Dispatches from a Small Business
Posts tagged ‘investments’
Looks like I will be on Fox & Friends at 8:15 EST tomorrow (Wed) to discuss the State of the Union, and specifically the Obama administration and public vs. private investment. That will make four national TV appearances and 4 entirely different topics (parks, minimum wage, electric car efficiency, and infrastructure investments). I’m really honing a razor-sharp personal brand.
As I predicted, the various highly touted European debt and currency interventions last month did squat. This is no surprise. The basic plan currently is to have the ECB give essentially 0% loans to banks with the implied provision that they use the money to buy sovereign debt. Eventually there are provisions for austerity, but I wrote that I don’t think it’s possible these will be effective. It’s a bit unclear where this magic money of the ECB is coming from – either they are printing money (which they refuse to own up to because the Germans fear money printing even more than Soviet tanks in the Fulda Gap) or there is some kind of leverage circle-jerk game going where the ECB is effectively leveraging deposits and a few scraps of funding to the moon.
At this point, short of some fiscal austerity which simply is not going to happen, I can’t see how the answer is anything but printing and devaluation. Either the ECB prints, spreading the cost of inflation to all counties on the Euro, or Greece/Spain/Italy exit the Euro and then print for themselves.
The exercise last month, as well as the months before that, are essentially mass hypnosis spectacles, engineered to try to get the markets to forget the underlying fundamentals. And the amazing part is it sort of works, from two days to two weeks. It reminds me of nothing so much as the final chapters of Atlas Shrugged where officials do crazy stuff to put off the reckoning even one more day.
Disclosure: I have never, ever been successful at market timing investments or playing individual stocks, so I generally don’t. But the last few months I have had fun shorting European banks and financial assets on the happy-hypnosis news days and covering once everyone wakes up. About the only time in my life I have made actual trading profits.
Thought problem: I wish I understood the incentives facing European banks. It seems like right now to be almost a reverse cartel, where the cartel holds tightly because there is a large punishment for cheating. Specifically, any large bank that jumps off the merry-go-round described above likely starts the whole thing collapsing and does in its own balance sheet (along with everyone else’s). The problem is that every day they hang on, the stakes get higher and their balance sheets get stuffed with more of this crap. Ironically, everyone would have been better getting off a year ago and taking the reckoning then, and certainly everyone would be better taking the hit now rather than later, but no one is willing to jump off. One added element that makes the game interesting is that the first bank to jump off likely earns the ire of the central bankers, perhaps making that bank the one bank that is not bailed out when everything crashes. It’s a little like the bidding game where the highest bidder wins but the two highest bidders have to pay. Anyone want to equate this with a defined economics game please do so in the comments.
Investors everywhere were shocked to see that MF Global seems to have lost over a billion dollars of their customers capital. In most cases, this capital was cash customers thought was sequestered as collateral for their trading accounts. MF Global took its customers money and used that money as collateral in making risky, leveraged bets on European sovereign debt, bets that fell apart as debt prices fell and MF Global faced margin calls on its bets that it did not have the liquidity to cover.
Certainly it strikes most folks as unethical to lose the assets in your customers’ brokerage accounts making bets for the house. But it turns out, it may have been entirely legal. This article is quite good, and helps explain what was going on, what this “hypothecation” thing is (basically a fancy term for leveraging up assets by using them as collateral on loans), and why it may have been legal.
In short, the article discusses two regulatory changes that seemed to be important. The first was a 2000 (ie Clinton era, for those who still think these regulatory screwups are attributable to a single Party) relaxation in how brokerages could invest customers’ collateral in their trading accounts. The second was a loophole where brokerages created subsidiaries in countries with no controls on how client money was re-used (in this case mostly the UK) and used those subsidiaries to reinvest money even in US brokerage accounts.
The increase in leverage was staggering. Already, cash in most commodities trading accounts is leveraged – customers might have only 30% of the value of their trading positions as collateral on their margin account. Then the brokerage houses took this collateral and used it as collateral on new loans. Those receiving the collateral on the other end often did the same.
MF Global would be bad if it were fraud. But it is even worse if MF Global is doing legally what every other brokerage house is still doing.
Here is the minimum one should do: Diversify brokerage accounts. We diversify between bonds and stocks and other investments, but many people have everything in one account with one company. I am not sure anyone can be trusted any more. My mutual funds are now spread across three firms and, if I grow my brokerage account for individual stocks and investments (right now it is tiny) I will split that as well.
1. Accepting for a moment that the purpose of the loan program under which Solyndra received its money was truly reduction of CO2 output and fossil fuel use, what is the metric the DOE uses to score these investments against these goals (e.g. tons of CO2 output avoided over the next 10 years per dollar of government investment).
