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Impending disaster in Greece

Paul Krugman analyzes the debacle in Greece. Although Greeks voted barely a week ago to reject the bailout terms offered by the EU, which called for uninterrupted austerity, Prime Minister Alexis Tsipras proposed to the EU to accept almost all of the terms if there was some true financial relief. Instead, what the European Union, spurred by Germany, proposed today demanded all of the pain, and none of the gain that Tsipras sought. Indeed, Germany has essentially demanded regime change in Greece, even though Tsipras only came to office in January. As Krugman says, “It is, presumably, meant to be an offer Greece can’t accept.”

The Germans, it would appear, have decided to push Greece from the eurozone. But demanding an end to Greek sovereignty and austerity as far as the eye can see is simply evil. Moreover, it negates the long-successful stand of European Central Bank (ECB) president Mario Draghi that the ECB would do “whatever it takes” to keep the eurozone intact. The ECB’s reputation would be damaged greatly should crisis recur in Spain, Portugal, Ireland, etc., now that the world knows the ECB will not do “whatever it takes.” This is a recipe for a new recession in Europe spreading from the EU periphery.

The German demands are particularly “grotesque,” as Krugman says, when you consider that Greece has already endured 25+% unemployment for three years (see chart). This is an unemployment rate that the United States never saw even at the height of the Great Depression in 1933, when it peaked at 24.9%.


source: tradingeconomics.com

However, I believe Krugman’s argument actually overlooks an important point. He writes:

But still, let’s be clear: what we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line.

His point is that eurozone membership has removed Greece’s ability to exercise monetary policy autonomy and respond to its specific conditions, including via currency devaluation. Indeed, there can be no doubt that monetary union was flawed from the start. But Krugman overestimates the ability of devaluation to fix an economic crisis. At the same time, he underestimates the ability of creditors to destroy a government whose economic policies they disapprove of.

 The mega-example of this, of course, is the Latin American debt crisis of the 1980s. Mexico, Brazil, and all the other victims of this crisis (caused primarily by the U.S. Federal Reserve cranking up interest rates to astronomical levels in the late 1970s and early 1980s, which in turn caused an unprecedented rise in the value of the U.S. dollar and a global recession) were “bailed out” by the International Monetary Fund (IMF) in order to prevent the collapse of creditor banks in the United States, but were subject to strict austerity, with the same results we’ve seen in the EU. Indeed, in virtually every Latin American country income per capita was lower in 1990 than at the start of the crisis in 1982, giving rise to the term “lost decade of development” to describe these events.

Supposedly, the IMF learned its lesson after the Asian financial crisis that austerity packages didn’t work. Krugman has argued this many times (one example here). Indeed, the IMF has seemed to be more of a voice of sanity in the current crisis than in either the Latin American or Asian crises. Yet, in the endgame of the Greek crisis, this seems to have fallen away, with the IMF going along with the EU on Greek austerity. Something is seriously wrong here.

But there is another important example to mention, where the IMF was not involved. This, too, was a result of the Fed-caused global recession, this time in France. After Francois Mitterrand and the Socialist Party swept to power in 1981, among the government’s many policy changes was an attempt at Keynesian stimulus. However, this was met by massive capital flight. The problem was that the French franc was losing so much value that the government had to reverse its policies. For example, the franc was 4.6453 to the dollar in January 1981, but fell to 8.0442 by August 1983, 9.3041 by September 1984, and 10.0933 in February 1985. The takeaway is that even having floating exchange rates does not guarantee that you can maintain your policy independence.

Events are moving very rapidly; perhaps the EU will find a way to prevent this disaster. But at the moment, things look very grim.

