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Guest Post: Is globalization good for America’s middle class? Part 2

by Kenneth Thomas

Guest Post:   Is globalization good for America’s middle class? Part 2

In Part 1, I examined what economic theory has to say about the winners and losers from trade. The main conclusion is based on the Stolper-Samuelson Theorem: Because the United States is labor scarce in a global perspective, an expansion of trade will reduce the real wages of labor. As we have seen, this theoretical prediction has been borne out as real wages remain below their peak level for the 39th year running.
In this post, I analyze what I consider to be the other main element of globalization, the expansion of the mobility of capital. Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).
Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing’s establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.

Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.
More generally, who should win and who should lose from the growth of capital mobility? One possibility is that it would simply speed up the effects of trade. If Mexico had needed to wait for the growth of domestic entrepreneurs, it could not have expanded its exports to the U.S. nearly as rapidly as in the actual situation where U.S. companies could provide the money. In that case, we would simply expect the effect of heightened capital mobility to be the same as the Stolper-Samuelson Theorem.
But this would not explain why European labor appears as opposed to globalization as U.S. unions. Western Europe is labor abundant, so we would expect western European worker to benefit from the expansion of trade. Yet one does not have to look hard at all to see that European unions are not in love with globalization. The right answer now might be that those who are mobile win in the global economy, while those who are immobile lose. While capital is mobile geographically, governments are bound to their location. Workers, even where they have significant legal opportunities to move, as in the European Union, are still restricted in their mobility by their language abilities or lack thereof, and by the common desire to live near their families (another way in which corporations are not people, by the way). And it is not as if European capital can only be invested in the EU.
This is consistent with studies of the effect on home country labor of foreign investment (see Richard CavesMultinational Enterprise and Economic Analysis): reduced employment because exports are replaced with foreign production, some possible increased employment due to supplying goods and services to foreign subsidiaries, but at best the result is a wash and more likely the net effect is negative.
If this is right, U.S. workers may have the worst of both worlds: they are harmed by expanding trade, and they are harmed by being less mobile than capital. While this does not explain the political changes that have happened in the U.S. since 1970 (though it is certainly relevant), it gives us a pretty good handle on the economic market pressures that the middle class needs to address politically. I will have more to say about these issues in future posts.

crossposted with Middle Class Political Economist

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Is Globalization Good for America’s Middle Class? Part 1

by Kenneth Thomas

Is Globalization Good for America’s Middle Class? Part 1

In this blog, I have frequently documented economic trends that have been bad for the middle class: Declining real wages, steadily falling bang for the healthcare buck, stagnant educational attainment, the gigantic cost of tax havens, etc. With this post, I want to begin exploring one possible reason for the economic insecurity of the middle class, namely globalization. Today, we will look at who wins and who loses from international trade, one of the key elements of globalization.
In some circles, one is likely to see a variant of the claim that “everybody” is better off because of freer trade. Even according to the most mainstream economic theory, this is simply false. The workhorse theory for determining the distributional effects of trade (i.e., who wins and who loses) is called the Stolper-Samuelson Theorem, first enunciated in an article by Wolfgang Stolper and Paul Samuelson in 1941.

To understand this theory, you need to know that economists think about national economies in terms of the amount of land, labor, and capital they have compared to all other countries in the world. These “factors of production” can be in relatively high supply compared to the rest of the world, in which case they are referred to as “abundant,” or in relatively low supply compared to the rest of the world, in which case we call them “scarce.”

The theorem can be stated in quite simple terms, but its consequences are not at all simple: As trade expands, owners of abundant factors of production benefit, and owners of scarce factors of production are harmed. Here, “benefit” means their real income increases, while “harmed” means their real income decreases.