2. How did Solyndra and other companies that were accepted for the program score on your metric? How did companies that were turned down score?
Of course there was no such analysis — the government appears to have invested in whatever companies raised the most money for Obama or got Joe Biden’s heart palpitating or both. Even if one pulls the obvious politics out of it, it appears they invested in stories they found appealing, the same mistake many novice investors make.
The Left works hard to wrap itself in the mantle of science, and Republicans just let them do so. If Chu wanted to take the high ground of trying to do the right thing for US energy policy, questioners should have taken him at his word and challenged how well his internal process matched his bold words. Politicians are too obsessed with finding some crime or smoking gun. The underlying failure is that the loan process does not, never will, and in fact cannot match the stated ideals and goals of the program.
I hinted at it in my last post, but have addressed it in more depth in my column this week at Forbes. A brief excerpt:
The theme from all these failures is distorted signals and corrupted communication. People, no matter how savvy, cannot possibly research every nook and cranny of the economy before making an investment. They make decisions, therefore, based on signals – prices, interest rates, perceived risks, and the profit history of other similar investments. If these signals are artificially altered or corrupted, bad decisions that destroy wealth and growth will result.
Which brings me back to education. I will tell you something almost every business owner knows: We business owners may whine from time to time that banks won’t lend us money, but what really is in short support are great people. Nothing has more long-term impact on an economy than amount and types of skills that are sought by future workers. That is why everyone accepts as a truism that education is critical to economic health.
Unfortunately, there is good evidence that our education policies have already done long-term harm. The signals we send to kids making their higher education plans have disconnected them from reality in a number of fundamental ways, causing them to make bad decisions for themselves and the broader economy.
Examples follow. Read it all.
Output of cellulosic ethanol will surge starting in 2013, according to the U.S.’ largest corn-based biofuel production firm, Poet LLC.
Poet says 2013 marks the start of commercial-scale cellulosic ethanol production in the U.S. and predicts its lone facility will “open the floodgates” for the advanced biofuel….
As Poet exec Greg Hartgraves points out, production of cellulosic ethanol is expensive and that means those floodgates need to be helped open with federal monies. Without an energy policy mandating its production, U.S. firms are likely to shy away from the cellulosic biofuel, he said.
Duh. It’s a substitute that is both less effective (lower btu per gallon) and more expensive that what it is supposedly substituting. I am just floored at the number of investors who are putting money up on the come with an expectation that somewhere down the road they can convince the government to subsidize them. Poet knows this plant is uneconomic but has built it anyway, probably hoping to extract promises of support from candidates in the Iowa caucuses. Kleiner Perkins did the same think with Fisker Automotive, making early stage investments that could only be bailed out by future political largess. As Ayn Rand would say,the aristocrats of pull.
Ray Lane of VC Kleiner Perkins is seen in this video trumpeting how the Obama Administration is, for the first time in his memory, succesfully making investments in private companies. His main example: Solyndra!
The reason this is particularly timely and fascinating is that just a few weeks ago, Ray Lane took delivery of the first Fisker Karma electric car, financed with $529 million of our tax money and promoted with $7500 of our tax money on every sale, Mr. Lane and Kleiner are investors in Fisker (and Lane is Fisker’s Chairman) and therefore huge beneficiaries of Obama’s largess, and Mr. Lane got the first Karma as a big thank you for his political connections that helped score the cash.
Of course Kleiner (who also hired green Crony-in-chief Al Gore) is going to be thrilled with the government money. Nothing is worse than being a VC in with a large early round position in a company and being unable to get the next stage of investment. Since it appears they could not get any private investors to fund this, the taxpayer money probably saved their investment …. at least for a while.
Update: Ray Lane is apparently ticked off by the negative publicity surrounding the Fisker Karma and the money they received from taxpayers. Tough. Surely he is used to his investors being ticked off about bad outcomes. Well, now he gets to see how REALLY ticked off his investors can be when their money was taken against their will, even without their knowledge. At least he can tell his institutional guys, when things go bad, that they came in with eyes open. What’s his response to taxpayers?
For those who have not seen it, my article on how the Fisker Karma, even on all electric, uses more fossil fuels per mile than an SUV is here.
Or maybe it is more correct to say that the taxpayer is being set up to keep BofA counter-parties whole. From Bloomberg, via Zero Hedge:
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.
Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.