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Will the US keep winning indefinitely? ISDS, that is

Now that Congress has given the President fast-track Trade Promotion Authority, the first agreement to be considered under these rules (no amendments allowed, up or down vote in 90 days) will be the Trans-Pacific Partnership (TPP). As you know from previous columns, one of the most worrying aspects of the TPP is its expansion of investor-state dispute settlement (ISDS), wherein private firms can bring their disputes with governments not to courts, but to international arbitration (usually through units of the World Bank or the United Nations), where legal precedent doesn’t matter and appeal is all but non-existent. Moreover, as the Consumers Union has long argued (recent example here), arbitration has a well-known pro-business bias. That’s why so many of your agreements with cable TV providers, financial services companies, and many more have fine print requiring mandatory arbitration, keeping you from getting your day in court if something goes wrong.

The response from the U.S. Trade Representative’s (USTR) office has been, “Not to worry! The United States has never lost an ISDS case.” The linked document goes on to claim that worldwide, only 1/4 of corporate plaintiffs have won cases against governments. But a new analysis by the International Institute for Sustainable Development (IISD),* using the same data source the USTR cites, comes to a very different conclusion based on its most recent update, the 2015 World Investment Report from the United Nations Conference on Trade and Development (UNCTAD). Moreover, we can see that countries with even more trustworthy court systems than that in the U.S. have lost ISDS cases. The Rule of Law Project, an initiative of the American Bar Association, has ranked 102 countries on the administration of justice and freedom from corruption, and puts the United States at #19 with a score of 0.73. Yet #14 Canada (0.78) has already lost ISDS cases, and both Canada and #10 Australia (0.80) are currently on the hook for major new cases (Eli Lilly and Philip Morris, respectively), that would overrule decisions by the countries’ respective Supreme Courts. So, even if governments have only lost 25% of ISDS cases, it’s unlikely U.S. luck will hold out indefinitely, if countries with better court systems are losing.

But it’s worse than that. UNCTAD’s database of known ISDS cases and their outcomes shows that in all cases decided through the end of 2014, the investor won 27% of the cases compared to 36% won by the state (see Figure III.10, p. 116). But another 26% of the cases are listed as “settled,” which often (but not always) means the respondent agrees to make some payment to the plaintiff to keep the case from going to arbitration. Public Citizen has a list of ISDS cases under prior U.S. trade agreements with examples of settlements that do and do not contain payments (see, for instance, NAFTA cases against Canada).

Moreover, as IISD attorney Howard Mann argues, if we separate out cases between jurisdictional determinations and determinations on the merits of the case, things look even worse for states. While only 71 of 255 cases (this excludes the “settled” cases) were concluded by a decision of the tribunal having no jurisdiction, Mann points out that all 255 cases effectively had decisions on jurisdiction, i.e., cases with final decisions had to have rulings that the arbitrators had jurisdiction. In that case, Mann says, “Investors, therefore, have won 72 per cent [184/255] of jurisdictional determinations.” And of the decisions on the merits of the cases, investors won 111, or 60%, of the remaining 184 cases. This calculation suggests that states are losing ISDS disputes at a much higher rate than normally portrayed. As if that’s not bad enough, the new World Investment Report finds that in 2014, of the 15 ISDS cases decided on their merits, states lost 10 (2/3) of them. In 2013, it was even worse for states, with investors winning 7 of the 8 cases decided that year (p. 126). If these higher proportions continue, obviously the proportion of investor victories will increase beyond the current 60% total.

Bottom line: The threat to regulation, democracy, and the rule of law posed by investor-state dispute settlement is very real. The U.S. Trade Rep’s  reassurances that the U.S. has never lost in ISDS don’t even make it likely that will continue into the future. We need to pressure Congress to vote down the TPP when negotiations conclude.

* Important disclosure: I have consulted for IISD several times since 2007 on investment incentive issues.

Cross-posted from Middle Class Political Economist.

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Elon Musk has received billions in subsidies

While receiving subsidies is nothing new for the Forbes 400 or even multi-hundred millionaire pikers like Mitt Romney, a recent story in the Los Angeles Times (via Good Jobs First) shows that Elon Musk (#34 in the Forbes 400) is a champion at getting subsidies for his companies. According to the Times article, Musk’s three companies, Tesla, Solar City, and SpaceX, have received a total of $4.9 billion (nominal value) in subsidies over the years. The article says that Tesla and Solar City stand out in the importance of the subsidies relative to the size of the company.

