a partial economic solution for what ails us, in part based on a McKinsey Global Institute report.   Infrastructure is like education (the other half of the Obama "plan") -- it's hard to find anyone against it per se, it is easy to find examples of it failing, and it is really hard to craft programs at the Federal level that really improve anything.

Having been inside the McKinsey sausage factor for five years, I was loath to just accept their conclusion without seeing the data, so I read the section of the report on infrastructure.  Having read the report, I still don't see how they got to the under-funding number.  Some of the evidence is laughably biased, such as pronouncements from the American Society of Civil Engineers, who clearly would be thrilled with more government infrastructure spending.  The rest comes from something called the world economic forum, but I simply don't have the energy right now to follow the pea any further.

I had two reactions to this plan:

  1. Presumably what infrastructure projects we choose matters, so how can we have any confidence (given things like our green energy investment program) that these investments will be chosen wisely and not based on political expediency?
  2. From my experience, and also from the McKinsey numbers, most of the infrastructure needs are refurbishment and replacement of existing infrastructure, rather than new infrastructure.  But politicians are typically loath to make these kind of investments, preferring to offer new toys to voters rather than saying all that money was spent just to keep their existing toys.  Just look at the DC metro system, which is still pursuing expensive expansion plans at the same time it refuses to perform capital maintenance and replacement on its current crumbling infrastructure.  Or look at Detroit which is falling apart but still wants to spend $400 million on a new hockey rink.

I was pleasantly surprised that McKinsey actually raised both of these issues as critical.  To the point about project selection:

To effectively deploy additional investment in infrastructure, the United States will have to improve its performance on project election, timely delivery and execution, and maintenance and renewal. This could raise the overall productivity of US infrastructure by as much as 40 percent and generate more economic impact for every dollar spent. And there is added pressure to raise infrastructure productivity today: as commodity prices rise, input costs are going up as well. In extreme circumstances, this can even lead to spot shortages of asphalt and other critical materials, making productive use of such assets even more important.

One of the most effective ways to make infrastructure investment more productive is to choose the right mix of projects from the outset. Too often, the primary approval criteria for project selection in the United States are political support and visibility rather than comprehensive cost-benefit analysis.129 Even when economic analysis is used, it is not always rigorous, or it may be disregarded in actual decision making. When state and local governments choose sub-optimal projects, the cost of financing rises, so focusing on those projects with the clearest returns is a crucial part of taking a more cost-effective approach for the nation as a whole.

In addition, planners at all levels of US government tend to have a bias toward addressing congestion and bottlenecks by building new capacity. But rather than immediately jumping to build new infrastructure projects to solve problems,
planners and project sponsors might first consider refurbishing existing assets or using technology to get more out of them. (See “Better maintenance, optimization, and demand management can extend the life of existing infrastructure assets” later in this chapter.)

The McKinsey study is not arguing for Keynesian digging holes and filling them in again.   They are arguing for infrastructure spending but only if it is better targeted than such programs have been in the past.   Anything about this Administration (or any other Administration, really) that gives you confidence this will happen?

In fact, they argue that a large reason for under-developed infrastructure is not the spending level per se but the insanely inefficient way in which government spends the money

Delays and cost overruns are a familiar refrain in infrastructure projects. Boston’s Big Dig, for example, remains the costliest highway project in US history and was plagued by years of delay and shoddy construction. Originally estimated at $2.6 billion, it now has a final price tag estimated by the Massachusetts Department of Transportation at $24.3 billion, including interest on borrowing. More recently, the San Francisco–Oakland Bay Bridge is being completed almost a decade late, and its original budget of $1.3 billion has grown to more than $6 billion.

Finally, their recommendation focuses more on maintenance and the prosaic, rather than expensive sexy headline grabbing investments (cough California high speed rail cough) that politicians prefer

Another major strategy for increasing infrastructure productivity involves maximizing the life span and capacity of existing assets. In many cases, directing more resources to these areas may be a more cost-effective choice for policy makers than new build-outs.

First, there is a need to focus more attention on maintenance, refurbishment, and renewal. This is an increasingly urgent issue for the nation’s aging water infrastructure, much of which was built in the years immediately after World War II; some of the nation’s oldest pipe systems are now more than a century old. Even more recent water treatment plants will need refurbishment: many built in the
1970s after passage of the Clean Water Act will soon require rehabilitation or replacement. Proactive maintenance to upgrade and extend the life of these aging systems is becoming a more urgent priority.

