Relevant and even prescient commentary on news, politics and the economy.

Subsidy Megadeals Out of Control Since Great Recession

The recent Good Jobs First report Megadeals is the most detailed compilation to date of the largest economic development incentive packages ever given by state and local governments. Defined as incentive packages of $75 million or more in nominal value, these deals have multiplied in both number and value in recent years as governments compete for a smaller pool of large investments.

 Starting with Pennsylvania’s 1976 $100 million deal for Volkswagen, the report details 240 megadeals through May 2013. The total cumulative amount of the deals comes to $64 billion. The report uncovers many deals of which I had been unaware, including a new number one subsidy of $5.6 billion for Alcoa in 2007 consisting of discounted electricity from the New York Power Authority, a state agency.

 Consistent with reports I have made on several occasions, but with a better database of incentive packages, Megadeals finds more and bigger deals than before the Great Recession. To be exact, since 2008 the number of such deals has doubled from about 10 per year (in the previous 10 years) to about 20 per year, with the average total of such deals doubling to about $5 billion per year over the same period.

 As Good Jobs First reported earlier this year in The Job Creation Shell Game, the number of significant investment projects as reported by Conway Data (publisher of Site Selection magazine) has fallen from a 1999 peak of over 12,000 per year to less than 6,000 per year in every year since 2005. This means that states and local governments are desperate to land the few projects that are available and therefore they are willing to pay more for them. Note that Conway Data reports projects meeting any one of three criteria: fifty new jobs, $1 million in investment, or facility size of at least 20,000 square feet. In particular, $1 million in investment is a low threshold.

 One thing we should realize is that while megadeals generate the most press coverage for obvious reasons, they are only the tip of the iceberg of total state and local investment incentives. The reason, of course, is that there are so many more smaller deals that collectively account for large amounts of money. The smaller ones receive little or no media coverage, which makes it hard to track them.

My only real criticism of the report is that I believe it would be more accurate to calculate present values for the subsidies that are given, rather than reporting only nominal values. Companies themselves will calculate the present value of an incentive package, and the European Commission does so as well in its supervision of EU subsidy rules. It should be more widely done in reporting in this country. $3.2 billion over 20 years (Boeing in Washington state) is not the same thing as $3.2 billion in cash; by my calculations, it is about $1.98 billion, as I first published in Investment Incentives and the Global Competition for Capital. Similarly, the $5.6 billion nominal subsidy for Alcoa comes to $3.22 billion present value, by my calculations. This is still more than 50% bigger than the Boeing incentive package and easily the largest single subsidy in U.S. history.

 In addition, I think it is a tossup whether to count Nike’s 2012 deal with Oregon for 30 more years of single sales factor (SSF) as a subsidy. SSF is already law in Oregon; Nike’s bargain only guarantees that it will not change. Still, Nike obviously thought it was important enough to bargain for, and it is possible to estimate the company’s savings relative to the pre-SSF apportionment formula, so its inclusion is certainly justifiable.

 Besides the great report, you can download a spreadsheet with all the data and sources at the link above.

 Disclosure: Good Jobs First shared its megadeals database with me in conjunction with a paper I gave in May, and I exchanged notes with authors Phil Mattera and Kasia Tarczynska as I prepared the paper and they finalized the report.

Cross-posted at Middle Class Political Economist.

Tags: , Comments (3) | |

U.S. Median Wealth Only 27th in the World

As I discussed last week, U.S. median wealth per adult is lower than many other countries. To be exact, it comes in at #27 for 2012, at $38,786 per adult. This is more than 1/4 lower than had been reported by Credit Suisse’s Global Wealth Databook for 2011. I contacted one of the authors, Professor James Davies of the University of Western Ontario, to find out the reason for the big change for the United States as well as the even bigger change for Denmark.

Professor Davies was kind enough to lay out the technical issues for me. First, of all, data for mean wealth is more reliable than median wealth. For rich countries like the United States, there is usually household balance sheet information which provides high-quality information on total wealth and, when combined with population data, wealth per adult.

Wealth distribution data is more difficult to estimate accurately, although it is known to be more unequally distributed than income for every country, as the 2012 Databook reports. The reason Denmark had such a sharp increase in its estimated median wealth is that its wealth distribution survey information was becomingly increasingly questionable, so the authors changed to a different estimation method that is not comparable with previous figures.

Comments (15) | |

“Technology Causes Inequality” Refuted

I’m getting to this a little late due to extensive travel (in South Africa now), but David Cay Johnston has a nice writeup of a recent paper on inequality based on the World Top Incomes Database. The paper, by Facundo Alvaredo et al., is important because it largely refutes the idea that technological change is the big reason for diverging incomes between skilled and unskilled workers. As Johnston writes:

That [sharply different levels of increased inequality] is significant because it means that new technologies and the ability of top talent to work on a global scale cannot explain the diverging fortunes of the top 1 percent and those below, since the Japanese have access to the same technologies and global markets as Americans. The answer must lie elsewhere. The authors point to government policy.