While SpaceX has received only $20 million, both Tesla and Solar City have received over $2 billion each, if you count the value of the subsidies their customers have received for buying Tesla vehicles and Solar City installations. This is more significant in the case of Solar City (about $1 billion) than for Tesla (about $321 million). Even without these sums, the companies have directly received about $3.5 billion, most notably for the new Gigafactory in Nevada and for a solar panel facility in Buffalo, New York.

Regular readers will remember that I have long argued in my books and elsewhere that these subsidies represent a transfer from average taxpayers to the much wealthier owners of the companies involved, worsening the already substantial inequality in the United States. These investment incentives have to be offset by higher taxes on others, reduced government services, or higher levels of government debt. While they are not the biggest driver of inequality, they do their part. Moreover, location subsidies reduce the country’s economic efficiency: It may well have made more economic sense to locate the battery Gigafactory as close as possible to Tesla’s assembly plant in Fremont, California.

While Musk refused to be interviewed for the Times story, he responded the next day on CNBC. Among other things, he argued that it was wrong to report a single figure for subsidies, which makes it seem like he received one big check. This is right as far as it goes. However, I think it would make more sense to give a single present value for the subsidies rather than the nominal value, which overstates the value of multi-year subsidies such as those for Tesla. Moreover, as Good Jobs First points out, it is perfectly necessary for taxpayers to know what their long-term liabilities are for multi-year subsidies in order to properly assess the impact on government finances.

Musk also defended the Tesla subsidies as merely necessary to make the project happen faster, rather than necessary to happen at all. Yet it conducted a multi-state auction in an all-too-common use of its location decision for rent-seeking. As I analyzed at the time, the deal was below average in terms of cost per job and aid intensity compared to other automobile facilities, and it is 13 times larger than Nevada’s previously largest incentive package.

Ultimately, the Musk story is far too familiar on a number of dimensions. Most importantly, it is a tale of rent-seeking and the policy/political drivers of inequality.

Cross-posted from Middle Class Political Economist.

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Why subsidize data centers?

A number of authors (Good Jobs First, David Cay Johnston, me, and me, among others) have pointed out that data centers (aka server farms) in the United States create very few jobs, yet receive state and local government subsidies that routinely exceed $1 million per job. I’m sure you already know that numbers like those make me ill: the typical automobile assembly plant will receive $150,000 or so per job, and require all sorts of component facilities to feed it — though, sadly, economic development officials often given incentives to the supplier plants as well.

So why $1 million or more per job? Data centers pay reasonably well, and the biggest are connected to famous tech names like Apple, Google, and Facebook, but it seems to me that it’s hard to get around the facts that there just aren’t that many jobs, and they don’t require an army of supplier facilities bringing indirect jobs.

But surely the competition for jobs is so steep that governments have no choice but to subsidize them? Actually, no. Aside from the fact that $1 million per job probably gives away more than the value of the investment to the government, my investigations have turned up multiple examples of companies building data centers without incentives.

One I’ve mentioned here before: American Express in 2010 built a $400 million data center in Greensboro, North Carolina, without any incentives at all. The leading explanation has been that Amex had already decided it was going to close a 1900-job call center in Greensboro (announced in 2011), a move it knew would trigger clawbacks of any incentives on the 50-150 job data center — so it didn’t bother seeking subsidies. Did I mention that North Carolina has cheap electricity?

More recently, I have found four Google data centers that opened or expanded without incentives in the last few years. New and expanded facilities in the Netherlands, Ireland, Finland, and Belgium all take advantage of cooler temperatures to reduce their electricity use. While Google did not respond to my email asking whether it received subsidies for those facilities, and IDA Ireland similarly was unresponsive, the Netherlands Foreign Investment Agency did respond with a confirmation that it had provided no “state aid” (EU-speak for subsidies) to the brand-new $773 million, 150-job data center opening in Groningen province in 2017. In addition, a search of the EU’s Competition Directorate case database did not reveal any Google state aid cases for data centers. Thus, it appears that none of these cases received incentives.