“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”
Obviously I am not a huge fan of bank regulation, but if the taxpayer is going to insure deposits, then the government has got to set and enforce capital restrictions on how those deposits are invested. How many times do we have to learn this lesson? The S&L crisis and the Texas bank collapse of the 1980′s was caused by the exact same BS, investing taxpayer insured deposits in increasingly risky investments.
Normally, in a free economy, we expect lenders to enforce rules and discipline on those to whom they lend, just as fire insurers in the 19th century developed the first building codes and inspections to protect their themselves. But if depositors are insured, they are not going to get worked up too much about BofA — I am a depositor but I know the Feds will make me whole if the bank crashes. Deposit insurance provides comfort to depositors and pays some dividends in heading off bank panics, but at the same time it relieves the bank of any accountability for how the deposits are invested unless the US government takes on that role. Of all the BS regulations financial firms have to put up with, this is the one that should actually exist, and the implication in this article is that despite thousands of pages of new regulation, these basic protections still don’t exist. Sure, they exist in law, but there seems to be nothing to stop an agency from issuing exemptions, and this Administration has shown itself to love giving exemptions.
This reminds me a ton of the AIG bailout. For some reason, there are a group of Wall Street companies (cough Goldman cough) that seem to have immense political power to protect investments in which they are a counter-party. To this point, people have been expecting that the BofA holding company might soon fail, but the underlying banks would be fine and just sold off in pretty good shape. Most of the trash is apparently at the holding company level.
The losers in all this are the counter-parties to these various derivatives, who would rather have a better set of assets to grab if the ship starts sinking. Of course, they don’t have any right to this — they didn’t make these original deals with the depository banks, they made them with Merrill Lynch and other trash BofA has bought. But never-the-less, the Fed seems fired up to give these guys a special deal. It reminds me of the Solyndra deal where the Administration allowed certain private parties to move ahead of the US Government on the creditor list, though at least in Solyndra’s case these parties actually put some money into the pot for the privilege. This seems to be a straight giveaway, and it is no surprise that the FDIC is apoplectic.
Megan McArdle looks into where all that green seed capital is going. It turns out it is going the same place most other government “investments” go — to large, well-connected companies who don’t actually need the money but will sure appreciate it come election time.
But I have highlighted what jumped out at me: most of the money has gone to enormous companies that should have no trouble accessing capital. Established utilities, large multinational auto manufacturers, a global warehouse owner. The bulk of these funds are not going to rectify some gap in the capital markets. They’re straight subsidies to huge corporations. Even some of the smaller firms/deals are owned by large corporations like Total SA.
Giving large, established companies extra-cheap loans to build power plants, run transmission lines, and fix up the roofs of their warehouses is, in the immortal words of P.J. O’Rourke, like paying a Dairy Queen owner to keep his ice cream freezers on.
From my Forbes post today, the following letter:
From: The Consumers and Small Businesses of China
To: The United States Senate
Re: Currency Exchange Rate Oversight Reform Act of 2011
Dear Senators:
Thanks! For years, our government has pursued a currency and trade policy that has subsidized your American consumers at the expense of our own here in China, and while we are unsure exactly why you would want to end this arrangement (we presume due to powerful lobby by your large manufacturers), we are happy that you are doing so….
A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese. So-called “dumping” represents an even clearer direct subsidy of American consumers over their Chinese counterparts. And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields and creating inflationary pressures.
Every single step China takes to promote exports is in effect a transfer of wealth from Chinese citizens to Americans, and we are tired of it.
Read it all.
From my own state of Arizona (emphasis added)
A group of small-business proponents is asking the Legislature to guarantee startup money for Arizona enterprises.
The backers of a so-called Arizona Fund of Funds made their pitch to a handful of lawmakers Monday, saying businesses need government help to start hiring again.
That help should come in the form of tax credits, said John Kowalski, who is promoting the idea through the Arizona Growth Foundation, a group of venture capitalists working to bring more investment to the state.
The credits would be a safety net to encourage venture capitalists to invest in a pool of money that would be distributed to emerging businesses, said Kowalski, a former executive with the Arizona Small Business Association….
The government’s role is to serve as a guarantor, through the tax credits, in case the investments don’t yield the projected results.
While this is being sold as something for small business, what it looks like to me is just more of the same socialization of bankers’ losses that helped get us into this financial mess. I suppose this “profits are mine if it makes money, losses are the governments if it loses money” never grows old for investment bankers and VC’s, but why is anyone taking this seriously anymore?
Faced with serious questions after the Solyndra failure as to their ability to make intelligent investments, the government is reacting by…. accelerating the approval of other green energy loans. Again, the difference with the private sector is not that the private sector makes no mistakes, but there is real accountability for those mistakes which lead to changes in behavior.