As the paper shows, the income share of the top 1% in the U.S. declined from a high of around 24% just before the Great Depression to a low of about 9% in the late 1970s. Since then, it has soared all the way back to about 23% just before the Great Recession, but falling back to 20% in 2010. Other English-speaking countries have had similar “U shaped” patterns, as the authors describe them (i.e., reaching Great Depression levels again), but the share of the 1% is much less in other countries. For example, in Australia, even though the 1% share is close to what it was in the 1920s, it is still only 10% of total income, compared to 20% in the U.S. This difference is part of the reason that median wealth is so much higher in Australia.

The paper gives examples of other countries where the 1% share is permanently below its 1920s level, such as Germany, Japan, France, and Sweden. In all four cases, that share is only about 10%. As Johnston emphasizes, these countries are all essentially equal to the U.S. technologically (remember back in the 1980s when so many people thought Japan was poised to eclipse the U.S. in technology?), so their substantially lower levels of inequality stand in direct contradiction to frequent economists’ claims that technology is the problem (Richard Freeman has a balanced analysis).

It is also important to point out, as Johnston does, that lower tax rates on the 1% have an impact on this. One suggestion the paper makes is that lower tax rates give CEOs and other top managers more incentive to bargain for higher income, so the effect even shows up in pre-tax income. Obviously, lower tax rates make post-tax income even more unequally distributed.

Tags: Comments (9) | |

“Libertarian Koch brothers have taken tens of millions in subsidies UPDATED

The Cato Institute, originally the Charles Koch Foundation, is one of the most influential libertarian think tanks in the country. With both Charles and David Koch on its board of directors, Cato has produced numerous studies on the evils of corporate subsidies (which it calls “corporate welfare“), dating back at least to the 1990s. Supposedly, Charles Koch himself (via Wikipedia) is opposed to “corporate welfare,” and plans to oppose it this year.

I guess I’ll believe it when I see it. As previously discussed in Dirt Diggers Digest, Koch Industries has received many subsidies over the years, and I doubt this leopard will change its spots. In fact, the full tally of giveaways they have received extends far beyond the article linked above.

The calculation below relies on Good Jobs First’s Subsidy Tracker database and the New York Times subsidy award database (not the program database). While 98% of the entries in the Times database come from Good Jobs First, reporter Louise Story took the first big step toward aggregating by standardizing company names. However, this still does not connect parent and subsidiary companies, so I carried out this step for the Kochs by using the Wikipedia entry for Koch Industries. With a quarter of a million entries and counting in Subsidy Tracker, I cannot imagine how long this would take if I had to do it for every company.

Here are the subsidies I was able to identify for Koch companies.

Flagship Koch Industries has taken over $16.5 million in subsidies from 11 different awards, none of which are sales tax breaks (which generally are not subsidies).

Subsidiary Georgia Pacific has received 72 subsidies worth over $43.9 million (none of these were sales tax breaks).

Subsidiary Flint Hills Resources LP has received subsidies from Iowa, Kansas, Texas, and Michigan, according to the Good Jobs First Subsidy Tracker; the New York Times subsidy database, which omits Michigan but includes one more Iowa subsidy, puts the value of the Iowa and Kansas subsidies alone at just over $12.5 million (again, none of which were sales tax breaks).

Subsidiary INVISTA has received $217,504 in training grants from South Carolina, according to Subsidy Tracker. Several other subsidies appear to be connected to this subsidiary, but none have available subsidy amounts. Again, none were sales tax breaks.

To summarize:

Koch Industries: $16.5 million

Georgia Pacific: $43.9 million

Flint Hills: $12.5 million

INVISTA: $0.2 million

Total subsidies to the Koch brothers:$73.1 million

Remember, this is the minimum value of the Koch brothers’ subsidies. Some of the entries had no dollar figures available, and there is always the possibility that some incentives were missed entirely or that the awards above were only a part of a subsidy package, not the entire value. In particular, local subsidies are not well covered in either database; the same is true for my national estimates. The  data just isn’t widely available.

Meanwhile, Koch Industries is going to be the largest investor in the Big River Steel project in Osceola, Arkansas, which is expected to cost the state $132 million in incentives.

Like I said, when it comes to the Kochs fighting subsidies, I’ll believe it when I see it.