So why did Google demand over $140 million (present value) in subsidies from North Carolina back in 2007? I think we’re looking at the “usual suspect” once again, rent-seeking. Of course, North Carolina couldn’t foresee the Amex no-incentive deal that didn’t happen until 2010, but now that we can see how Google and American Express do business when they have to, it’s time economic development officials around the country learned to “just say no” on data centers.

Cross-posted from Middle Class Political Economist.

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Moving the goal posts on ACA success (w/update)

Right. So the the same day that I posted about the substantial fall in the uninsured rate for adults that we have seen since Obamacare went into effect, a conservative writes at the Wall Street Journal making exactly the same arguments that Matt Yglesias had refuted. Cliff Asness writes in the WSJ:

That more people would be insured was never in dispute. If you mandate that people buy something, penalize them if they don’t and give it away to some, more people will end up with it. The proper response to this is: Duh.

So, as I said, Yglesias had already refuted this, giving a number of examples of conservatives who predicted there would be no reduction in the number of uninsured Americans. Today, Paul Krugman takes us to Jonathan Chait’s response to Asness, where of course he piles on more examples of conservatives predicting a failure to improve the uninsured rate. Then he goes further. Asness wrote that a critical issue was “how many people covered by ObamaCare were previously uninsured.” You can probably guess Chait’s answer: “Well, that’s why you measure the net number of uninsured people, not just the gross expansion of coverage under Obamacare.” Which leads us back to the chart showing the substantial fall in the uninsured rate that was in my last post (and Yglesias’, Krugman’s and no doubt many more besides).

The latest round is that yesterday Asness responded to Chait. Here is where the goal post move comes in:

In contrast the rise in coverage is heralded by a myriad of Obamacare supporters as one of two major pieces of proof the law is working. But, how can something we knew before the fact be proof of anything?

Did you catch that? If we predict that something good will happen as a result of a new law, and that good thing happens, it doesn’t count as proof that the law was good. This is silly. We didn’t actually know the insurance rate would fall, but we had economic models that told us it would. So not only is the fall evidence that the law is working, it’s evidence that the models were right!

Somebody wake these people up.

UPDATE: @HaroldPollack points me to a new J.D. Power survey finding that people who signed up for insurance on the exchanges were more satisfied (696 out of 1000) than people with non-exchange plans, usually through employers (679 out of 1000). People re-enrolling on the exchanges scored even higher, with a score of 744 for people who re-enrolled on the Exchanges. Private plans offering multiple options were able to reach the 696 average for Exchange enrolees, which means that companies offering one insurance option had to be doing substantially worse than 679. Not surprisingly, new enrolees for 2015 were a large 55 points more satisfied than 2014 enrolees, who of course went through the disastrous rollout of healthcare.gov.  So people like their subsidies and they like their actual insurance policies, on average. Maybe that’s why Republican Senators are getting antsy that there will be hell to pay if the Supreme Court rules for the plaintiffs in King v. Burwell.

Cross-posted from Middle Class Political Economist.

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Oh, look! The uninsured rate fell again!

As any conservative can tell you, Obamacare is a job-killing “train wreck.” Not only is it a job killer, there is no way that it could possibly work. Except, of course, it does.

When I last visited this issue, the percentage of adults without health insurance had fallen from its peak of 18.0% in the third quarter of 2013 to 13.4% in the second quarter of 2014. Now, as Gallup (via Matt Yglesias) shows us, it continues to fall, dropping to 11.9% in the first quarter of 2015, based on over 43,000 interviews throughout the quarter. This is a drop of exactly one percentage point from the fourth quarter of 2014, or about 2.4 million adults.

The gains that we have seen now through two enrollment cycles (Q4 2013 through Q1 2015) affect every major demographic group, as the following table from Gallup shows.