The study uses a GDP multiplier of 1.77 for infrastructure spending, which explains why their claimed GDP impacts are so high.  Using this kind of chicked-in-every-pot high multiplier will of course make infrastructure spending seem like a no-brainer.  Of course those of us with more sympathy towards Austrian economics, wherein recessions are caused by misallocations of capital, will worry that this kind of government spending program, shifting private resources to public decision makers to spend, will only double down on the same crap that caused the recession in the first place.  I grew up with Japan's MITI being praised as a model by the American Left, watched the lost decades that followed this government-directed investment program, and believe that a similar reckoning is coming in China.

Corporate Welfare and the Thin Edge of the Wedge

The other day, the City of Glendale approved a deal which has the city subsidizing (more in a second) the buyers of the Phoenix Coyotes hockey team to get them to actually stay in town rather than move to Seattle.  The deal is arguably better than deals it was offered in the past (it gets shares of parking and naming rights it did not have before) and may even be a rational deal given where it is today.

But that is the catch -- the phrase "where it is today."  At some level it is insane for a city of 250,000 people to pony up even more subsidies for a team that has the lowest attendance in the league.  The problem is that the city built the stadium in the first place -- a $300 million dollar palace for a metropolitan area that already had a major arena downtown and which was built (no disrespect to Glendale) on the ass-end of the metropolitan area, a good 90 minute round trip drive for the affluent Scottsdale and east-side corporate patrons who typically keep a sports franchise afloat.

Building this stadium was a terrible decision, and I and many others said so at the time.  But once the decision was made, it drove all the future decisions.  Because the hockey team is the only viable tenant to pay the rent in that building, the city rationally will kick back subsidies to the team to keep it in place to protect its rent payments and sales taxes from businesses supported by the team and the arena.  The original decision to build that stadium has handcuffed Glendale's fiscal situation for decades to come.  One can only hope that cities considering major stadium projects will look to Glendale's and Miami's recent experiences and think twice about building taxpayer funded facilities for billionaires.

The deal the other night to keep the team went down in the only way it could have.  As I had written, the NHL was insisting on selling the team for its costs when it took it over in bankruptcy, which were about $200 million, which was well north of the $100 million the team was worth, creating a bid-ask gap.  Several years ago, the city tried to just hand $100 million to a buyer to make up the gap, but failed when challenged by the Goldwater Institute.  The only real avenue it had left was to pass the value over to the buyers in the form of an above-market-rate stadium management contract.

And that is what happened, and I guess I will say at least it was all moderately transparent.  The NHL came down to a price of $175 million, still $75 million or so above what the team is worth.   The City had already sought arms-length bids for the stadium management contract, and knew that a fair market price for that contract would be $6 million per year.  It ended up paying the buying group $15 million per year for the 15-year contract, representing a subsidy of $9 million a year for 15 years.  By the way, the present value of $9 million over 15 years at 8% is... $75 million, exactly what was needed to make up the bid-ask gap.  Again, I think the city almost had to do it, because the revenue stream it was protecting is likely higher than $9 million.  But this is the kind of bad choices they saddled themselves with by building the stadium in the first place.

The Crony Christmas Tree

One item that was part of the (thankfully) deceased farm bill that got little attention was a levy on live Christmas trees.

Apparently, live Christmas tree producers are upset at competition from artificial trees.  And there is nothing to which Congress is more sympathetic than using government coercion to help industry incumbents fight off new competition.

Readers may or may not know that the government often steps into certain agricultural commodities and, at the behest of the largest producers, creates mandatory advertising regimes.  In these regimes, a tax is levied on everyone's product and the money is used to fund advertising campaigns (e.g like the ones for milk and beef).

The most recent farm bill was to create a similar regime for live Christmas trees, requiring all tree producers to pay the per-tree tax whether they wanted or needed the advertising campaign or not.  So, for now, we have escaped holiday government-funded ads like "Pining for Christmas" and "Live Trees:  They are What's Fir Christmas."

The egg industry was silent on whether they would consider a similar step to battle plastic Easter eggs.

This May Finally End NHL Hockey in Arizona

Let me bring you up to speed:  The NHL owns the Phoenix Coyotes hockey team, having taken them over in bankruptcy.  It needs to sell the team and is demanding $200 million for the team, having promised the league owners it would not accept anything less (so they will not take a loss in the investment).  The team is worth, however, something like $100 million, at least if it stays in Arizona.

The team plays in a stadium built by the relatively small city (250,000 people) of Glendale, which put something like $300 million of taxpayer money into the stadium and has provided operating subsidies to the team the last several years that probably total another $100 million, at least.  The city has a bad hand, but keeps doubling down on its bet to try to retain the team.