UPDATE: Yasha Levine tweeted me to let me know about two stories he did at Exiled Online in 2010 and 2011. While I focus above on state and local subsidies, Levine’s stories focus on federal and foreign subsidies received by Koch companies. The biggest takeaway is that the federal subsidies, especially the ethanol subsidy, dwarf what the Kochs have received at the state and local level, with the ethanol subsidy alone worth perhaps $1 billion a year. The mind boggles.

Check out Levine’s stories for the gory details. Thanks, Yasha!

Cross-posted from Middle Class Political Economist.

Comments (0) | |

Mississippi sets a record for unreported subsidies

As I have written before, when states announce a major new investment, it is far more likely that the announced subsidy is an underestimate than an overestimate. A new Good Jobs First study commissioned by the United Auto Workers unearths a new example of this, which I believe is the largest underestimate ever: Nissan in Mississippi.

Tags: , , Comments (10) | |

Four easy fixes for corporate taxation

Everyone “knows” that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand.

 

Don’t believe a word of it. While some economists believe we shouldn’t tax corporations at all, the corporate income tax (CIT) is a necessary backstop to the personal income tax (PIT). With no CIT or a rate lower than the PIT, individuals have an incentive to incorporate their economic activities so they aren’t taxed on them, or are taxed less. Needless to say, this is something an average wage or salary worker would not have the ability to do. This is another area where we have one tax law for the 1%, and different rules for the rest of us.

Tags: , , Comments (2) | |

Unemployment hits new highs in Spain and France

As if there were not already abundant proof of the failure of austerity in the eurozone, the BBC reported yesterday that both Spain and France have hit new unemployment milestones.

In Spain, unemployment has jumped from February’s 26.3% to a first-quarter rate of 27.2% (implying an even higher figure for March). In March 2012, it was “only” 24.1% (see source in table below).

In France, there are now 3.2 million unemployed, more than at any time since the country began keeping records in 1996. Complete EU unemployment data for March should be released in early May.

For a fuller picture of the continuing deterioration of the situation in the European Union and the eurozone, the unemployment rates tell a stark story.

Date     Eurozone     Spain     Greece     Portugal     Ireland     UK     USA   EU-27

3/2012   10.8%         24.1%    21.7%     15.3%      14.5%    8.2%  8.2%   10.2%

2/2013   12.0%         26.3%    26.4%     17.5%      14.2%    7.7%  7.7%   10.9%

Note: Greece and UK figures are for January 2012 and December 2012, rather than March 2012 and February 2013

Sources: Eurostat, 2 May 2012, for March 2012; Eurostat, 2 April 2013, for February 2013; Bureau of Labor Statistics for U.S.

Moreover, it is important to note that despite drastic budget-slashing, in none of the EU countries did debt come under control, even for Ireland and the UK, which have managed some slight growth over the 11-month period. Using this handy BBC interactive tool, we can see that Spain’s debt/GDP ratio increased from 69.3% in 2011 to 84.2% in 2012 (Wait, that’s under 90%! What’s happening?), Greece declined from 170.3% to 156.9%, Portugal increased from 108.3% to 123.6%, Ireland increased from 106.4% to 117.6%, and the U.K. increased from 85.5% to 90%. In fact, just six short years earlier, Ireland had a debt/GDP ratio of just 24.6%. The Celtic Tiger, favorite of conservatives everywhere, has truly crashed and burned.

Given the Spanish and French figures, look for bad news for EU unemployment next week. Despite the continuing austerity fail, Republicans and some Democrats continue to push for deficit cutting here, and will maintain a steady drumbeat. But, like Reinhart and Rogoff, they all deserve the Colbert treatment.

Cross-posted from Middle Class Political Economist.

Comments (0) | |

German tax enforcement paying dividends

I have long advocated that the United States should follow Germany’s example of aggressive pursuit of tax evasion, in particular its practice of paying informants for account information from secrecy destinations like Liechtenstein and Switzerland. The German Parliament’s upper house (Bundesrat) rejected a deal in November that Prime Minister Angela Merkel was willing to sign with Switzerland that would have allowed German account holders to pay tax anonymously. (As I reported on April 12, automatic exchange of information is rapidly becoming the standard to which even Luxembourg will adhere, so Switzerland will come under great pressure to do the same, thus ending bank secrecy.)

Now, Naomi Fowler of Tax Justice Network points me to new enforcement actions based on leaked account information. Last week the southwest German state of Rhineland-Palatinate conducted searches of over 200 homes in connection with alleged tax evasion. The raids were based on a CD with data on thousands of German citizens with Swiss bank accounts, for which the state had paid an informant 4 million euros ($5.2 million). However, tax authorities estimated that they would have an over 100-fold return on this investment, expecting to collect 500 million euros ($654 million) as a result of the investigation.