Remember, trade can expand for two main reasons. First technological innovations can reduce the cost of transportation, making it first possible, then cheaper, to send goods long distances. For example, political scientist Ronald Rogowski, in his great book Commerce and Coalitions shows how the introduction of the steamboat made it possible to export North American wheat to Western Europe, displacing wheat from Eastern Europe. Second, policy changes like the North American Free Trade Agreement (NAFTA) or the trade agreements embodying the World Trade Organization (WTO) reduce or eliminate costly barriers to trade and lead to its expansion.
The grain example helps show why trade creates winners and losers. The Midwest U.S. and Canadian Prairie provinces are a gigantic breadbasket made possible by low population density, which implies abundant land and scarce labor. Expanding trade gave these farmers new markets and higher incomes. In much more densely populated Europe, the reverse is true: labor is abundant and land is scarce. As a result, expanding trade in grains meant more import competition and lower income for European farmers..
Fast forward to today and we can ask what U.S. factor endowments are currently. As a rich country internationally, the United States is necessarily a capital abundant country. As a comparatively low population density country, it is land abundant but labor scarce. The answer is to our initial question is then quite clear: expanding trade is harmful to U.S. workers because imports of labor-intensive products and services from abroad create competition for American workers, reducing their real wages. As I have discussed before, U.S. real wages have remained below their peak for 39 straight years, just as the Stolper-Samuelson Theorem would predict.
What about all the cheap goods we now buy at Wal-Mart? It doesn’t change this story at all, because the lower price of imported goods is already reflected in the inflation rate we use to calculate real wages.
Rogowski’s book also argues that we can expect certain pattens of political coalitions to form, with the winners from trade on one side and the losers on the other. NAFTA illustrated this well, with capital and agriculture generally in favor of the agreement (minus a few small specialty agricultural products like oranges), while labor was strongly opposed. And of course, this only helps us understand economic reasons for support or opposition to trade agreements; for non-economic reasons such as the environment, we have to look elsewhere. Although beyond the scope of this post, Rogowski’s analysis of the entire world through phases of rising and falling trade (i.e., the Great Depression) lends strong credence to his claims. You should definitely read his book sometime.
Economists are divided over how big this effect is. In the 1990s, when I first started teaching, the most common view of economists was that technological change was the driver increasing the premium for high skilled labor while reducing wages for low-skilled labor. Adrian Wood’s 1994 book, North-South Trade, Employment, and Inequality, argued that trade was in fact the main culprit, (a good, ungated analysis is Richard Freeman’s “Are Your Wages Set in Beijing?”). Although this met with a lot of resistance at the time, Wood’s view has gained a lot of traction among economists based on developments over the last 15 or so years. Paul Krugman, a particularly noteworthy example due to his Nobel prize, has gone from being a fanatic adherent of free trade to someone who sees trade as a big problem, though even today he is not quite willing to pull the plug on free trade.
One important point Rogowski makes (and Stolper and Samuelson did before him) is that the theory of comparative advantage tells us that the winners from trade gain more than the losers lose, which makes it possible in principle to compensate the losers and have everyone be better off. But he also argued that those who benefit economically from trade will see their political power increase, something that has certainly been borne out in the United States in the more than 20 years since his book was published. This makes it less likely that such compensation will occur, and we certainly haven’t seen any policy in the U.S. that comes close to making everyone better off as a result of trade.
One small bit of comfort comes from Paul Krugman’s book The Conscience of a Liberal (pp. 262-3). He provides us some reason to think that the Stolper-Samuelson Theorem isn’t necessarily destiny, as he shows that the United State and Canada, two countries with the same factor endowments as each other, have distinctive differences in political outcomes, particularly with regard to unionization rates.
Overall, unfortunately, it looks like the answer to today’s question is clear: freer trade has harmed, and is harming, the American middle class. But globalization is more than trade, and I will continue to analyze other elements of globalization in my next few posts.

crosposted with

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New Report Highlights Flaws of North Carolina Mega-Incentives

by Kenneth Thomas

New Report Highlights Flaws of North Carolina Mega-Incentives

My new report for the North Carolina Budget and Tax Center, Special Deals, Special Problems–An Analysis of North Carolina’s Legislature-Approved Economic Development Incentives, has just been published. It covers a range of issues I’ve emphasized here before as well as some basic considerations reporters really need to pay more attention to.

North Carolina has some of the best economic development practices in the country, in terms of online transparency, performance requirements, use of clawbacks for non-performance by companies, sunset clauses for tax expenditures, hard caps for many tax credit programs (see my report on these points), etc. The state publishes an economic development inventory I consider to be of very high quality and consistent with international definitions of a subsidy. The most recent edition shows that in the 2008-9 fiscal year the state spent about $1.2 billion on economic development, enough to hire 24,000 people at $50,000 a year in wages and benefits.

At the same time, however, the state has persistently had problems in overvaluing potential investments and consequently offering wildly excessive subsidies for them. The best known case is Dell in 2004, when Virginia offered the company a $37 million incentive package, while the state and local bid from North Carolina came to almost $300 million on a nominal basis ($174 million present value). Other deals discussed in the report are Google ($260 million nominal value, $140 million present value), Apple ($321 million over 30 years nominal value, no present value calculation available), and a provision in a 2011 special incentives bill to allow Alex Lee Inc. to keep $2 million it should have forfeited for not keeping job promises. This last case illustrates how special legislative deals weaken the state’s performance requirements; this case will make future companies think that there may be no penalty for non-performance.