The problem, of course, is the $100 million difference in the bid-ask for the team.  Glendale first tried to fix this by agreeing in a previous deal couple of years ago to basically give the buyer $100 million of taxpayer money to bridge the bid-ask gap.  The Goldwater Institute sued, saying that the Arizona Constitution pretty clearly states the government can't directly subsidize commercial interests.  They prevailed (before it ever reached court) and the deal died.

The only way left for Glendale to make the deal happen was to give a buyer $100 million in taxpayer money but to do so in a more disguised manner.  The one option they had was in the stadium management contract.  If they agreed, say, to pay the buyer $10 million a year over market rates for the stadium management contract, over 15 years that has about a $100 million present value.  They can get away with this because there is no objective valuation of what a management contract would cost on the open market.

But their ability to do this is, thankfully, about to die.  Under intense pressure, and in a fit of good government that I am sure Glendale regrets, it actually went out and sought arms-length contracts for stadium management from third parties.  It is enormously unlikely the city will accept any of these bids, because it needs the stadium contract as a carrot for someone to buy the Coyotes at the NHL's inflated price.  Besides, I bid on large contracts a lot and I have often been presented with bid packages from an entity that had no intention of awarding, but wanted me to go through all the bid effort just to establish an internal price benchmark or to keep their preferred provider honest.  I can smell these from a mile away now.

The problem Glendale will have, though, is that when these 3rd party bids become public (which they inevitably will), it will then be impossible to hide the implicit subsidy in the management contract.  Presumably, taxpayers then will push back on any future deals using this dodge, though Glendale citizens seem pretty supine so one never knows.  Also, the city can also tweak the responsibilities of the stadium contract, thereby allowing them to claim that comparisons against these past bids are apples and oranges (though this will be hard as I expect arms-length bids around $5 million a year vs. $15 million they propose to pay the team buyer).

PS-  It is hilarious to see worried comments from Gary Bettman (NHL Commissioner) about how hard on Glendale it will be if the Coyotes leave town.  Merely lowering his asking price to something less than 2x the market price would solve the problem in an instant.

Crony of the Month

In barely a month, Dianne Feinstein's husband has scored 1) The first ever national exclusive real estate broker's contract to sell USPS buildings and 2) The multi-billion dollar contract to construct the first leg of California "high speed" rail.

Film Production -- The Strangely Favored Industry

My son and I were watching a TV show and at the end there was a blurb about it being made in Georgia.  I said to him "I guarantee that "filmed in Georgia" translates to "subsidized by Georgia."  He did not believe me, and could not understand why anyone would subsidize film production.  After all, we can argue about whether any government subsidized jobs make sense or just cannibalize investment in other areas, but film jobs are the most temporary and fleeting of all jobs.

Turns out I was right (I followed a web link from the credits):

Georgia production incentives provide up to 30% of your Georgia production expenditures in transferable tax credits.

The program is available for qualifying projects, including feature films, television series, commercials, music videos, animation and game development. With one of the industry’s most competitive production incentive programs, the Georgia Film, Music & Digital Entertainment Office can help you dramatically cut production costs without sacrificing quality.

Highlights from the Georgia Entertainment Industry Investment Act include the following:

  • 20% across the board, transferable flat tax credit with a minimum of $500,000 spent on qualified production and post production expenditures within Georgia
  • Additional 10% tax credit if a production company includes an imbedded Georgia promotional logo in the qualified feature film, TV series, music video or video game project
  • Provides same tax credits to all instate and out-of-state labor working in Georgia, plus standard fringes qualify
  • No limits or caps on Georgia spend; no sunset clause
  • For commercials and music videos, a production company may group multiple projects together to meet the $500,000 minimum spend on qualified expenditures

This is just insane.  WTF is the state doing subsidizing 30% of the cost of making commercials?  What could possibly justify this, except that this is a sexy business and it gives politicians a chance to rub shoulders with film people?   Why are Georgia business people taxed in order to hand money film producers?   What makes film production a "good" industry and, say, campgrounds a bad one?

Well, I suppose it could be argued that filming in Georgia would help advertise Georgia by showing scenes filmed on location in the state.  Except that the show we were watching was Archer, an animated series about spies based in New York City.  Not one second of the TV show has ever shown or ever will show a live image of Georgia, and I am almost all the way through the second season and not one location in the state of Georgia has been mentioned  (though they might have mentioned the one in Asia).