 

Percentage of Uninsured Americans, by Subgroup

 

Especially notable are the gains for minorities (8.3 percentage points for Hispanics and 7.3 for African-Americans), those with income below $36,000 per year (8.7 points) and adults from 26-34 (7.4 points). But notice that even Americans making over $90,000 annually have seen their uninsured rate fall by 2.3 points, meaning that 40% of this group is no longer uninsured. This is actually the biggest percentage gain among any of the demographics Gallup surveyed.

As Gallup and Yglesias both point out, part of the reason for the improvement is the declining unemployment rate. But Yglesias is right on the money that this undermines the “job-killer” meme. In fact, as he shows, 2014 was “the best year of job creation since 1999.”

This is one argument conservatives aren’t going to win. In fact, it looks like they’ve already lost the vote of one Tea Partier who was able to retire early because of Obamacare.

Cross-posted from Middle Class Political Economist.

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Good Jobs First reveals top federal subsidy recipients: Subsidy Tracker 3.0

Slow to be getting to this, but I have to come back to such a major development. Good Jobs First, a national non-profit best known for its work on state and local subsidies to business, unveiled in March its Subsidy Tracker 3.0. This work differs from previous publications on federal subsidies by being project-based/firm-based, rather than program-based. This lets us know which companies have received the most federal subsidies over the years.

“Uncle Sam’s Favorite Corporations” finds that the federal government has awarded $68 billion in “grants and special tax credits” in the last 15 years. 2/3 of this has gone to large corporations. This is on top of hundreds of billions of dollars given to the banking sector during the financial crisis. One advantage of using Subsidy Tracker 3.0 is that it incorporates previous work by Good Jobs First tracking parent/subsidiary relationships.

One substantial finding is that:

Six parent companies have received more than $1 billion in grants and allocated tax credits (those awarded to specific companies), 21 have received $500 million or more, and 98 have received $100 million or more. Just 582 large companies account for 67% of the $68 billion total.

All six of the billion-recipients are in the energy sector: Spanish company Iberdrola tops the list with $2.2 billion, followed by NextEra Energy, NRG Energy, Southern Company, Summit Power, and SCS Energy. And five companies were on all three of the top 50 federal subsidy recipients list, the top 50 bailout list, and the top 50 state & local subsidy list: Boeing, Ford, General Electric, General Motors, and JPMorgan Chase.

It’s important to recognize that project-based and program-based subsidy databases serve two functions that that do not reduce to each other. If you want to know the total amount of money governments give in incentives, you need program-based reporting. This is because many subsidy programs provide benefits automatically to all investors meeting certain criteria and they rarely list all the automatic recipients. In that case, you need to know what the program as a whole is spending. This is the approach I have taken in my subsidy estimates in Competing for Capital and Investment Incentives and the Global Competition for Capital, and Louise Story took in the New York Times program database (“State Money Flow”) in its December 2012 series “The United States of Subsidies.” To understand the overall scope of the problem, you need program-based reporting.

Of course, program-based reporting can have its flaws. A number of think-tanks with widely varying ideologies have produced these reports over the years, and they appear to give dramatically different answers. In fact, as I showed in Competing for Capital (pp. 152-158), the answers are all highly consistent, as they are based on a handful of federal studies (the Joint Committee on Taxation’s Tax Expenditures reports, the Congressional Budget Office’s Reducing the Deficit: Spending and Revenue Options, and the CBO’s occasional publication, Federal Financial Support of Business). The differences, even when they are seemingly vast, stem from clear ideological choices by think-tank researchers.

To take the most obvious example, when the Cato Institute estimates “corporate welfare,” it does not include the value of subsidies which take the form of tax expenditures. This give a much smaller number than estimates that follow the JCT/CBO methodologies closely, since tax expenditures easily total 2/3 of federal subsidies (and often 90% of state and local subsidies). In Cato’s 2012 estimate of federal corporate welfare, author Tad DeHaven admits (p. 12) that tax expenditure are a “form” of corporate welfare, but he does not include them in his claimed total of $98 billion in federal “corporate welfare” annually. On the flip side, for any federal agency Cato wants to see privatized, it counts the entire budget as “corporate welfare.” This inflates the Cato estimates relative to those which stick closer to the JCT/CBO methodologies, such as Citizens for Tax Justice.