I have argued many times that private investors, over the long haul, will make better investment choices than the government, in part because they have better incentives and information to guide their decision-making. The straw-man argument against this is to point out anecdotes of failed private investments. Heck, I can do that. Pets.com famously blew through $300 million of private capital with a corporate strategy that never made much sense to people.
The Pets.com investors were chagrined, and probably learned a lesson from their mistake. Certainly most of us thought the blame, if blame existed, for the debacle rested on the investors for pouring money into a bad proposition. Certainly no one accused the management of fraud — I am sure they were diligently, honestly trying to make the company a success, even if they were misguided as to where that success lay.
As it turned out, everyone, not just the Pets.com investors, learned from the mistake. The failure was an important driver in an industry-wide rethink as to what a successful Internet business model might look like. This benefit only came because people were willing to acknowledge not just that the Pets.com investment was flawed, but that it represented a systematic mistake that was being made vis a vis Internet startup investments.
Now, consider solar manufacturer Solyndra. It failed this week, likely taking with it most of $535 million in taxpayer money that the Obama Administration was so eager to give them that it short-cutted its internal processes to fork over the cash more quickly.
Many of us on the outside would love to see the government rethink such investments in a systematic way, and reconsider if it is even possible for the government to make such investments, and in particular whether “green jobs” investments make any sense at all.
But the likelihood of that kind of introspection happening in the public world is about zero, and my bet is that Obama is going to propose more of the same tonight in his speech.
In fact, the Department of Energy (the source of the loan) and the FBI have today sent armed agents into Solyndra looking for evidence of fraud. While Zero Hedge argues that fraud would be bad for Obama, in fact I think it would probably be the best possible outcome and one he is hoping for. If he can say, “wow, you and I both got tricked here by some evil folks we are going to put in jail” it deflects attention from the fact that he put a half billion dollars of taxpayer money into a business plan that never made a lick of sense.
Another me-too solar manufacturer with a factory in California of all places was never going to compete in a global commodity market. This company’s plan was always to sell dollars for 50 cents and to make it up on volume. I don’t see how any investor thought this was going to work. My guess is that the private investors didn’t know much about solar and invested because it had a certain hip-ness to it, or less charitably, they knew it never made sense but hoped that Uncle Sam, once it was already in for a half billion, would keep more money flowing or perhaps agree to buy out their production at above market prices.
There may have indeed been fraud, but as in the case of Pets.com, it is perfectly possible no real internal fraud existed and they ran through a ton of money against a stupid business plan that should never have been funded. Obama would greatly prefer to call it fraud rather than his own failure of judgement. As an aside, Fannie and Freddie are pursuing exactly the same course in suing banks, arguing that they were defrauded by the banks in buying mortgages, a fairly laughable proposition in the great scheme of things when one considers Fannie and Freddie were at the forefront of the industry in driving down lending standards and promoting the expansion of the mortgage market.
My new column is up at Forbes, and discusses why politicians, particularly this administration, think they can allocate capital better than the market
The problem is that this top-down override of market capital allocations is almost certain to destroy wealth, because there are at least two problems with it (beyond the obvious liberty and property rights issues).
First, the decisions are being made by, at most, a few hundred government workers. There is no possible way these workers can ever gather the knowledge and information posessed by millions of private actors making similar investment decisions. Like monkeys throwing darts, some of the investments will work out, but on average their success rate has to be far lower than the network of individuals in the broader economy.
Second, and probably more important, government decisions-makers have terrible incentives when making these investments. Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return. In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch. These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.
Obama’s investment of taxpayer money into Solyndra is a great example. It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program. A good, well-timed sound bite on the evening news was more important that the actual details of the investment.
But, in fact, little due dilligence should have been necessary. ….
Kevin Drum argues that Conservatives have vastly over-estimated the effects of capital gains tax changes on investment.
I can’t agree with parts of the article that seem to argue that all taxes have limited effects on behavior (this is easily disproved, just look at what the tax code does for preferences of issuing debt vs. equity, or even look at the mortgage market). But I have always suspected that the political focus on the capital gains tax represents another piece of evidence that financial players (Wall Street, banks) dominate much of economic regulation.
All things being equal, a low capital gains tax is fine. If I sell some stock, its nice to pay a lower tax on the profits, particularly since at some level those profits have already been taxed once at the corporate level. Financial players who buy and sell securities live and die by the capital gains tax, and I suppose for businesses there is some advantage in that it perhaps reduces the cost of debt and equity.