Investigators in Rhineland-Palatinate stated that they were investigating Credit Suisse and its German subsidiaries for assisting in tax evasion as a result of data on the CD. This comes on top of a 2011 settlement by the bank to pay 150 million euros for facilitating German tax evasion.

How often do governments get a 100-fold return on investment? The U.S. routinely pays drug informants; it should be more aggressive in finding tax evasion informants.

Cross-posted at Middle Class Political Economist.

Comments (3) | |

Reinhart/Rogoff Shot Full of Holes Updated X3

This story has rapidly made the rounds in the blogosphere, and it is indeed a big deal. One of the most significant economics papers underlying the argument for why high government debt (especially over 90% of gross domestic product) is bad for growth was published in 2010 by Carmen Reinhart and Kenneth Rogoff, “Growth in a Time of Debt” (ungated version here).

The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot).

The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:

Debt/GDP Ratio     R/R Results     Corrected Results
Under 30%            4.1%               4.2%

30-60%                 2.8%               3.1%

60-90%                 2.8%               3.2%

Over 90%             -0.1%               2.2%

As Paul Krugman (link above) argues, what we are likely seeing is reverse causation: slow growth leads to high debt/GDP ratios. That is certainly what EU countries are finding as they implement austerity measures and slip back into recession. But even if high debt/GDP did cause slower growth, we can see it is nowhere near the crash that Reinhart and Rogoff’s paper made it out to be.

The bottom line here is simple: the focus on deficits and debt that have dominated our political discourse is completely misplaced. We need to do something about the unemployment crisis by increasing growth, something that is even truer in the European Union where the unemployment rate in Spain and Greece exceeds 26%.

Update: Reinhart and Rogoff have responded in the Wall Street Journal. They emphasize that there is still a negative correlation, and that having debt/GDP above 90% for five years or more reduces growth by 1.2 percentage points in developed countries, which is still substantial for developed economies.

Update 2: Paul Krugman’s response to Reinhart and Rogoff is here.  He pronounces it very disappointing, saying they are “evading the critique.”

Update 3:  Reinhart and Rogoff have a new response in the Financial Times (registration required). Here, they admit they committed the Excel error, but claim there was nothing nefarious in their disputed data choices:

The ‘gaps’ are explained by the fact there were still gaps in our public debt data set at the time of the paper. Our approach has been followed in many other settings where one does not want to overly weight a small number of countries that may have their own peculiarities.

This is a very odd response from two authors who equated one year of New Zealand to 19 years of the far larger UK economy. Worse still when you add the fact that by excluding several years when New Zealand had a debt/GDP ratio over 90%, they got an “average” (actually only one year) growth rate of -7.6%, when the correct average, with all relevant years over 90% included, was 2.58%, a 10.18 point swing!

It’s obvious that the austerity crowd is still going to defend this paper, but that doesn’t mean anyone else should be taken in by them.
Cross-posted from Middle Class Political Economist.

Comments (12) | |

How high does senior poverty have to go?

It’s official: President Obama has proposed cutting Social Security by replacing the program’s current inflation adjustment with the stingier “chained” Consumer Price Index. As I’ve discussed before, this risks undoing all the progress made against senior poverty since the passage of Medicare and Medicaid in 1965. 25% of seniors were poor according to official poverty line in 1968, compared to just 9.4% in 2006. Note, however, that the Supplemental Poverty Measure, which includes things like out of pocket health care expenses which hit seniors disproportionately, already shows a 16.1% rate by 2009. And our senior poverty rate, measured by the international standard of 50% of median income, is already 25%, much higher than most developed countries, more than three times Sweden’s rate and over four times as high as Canada.

Why is Obama doing this? We just rejected the candidate who wanted to cut Social Security and Medicare. Perhaps, as Krugman (link above) suggests, he chasing the fantasy of “being the adult in the room,” but this is a losing proposition. As Brian Beutler points out:

Just like that, Chained CPI morphs from a thing President Obama is willing to offer Republicans into a thing Republicans dismiss as a “shocking attack on seniors.”

We’ve seen this game before. The Heritage Foundation’s health care plan became “death panels” when President Obama endorsed it.  And, as Beutler’s title makes clear, we have plenty of examples of the President negotiating with himself to bad effect, most notably in the 2011 debt ceiling battle.

If this cut really happens, Social Security benefits will steadily fall in true inflation-adjusted terms due to the magic of compounding. Moreover, with 49% of the workforce having no retirement plan at work and another 31% with only a grossly inadequate 401(k), the cuts will worsen the coming retirement crisis. The only question will then be: how high will senior poverty have to go before we do something about it?

Cross-posted from Middle Class Political Economist.

Comments (9) | |