Project-based reporting, like Good Jobs First does with Subsidy Tracker and Megadeals, can find large individual recipients and projects, but it does not get you anywhere near the total amount of subsidies given by an individual government. As mentioned above, many programs with automatic tax breaks for investors do not give individualized listings of their recipients. (Hopefully this will change when the Government Accounting Standards Board releases its final tax incentive rules.) But because you can document every single individual award, you can derive an absolute baseline which is irrefutable.

The inauguration of Subsidy Tracker 3.0 is a great addition to the transparency tools brought to us by Good Jobs First.

Cross-posted from Middle Class Political Economist.

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Wikileaks releases Trans-Pacific Partnerhip investment chapter

Via Daily Kos, we learn that Wikileaks has released the investment chapter of the Trans-Pacific Partnership (TPP). This is a critical chapter, as it was in the North American Free Trade Agreement (NAFTA), because it establishes investor-state dispute settlement (ISDS) mechanisms.

Despite its neutral-sounding name, ISDS is actually a radical concept. Instead of using the courts to settle disputes, which have appeals procedures and build up case law via precedent, ISDS allows companies to take governments to arbitration, where neither precedent nor appeals exist.

Susan Sell gave several examples of ISDS in her guest post in February, which illustrate the dangers well. Eli Lilly had two of its pharmaceutical patents invalidated in Canada; the company appealed both of these decisions to the Canadian Supreme Court, and lost both times. Then the company turned to investor-state dispute settlement under NAFTA to receive $500 million in compensation for the Supreme Court decisions. That case is still ongoing.

In an example also noted by Wikileaks, Sell points out that U.S. tobacco maker is using ISDS against Australia because the country mandated plain packaging on cigarettes to make them look less attractive. This should not be possible, because the U.S.-Australia Free Trade Agreement does not include investor-state dispute settlement provisions. Instead, the company is using a subsidiary in Hong Kong, which has a free trade agreement with Australia that does include ISDS, to bring the complaint. Indeed, the government alleges that Philip Morris Asia bought the Australian subsidiary, already owned by the parent company, so that it could bring this complaint.

Unsurprisingly, Australia is opposed to including ISDS in the TPP agreement, and in the current draft has excluded itself completely from ISDS. However, the draft also shows that Australia might end its objection “subject to certain conditions.” Since the negotiation is being conducted in strict secrecy, there is no way to find out what those conditions might be, unless someone leaks them to the press.

The Obama administration continues to seek “fast track” negotiating authority from Congress for the TPP. This would allow the agreement to be voted on only as negotiated, with no amendments allowed. Note that this also means that the TPP would be incorporated as a U.S. law rather than as a treaty. As a law, it only needs a majority in both Houses of Congress. If it were to be offered for approval as a treaty, it would need a 2/3 majority in the Senate, with no House vote. Both NAFTA and the World Trade Organization agreements were passed as laws rather than treaties.

Don’t forget that ISDS is also on the negotiating table in the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. ISDS is also under fire in the European Union. In an ironic twist of events, the European Commission, a supporter of ISDS (h/t Washington Post) so far in the negotiations, has ruled in a state aid case involving Romania that paying an ISDS award (Micula v. Romania) to a company whose subsidies were terminated due to EU law, would itself be an illegal state aid! The Commission’s effort to effectively nullify the decision (further irony: brought under the Sweden-Romania bilateral investment treaty, so both EU members) is not sitting well with proponents of ISDS. Too bad!

If we’re lucky, the combined opposition of Germany, a large part of the EU public, some parts of the European Commission, and a growing portion of the U.S. public will kill off ISDS in the TTIP. We need to make sure it disappears from the TPP as well, even if that means rejecting the TPP. And we may well want to reject the TPP anyway over its provisions on medicines and other intellectual property issues.