But as a business person with my own company, that capital gains tax is largely irrelevant to my investment decisions. That is because all my investments are made to generate cash flow, and thus the regular tax rate is the ordinary income tax rate. Perhaps one time in my life, if ever, the capital gains tax will be hugely relevant when I sell my business, but that is at some time in the future so nebulous that it does not affect my behavior. Other than the double taxation argument, I have never understood why those who take their investment gains in asset value appreciation rather than in income should get different tax treatments.
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.
It does not appear that Rick Perry is the guy to dismantle our growing corporate state.
The LA Times investigates the big-money culture of Texas politics, which has gotten even bigger and money-er since Rick Perry became governor:
Perry has received a total of $37 million over the last decade from just 150 individuals and couples, who are likely to form the backbone of his new effort to win the Republican presidential nomination….Nearly half of those mega-donors received hefty business contracts, tax breaks or appointments under Perry, according to a Los Angeles Times analysis.
Perry, campaigning Monday at the Iowa State Fair in Des Moines, declined to comment when asked how he separated the interests of his donors from the needs of his state. His aides vigorously dispute that his contributors received any perks. “They get the same thing that all Texans get,” said spokesman Mark Miner.
Nearly half! And this doesn’t even include anything about David Nance and the largesse Perry distributes via his $200 million state-managed venture capital slush fund. Doling out political favors in industrial quantities is obviously something that isn’t frowned upon by Texas political culture, and Perry has taken it to whole new levels.
Kudos to the LA Times and folks like Kevin Drum for digging this up, but everyone involved should be embarrassed by just how partisan outrage on this kind of thing can be. The same folks who are rightly upset at Perry actively cheered on Obama as he took ownership of GM away from the secured creditors and handed it to his major campaign supporters in the UAW. His stimulus program has been a trillion dollar slush fund to pay off nearly every liberal constituency, and while I find the idea of a state-run venture capital fund horrifying, I see no difference here with Obama’s green job investments, many of which have gone triends, campaign supporters, and even spouses of prominent administration officials.
As I asked the other day, if the President is really supposed to be our VC in chief (an absurd thought) who in the hell would pick Obama for the job? As one random example out of my feed reader:
Last year, Seattle Mayor Mike McGinn announced the city had won a coveted $20 million federal grant to invest in weatherization. The unglamorous work of insulating crawl spaces and attics had emerged as a silver bullet in a bleak economy – able to create jobs and shrink carbon footprint – and the announcement came with great fanfare.
McGinn had joined Vice President Joe Biden in the White House to make it. It came on the eve of Earth Day. It had heady goals: creating 2,000 living-wage jobs in Seattle and retrofitting 2,000 homes in poorer neighborhoods.
But more than a year later, Seattle’s numbers are lackluster. As of last week, only three homes had been retrofitted and just 14 new jobs have emerged from the program. Many of the jobs are administrative, and not the entry-level pathways once dreamed of for low-income workers. Some people wonder if the original goals are now achievable.
“The jobs haven’t surfaced yet,” said Michael Woo, director of Got Green, a Seattle community organizing group focused on the environment and social justice.
“It’s been a very slow and tedious process. It’s almost painful, the number of meetings people have gone to. Those are the people who got jobs. There’s been no real investment for the broader public.”
At the same time, heavily subsidized Evergreen Solar is going bankrupt.
Bloomberg News reports that the firm Evergreen Solar will file for bankruptcy and close its operation in Midland, Mich. The maker of solar cells cites over-capacity in the industry, competition from China and fewer government subsidies as contributing factors. According to Bloomberg, the firm has 133 employees worldwide.
Given a Michigan location and participation in a politically faddish industry, readers won’t be surprised that Evergreen was the beneficiary of special state subsidies and a local tax break. Specifically, three years ago Evergreen Solar was offered a $1.8 million “refundable” tax credit by the Michigan Economic Growth Authority. For firms with little or no tax liability, this amounts to an outright cash subsidy, contingent on attaining certain employment and investment milestones. Evergreen Solar’s specific tax liability is not public information.
The deal was based on crystal-ball projections from the Michigan Economic Development Corporation using a software program known as REMI, which predicted that an Evergreen deal would create exactly 596 direct and “spin-off” jobs by 2018, producing $18.5 million in new state tax revenue.
The city of Midland also granted property tax abatements worth $3.9 million over 12 years, according to Mlive.com. It’s not known how much, if any, of these subsidies and tax breaks were ever collected by the company.
This actually understates the total subsidies, as it ignores subsidies to its customers, incoluding above market geed-in tariffs, to buy the solar panels.