 

Electric Vehicle Welfare Queen

No, we are not talking today about Elon Musk (though the name fits) but about this electric car buyer profiled in the WSJ:

Bronson Beisel, 46, says he was looking last fall for an alternative to driving his gas-guzzling Ford Expedition sport utility around suburban Atlanta, when he saw a discounted lease offer for an all-electric Nissan Leaf. With $1,000 down, Mr. Beisel says he got a two-year lease for total out-of-pocket payments of $7,009, a deal that reflects a $7,500 federal tax credit.

As a resident of Georgia, Mr. Beisel is also eligible for a $5,000 subsidy from the state government. Now, he says, his out-of-pocket costs for 24 months in the Leaf are just over $2,000. Factor in the $200 a month he reckons he isn't paying for gasoline to fill up his hulking SUV, and Mr. Beisel says "suddenly the car puts $2,000 in my pocket."

Yes, he pays for electricity to charge the Leaf's 24-kilowatt-hour battery—but not much. "In March, I spent $14.94 to charge the car" and a bit less than that in April, he says. He also got an electric car-charging station installed at his house for no upfront cost.

"It's like a two-year test drive, free," he says.

I hope you all enjoy Mr. Beisel's smug pride a driving a car using your money.

In my next post, I am going to dive deeper in the operating cost numbers here.  By the article, Mr. Beisel has cut his monthly fuel costs from $200 to $14.94, a savings of over 90%.  If these numbers are real, why the hell do we have to subsidize these cars?  Well, while it turns out that while the Leaf is a nice efficient vehicle, these numbers are way off.  Stay tuned.

Licensing and Cronyism

This is a depressing but all too familiar story of crony protections for incumbent operators

Only one company is competing for Tempe’s lucrative contract for ambulance services to support the Fire Department.

The Tempe City Council chose to allow only Professional Medical Transport to compete for the contract because city officials believe that the state’s approval last year of Rural/Metro Corp.’s purchase of that company effectively ended competitiveness in the market.

Indeed, the Ambulance market used to be competitive. State law makes it nearly impossible to start an ambulance company, or for an existing company to get access to the Arizona market. However, this used to be ok, because there once were a handful of companies competing in the market. That meant that having a statute that artificially blocked new entrants wasn't a huge problem.

Then a strange thing happened...Rural Metro bought all the other companies. Then they hired a team of the best lobbyists in the state in order to prevent the law from being changed. Frankly, it's a brilliant move.

This session, I worked with a client that wants to break into the inter-facility transfer market. Inter-facility transfers are scheduled transports of stable patients who aren't able to ride in cabs, private cars or stretcher vans. They are by definition, non-emergency transfers, but they still require an ambulance. And that ambulance has to be licensed as an "ambulance". The problem is that it is statutorily impossible to break into the market...which like I said, was fine until Rural Metro bought the other companies.

Our bill to open up the market to competition didn't even get a hearing.

The one disagreement I have is that it was somehow "OK" to prevent competition when there were three competitors but not when there is one.  This reminds me of why Republicans can't be trusted to make a case for free market capitalism.  New competitors can bring just as much to the table in already crowded markets as they can to monopolies.  Were we "OK" when there were just 3 major networks, or are we better off with competition from 600 cable channels?  Were we "OK" with just the big 3 auto makers or are we better off with Toyotas and Kias as choices?

One of the great under-reported stories of the health care field has been the certificate of need process for hospitals which, in most communities, has prevented construction of competing hospitals.  So then, like in this example, all the hospitals in a local community buy each other, and an instant monopoly is created.  Capitalism is blamed, but in fact the resulting high prices are a result of government action.

Florida Reduces Yellow Light Times to Generate Red Light Camera Revenue

Via Crony Chronicles

The 10 News Investigators found a number of communities shortened their already-safe intervals to the new minimums. In some cases, FDOT mandated longer yellow lights, but seemingly only at intersections that hadn’t been in compliance for years.  Around Greater Tampa Bay, the yellow interval reductions typically took place at RLC intersections and corridors filled with RLC cameras.

FDOT’s change in language may have been subtle, but the effects were quite significant. The removal of three little words meant the reduction of yellow light intervals of up to a second, meaning drastically more citations for drivers. A 10 News analysis indicates the rule change is likely costing Florida drivers millions of dollars a year.

When I lived near Denver, the government (not sure if city, state or county) reduced the speed limit and messed up the traffic light timing of a free road that paralleled a new toll road to try to generate more money for itself and its private toll operator.

Who is the Largest Source of New Consumer Credit?

Consumer Credit Holdfers_0

 

That's right, it's you.  That taxpayer.  So when the student loan bubble bursts, taxpayers are on the hook.

source