Cross-posted from Middle Class Political Economist.

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More evidence low taxes didn’t create the Celtic Tiger

The Tax Justice Network has just inaugurated a new blog, Fools’ Gold. It just came out with an excellent piece on taxes and Irish economic success in the “Celtic Tiger” era, written by Nick Shaxson. As I argued in 2011 and in my book Investment Incentives and the Global Competition for Capital, Ireland had low taxes for decades with nothing to show for it, with no improvement relative to EU-15 GDP per capita in 1958-87.

The Fools’ Gold piece updates the data to 2013. Take a look at its Chart 1, which provides a great visualization of Irish income per capita, tax rates, and developments in the European Union.

Chart 1: Ireland’s GNP per capita, relative to European GNP per capita, 1955-2013. 

invisible hand

 

In addition, the chart shows the significance of EU funds flowing into the country, though it only covers the Common Agricultural Policy (CAP) monies. It does not include the Structural Funds, which Frank Barry (via Shaxson) puts at almost 3% of gross domestic product from 1989 to 1999, or about the same as the CAP. The importance of the European Union, in terms of both trade access and transfers, is hard to understate.

Unfortunately, as Shaxson writes, true believers in the low tax myth, and the architects of its tax haven policies, are still in control of Irish policy. So we have scores of billions of dollars of profits hidden in Ireland and continuing pressure to lower tax rates in the rest of the European Union, and the United States, too, despite the fact that low taxes didn’t cause Irish economic success at all.

Don’t forget to follow Fools’ Gold!

Cross-posted at Middle Class Political Economist.

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Shocking incentive failure rate in North Carolina

@sandymaxey points me to a new report from the North Carolina Justice Center that is making my head spin. Picking Losers shows that the state’s flagship development program, the Job Development Investment Grant (JDIG), has seen 62 of its 102 projects fail in the period from its inception in 2002 until 2013. That is, 60% of the projects failed to meet either their job, investment, or wage goals, and had to have their awards canceled.

60%! This isn’t baseball, where a .400 batting average is outstanding, a feat that hasn’t been accomplished since Ted Williams in 1941. Let me tell you about a different failure rate: Investment Quebec takes equity stakes in a number of tech start-ups and other new companies. When I interviewed the director in Montreal in 2007, their failure rate was only 20%, a figure he considered needed to be reduced. In North Carolina, we are talking about a failure rate three times as high, despite giving the awards to firms that should not be nearly so risky.

One such firm was Dell Computers. In 2004, the company conducted a bidding war for a new computer manufacturing plant between Virginia and North Carolina. But North Carolina’s analysis of the project was so out of whack that in nominal dollars it offered almost $300 million ($174 million present value) compared to Virginia’s offer of $37 million. The plant shut down completely in 2010.

Here’s the paradox: North Carolina has some of the best taxpayer protections in the country; indeed, state and local governments lost only a few million dollars when Dell failed. The state is rigorous about canceling awards and clawing back monies already paid out. But the problem is that the state’s economic analysis of potential projects is simply atrocious. The 60% failure rate is one sign of this. The Dell fiasco, analyzed by the NC Justice Center and the Corporation for Enterprise Development in 2007, shows another aspect of fanciful economic modeling.

What can be done? I’ve written before about the weakness of economic development cost-benefit analysis. Even by that low standard, North Carolina’s performance is breathtaking. Report author Alan M. Freyer suggests that the Legislature needs to resist calls to expand JDIG or create another fund with the same purpose, maintain its jobs standards, focus on expanding industries, vastly improve its evaluation of potential projects, and focus help on rural counties. I would add that the state should reverse its cuts to education, one of North Carolina’s economic development crown jewels to date, and restrict its subsidies only to those types shown to have a positive national impact, primarily customized training for companies and generalized training for individual workers. Improving skills increases workers’ income, and it also strengthens the U.S. economy as a whole, as opposed to simply building up a company’s bottom line.

Cross-posted from Middle Class Political Economist.

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