Closer to home, a Tucson solar panel manufacturer that was opened to great fanfare with the help of Janet Napolitano and Gabby Giffords just closed after being open barely 2 years. They scored some subsidies, got some large government and utility contracts on the promise of local employment, and then packed up shop for China. Apparently they were attempting to compete in the commodity solar panel market on a strategy of having a higher fit and finish on their product, a product that sits on the roof and no one ever looks at. Good plan.
PS- Yes, private investments fail all the time, but they are 1) not using my money, unless I voluntarily offer it and 2) there are real consequences for those who make bad investments
This sort of thing drives me crazy:
Before 2009, the U.S. was supplying less than 2% of a tiny global market in advanced batteries. When the stimulus-funded factories are all complete, they’ll have the capacity to supply 40% of a rapidly growing global market, about 500,000 batteries a year. The stimulus will also boost our supply of electric-vehicle charging stations by more than 3,000%. And the Obama administration has provided loans to help Tesla, Fisker and Nissan build electric-car factories in the U.S., all part of Obama’s pledge to put 1 million plug-ins on the road by 2015. That is what change looks like, even if the President doesn’t beat his chest and call for mass beheadings on Wall Street while it happens
A few random thoughts
… there are actually folks who think that Obama’s farcical and unreachable 54.5 mpg standards for cars are too low.
Since cars are redesigned every 5 years, the 2025 date is basically 3 car revisions from now. It also is far enough in the future the auto makers can cynically sign on now fully expecting to ignore or change the regulation in the future.
This is the corporate state in 2011. Every single executive signing on to this is thinking “this standard is total BS.” But they go along with it because they fear the government’s power over them and crave the valuable taxpayer $ giveaways this Administration has demonstrated it is willing to give its bestest buddies in the auto industry.
Of course, once again, some greenie has convinced himself this will create all sorts of jobs. Sure, investments in car mileage is an investment in productivity (cars will uses fewer resources for the same output, ie miles driven). BUT – the money that will be forced into this investment would come from other spending and investments. Right now, private actors think that these other investments are a better use of the money than investing in more MPG. I will take the market’s verdict over the gut feel of an innumerate green. So this standard is about shifting investment and spending from more to less productive uses. Which has to reduce growth and jobs.
Ray Lane of Kleiner Perkins has helped score hundreds of millions of dollars of taxpayer money from the Obama administration to help subsidize Kleiner investments. More corporate welfare for billionaires.
It is a nice touch, therefore, that the first tangible result of these sizable public subsidies will be… a new family car for Ray Lane (the car is from Fisker Automotive, a Kleiner investment and recipient of $529 million in taxpayer subsidies. It appears to be a cool car, but an iPhone is a cool piece of tech too but you don’t see me advocating taxpayer money for Apple.
Corporate profitability is back up, and output has returned to nearly pre-recession levels. But employment still has not recovered. Why?
Well, I am sure there are a lot of reasons, but one potential reason I have pointed out for a while are Federal efforts to increase the cost of employment. If the true cost of an employee is higher, or even more uncertain, then investments are going to be funneled preferentially into capital rather than labor. Certainly that is what our company has been doing for a while. Thus productivity is way up, and employment is low.
I believe that Obamacare is a very important element in raising the cost and uncertainty of hiring new employees, particularly for small and middle-sized businesses that so often drive much of American employment growth. Certainly in the NFIB, the small business group to which my company belongs, the entire character of our internal discussions has changed. Three years ago we might have been discussing a mix of 10 or 12 issues we had. Now all you hear is Obamacare discussion. [Note - some on the Left like Kevin Drum argue that this concern is irrational. I seldom take seriously the opinion of people who have never tried to make a payroll about what business people should and should not be concerned about, but it almost does not matter. Whether it is irrational or not, the concern is a fact.]
Let me share a chart I just saw on Kevin Drum’s blog (which he used to make an entirely different point). Let’s look at the recession up to March 2010:
Look at the orange line which is private sector employment growth (the blue bars include government and get squirrelly in 2010 due to temporary census workers). This looks like a normal (though deep) recession with a nice recovery beginning.
Then, on March 18, 2010, Obamacare passed. Now lets play the numbers forward. Again, pay attention to the private job growth in orange – the blue spike in April in May is all temporary census workers
Correlation is not equal to causation, but Obamacare looks to me to be exactly like the National Industrial Recovery Act under FDR, a huge source of regime uncertainty and stab at free markets that killed an incipient recovery.
Here is a portion of Kevin Drum’s argument against lowering the minimum wage to stimulate employment
Is this really what we’ve come to? That we should provide a (probably very small) boost to the job market by allowing businesses to hire people for $9,500 per year instead of $14,500? Seriously? I mean, this is the ultimate safety net program, aimed squarely at working people at the very bottom of the income ladder. If we’re willing to throw them under the bus, who aren’t we willing to throw under the bus?
Part of the problem is that Drum is absolutely convinced that our intuition (and, oh, 200 years of experience) that demand curves slope downward is flawed in the case of low-skill labor. He has read the two studies out of a zillion that, contrary to all the others, suggests that minimum wage increases may not affect employment and has convinced himself that these are the last word in the science. As an employer who has laid people off and made larger and larger investments in automation with each successive minimum wage increase, I will continue to trust my intuition that higher minimum wages makes hiring less desirable.
I will say, though, that there are a number of reasons why a change in the minimum wage may have a smaller overall effect nowadays than one might expect. That is because the minimum wage vastly understates the cost of taking on an unskilled worker. Even with a lower minimum wage, these government costs will remain:
Hiring employees used to be a joyous occasion. Now I cringe and wonder what kind of liabilities I am taking on.
But back to Drum’s statement, how sick is it that allowing people off the dole to actually get a job is called “throwing them under the bus?” Drum, for someone so fired up to make decisions based on academic work, sure is willing to put on blinders to all the academic work that actually characterizes who works for minimum wage and how long they stay on it. He who argues against making policy based on flawed intuition is operating here entirely from a flawed perception of who minimum wage workers are. He seems to want to picture families of eight supported for decades by someone trapped in the same minimum wage job, for whom a raise only comes when Congress grants it, but that is simply not the reality.
Just as one metric, for example, the percentage of all wage and salaried workers making minimum wage or less fell from 8.8% in 1980 to 1.7% in 2008. In fact, the actual absolute number of people making the minimum wage fell by over 2/3 during these years. I would argue that this number is probably too low. A dynamic labor market needs to bring people in at the bottom, and raising the minimum wage makes this harder, and so traps people into unemployment. In fact, the number of unemployed in this country is at least 6 times larger than the number of minimum wage workers.
If we dropped the minimum wage, only a fraction of the 2 million or so who make the minimum wage would see their wages go down, but lets assume a quarter of them would. We are therefore trying to prop up wages for 500,000 but at the same time creating barriers for 13.9 million people who are unemployed and are looking for work. And it is low-skilled workers who we are most particularly throwing under the bus by keeping minimum wages high.
I was thinking this weekend that one reason the US recovery may be slow is related to labor and capital mobility.
One substantial avenue to recovery in a recession has always been labor and capital mobility. The fast labor and capital can be redeployed from losing industries to improving ones, the faster a recovery occurs. One reasons Japan and certain European countries have had slower recoveries in the past than the US is that our mobility was higher and barriers to entrepreneurship lower.
But it strikes me that two things are going on in the US to endanger this advantage we have always enjoyed
In the late 1970′s, the auto industry was in trouble but the oil patch was booming. The Houston newspapers sold well in Michigan, popular for their help wanted ads. From space, the Interstate highways between the Detroit and Texas probably looked orange from all the U-haul trailers.
The exact same dynamics could and should be occurring today. Capital and labor should be shifting from, for example, the failing auto industry to the growing energy sector. But the government today stands to block this reallocation. It is raising taxes on oil companies and placing barriers to their growth, while giving tax money to the auto industry and using every bit of power it can to sustain it. Combine this type of barrier to capital flows (and auto/energy is but a couple of examples) with rising barriers to entrepreneurship, and it should be no surprise that growth is abysmal.
This is what happens in a corporate state. Past winners retain huge amounts of power in the government long after their companies have become senescent in the marketplace. Politicians argue for the power to pick winners and losers in the economy but generally use it only to protect current competitors and stand in the way of progress.
Kevin Drum doesn’t buy the regime uncertainty argument as a partial explanation of the slow recovery.
Here’s what’s remarkable: Carter, a law professor at Yale, apparently never once bothered to ask this guy just what regulations he’s talking about. Is he concerned with general stuff like the healthcare law? Or something highly specific to his industry? Or what?
Regardless, I’ve heard this kind of blowhard conversation too often to take it seriously. Sure, it’s possible this guy manufactures canisters for nuclear waste or something, and there’s a big regulatory change for nuclear waste storage that’s been in the works for years and has been causing everyone in the industry heartburn for as long as they can remember. But the simple fact is that regulatory uncertainty is no greater today than it’s ever been. Financialuncertainty is high, but the Obama adminstration just hasn’t been overhauling regs that affect the cost of new workers any more than usual. The only substantial exception is the new healthcare law, and if you oppose it that’s fine. But it was passed over a year ago and its effects are pretty easy to project.
First, the costs of the health care law are NOT easy to project, and are made even harder when your company might or might not get waivers from certain provisions. Second, he seems to forget cap and trade, first by law and then by executive fiat; the NLRB’s new veto power over corporate relocations it exercised with Boeing; the absurdly turbulent tax/regulatory/permitting regime in the energy field, and particularly oil and gas. How about trillion dollar stimulus projects, that until very recently Obama was still talking about replicating (and Krugman begs for to this day). I could go on and on. This is spoke just like a person who never had to run a business.
Further, I wrote this in the comments section:
I think you are both right and wrong. I am sure the discussion about this is to some extent overblown. But you are thinking about business and hiring much too narrowly.
You seem to have a mental model of business showing up at the door, and someone turning that business down because they don’t want to hire an employee to serve it (or out of sheer petulance because Fox News told them to sit on their hands, lol). You find it unlikely anyone would refuse the business, and so do I.
But I run a small to medium size business, and a lot of hiring decisions don’t work that way. I do have some situations that fit your model – I have a campground that is really busy this year, so we hired more people to serve the volume. No problem.
But most of my hiring decisions are effectively investments. I am going to create a new position, pay money to train that person, and pay their wage for a while in advance of demand. Or I am going to open a new site or department or location and make a lot of investment, and the return on investment may be very sensitive to small changes in labor or regulatory costs.
For our business, with labor costs over 50% of costs, the issue is definitely labor costs. Our pre-tax margins are in the 6-7% range. So if labor costs are 60% of revenues, then a 10% change in labor costs might wipe out the margin entirely, and a much smaller change in costs might flip the investment from making sense to not making sense.
We run a seasonal business with part-time workers who are older and on Medicare. Regulations about exactly how much we will have to pay under Obamacare have not been written, so we have no idea how much our employment costs will go up in 2014, so we sit and wait. I have cancelled two planned campground construction projects in the last 6 months because we have no freaking idea if they will make money.
If I am having trouble with just this one law figuring out whether to make investments, what are, say, oil companies doing in evaluating investments when they have absolutely no idea what their taxes will be, whether they will be permitted or not to drill, or whether they will be subject to cap and trade?
One other thought, it strikes me that there is a lot of good scholarship that suggests that the Great Depression was extended by just this kind of regime uncertainty. Now, of course, the proposed structural changes to the economy being proposed at the time were more radical than anything on the table today. The National Industrial Recovery Act was essentially an experiment in Mussolini-style economic corporatism, until most of it was struck down by the Supreme Court. Nothing so radical is being proposed (unless you work in health care).
Look, I know the Left has convinced itself that only consumer demand matters in an economy, but business investment has simply got to matter in a recovery. If the returns on future investments are harder to predict, and therefore riskier, businesses are going to apply a higher hurdle rate to new investments, meaning they don’t stop entirely, but do invest less.
One interesting may to confirm this some day would be to look back and see if larger corporations with political access invested more than smaller ones or ones with less access. Did GE, who clearly can get whatever it wants right now from the government, invest more than a small company or even than Exxon, which is on the political outs? If so, this in my mind would confirm the regime uncertainty hypothesis, because it means that the companies doing most of the investing were the ones confident that they could shape the mandates coming out of the government in their favor.
Beyond regime uncertainty, if you want to talk about Obama and the recovery, you have to mention that a trillion dollars was diverted from private hands to public hands. Does anyone believe that taking a trillion dollars out of whatever investments private actors would have used the money for and diverting most of it to help maintain government payrolls is really the way to increase the strength and productivity of the economy?
U.S. Treasury Secretary Timothy Geithner told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion legal limit on its debt.
The U.S. Treasury will issue $72 billion in bonds and notes on Monday, pushing the nation right up against its borrowing cap at some point during the day, according to a Treasury official.
Geithner said he would suspend investments in two government retirement funds, which will give the U.S. Treasury $147 billion in additional borrowing capacity.
“I will be unable to invest fully” in the civil service retirement and disability fund and the government securities investment fund, he said in a letter to congressional leaders
Why does this surprise anyone? Up to this point, government workers have enjoyed a special privilege. All other Americans have had their retirement accounts in the Social Security system raided and replaced with IOU’s, such that $0 actually still exists in these accounts. All this does is subject government worker’s pensions to the same treatment. It is in fact telling that government employees have been a protected class on this dimension for so long.
I am sure these funds will be quickly replaced. No such luck for folks counting on Social Security for their retirement.