Reporters take note! This publication describes useful techniques for comparing the size of incentive packages regardless of project size or payout period of the incentive. From the European Union I borrow the term “aid intensity,” which measures the size of the incentive relative to the amount of the investment or the number of jobs created. The idea is that a $1 million incentive would be large for a call center but a rounding error for an automobile assembly plant. As a result, we need a standardized way of comparing incentives.

While in this country one can sometimes find cost per job analyzed for some subsidy packages, the EU actually uses the subsidy/investment metric as its primary measure of aid intensity. In my last post I discussed a mall redevelopment which could conceivably have an aid intensity of 96%. For comparison purposes, we should note that the highest aid intensity allowed for large firms anywhere in the European Union, is 50%, and that is only allowed in the poorest regions of the EU, mainly in eastern Europe. (Richer regions have lower allowable maxima.) A region’s maximum is cut by half for large projects over 50 million euro, and by 66% for spending over 100 million euro.

The other important concept is present value, a familiar one to accountants and economists, but not widely understood among the general public. The basic idea is simple: receiving a dollar today is worth more than receiving a dollar next year, which is worth more than receiving a dollar in two years, etc. Since incentive packages can pay out immediately (with a cash grant) or over a period of 30 or more years, we need to use present value to properly compare the size of incentives with different payout periods. This requires finding a a “discount rate” by which to reduce future payments. We then use the present value as the numerator in calculating aid intensity to be able to compare across different sizes of projects.

Using Google as an example, this $600 million project will receive $260 million over 30 years and create 210 jobs. As mentioned above, this is its nominal cost, before discounting the future dollars. Following the practice of a 1990s study by the Organization for Economic Cooperation and Development to compare subsidies among its then 23 members, I used a discount rate equal to the 10-year Treasury bond yield to come up with a present value of $140.6 million. Then the aid intensity is $140.6 million/$600 million, or 23%, and the cost per job at present value is $669,489.

We can then use these two measures of aid intensity to compare the incentive to that given for other projects and inform our judgment of whether it was a better or worse deal than other states have made, in the current context where states make such deals all the time. Of course, I believe there should be limits placed on state and local governments so we can sharply reduce net incentive spending, which has few national benefits–but that is a long time in the future.

North Carolina provides an intriguing case study because it does so much right in economic development, but it makes special deals outside its statutory incentive programs. The result is high costs and weakened bargaining position in the future. It’s a case we can learn a lot from.

crossposted with Middle Class Political Economist

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Guest post: Basics: How Overrepresented Are Rural and Low-Population States?

by Kenneth Thomas

Guest post: Basics: How Overrepresented Are Rural and Low-Population States?

We all kinda sorta know it: rural and small states are overrepresented in the Senate and, to a lesser extent, the Electoral College.This has deep roots in American history, of course: when the United States Constitution was drafted, small states demanded the Senate, with two votes for every state, to guarantee they would not be overwhelmed by the larger states politically. But today, when we have much greater population differences among states than in 1787, this takes on much more anti-democratic significance than it did then. Because each state has two Senators, political changes favoring the middle class are much harder to achieve than if everyone in the country were equally represented, in a mathematical sense, in Congress. Moreover, with the existence of the filibuster (recently challenged in court by Common Cause), the effect of this overrepresentation is substantially magnified. But how big is the effect after the 2010 Census?

Under the Senate’s filibuster rules, 41 Senators can block debate on Senate bills and nomination confirmations. So the first question is what percentage of the 50 states’ population do the 21 smallest states have. The 2010 Census showed the states to have 308.1 million (all quoted figures are subject to slight rounding error) population, with the smallest 21, from Wyoming’s 564,000 to Iowa’s 3 million, having a total of 34.8 million, or just 11.3% of the 50-state population. In theory, Senators representing those states could mount a successful filibuster. Of course, this is unrealistic, since some small states are heavily Democratic, such as Vermont, Rhode Island, Hawaii, and Delaware. Even Montana currently has two Democratic Senators.

Another way to look at the filibuster is to ask what percentage of the 50-state population is represented by the 41 Republican Senators from the least populous states. The answer takes the actual population of states with any Republican Senators, except Texas (Cornyn and Hutchison), Florida (Rubio), Illinois (Kirk), Pennsylvania (Toomey), and Ohio (Portman). The population of the states represented by the other 41 Republican Senators is 104.7 million, or 34.0% of the population of the 50 states. Thus, states with just a third of the country’s population can block legislation or Presidential nominations. With the recent skyrocketing use of the filibuster in the Senate, this is profoundly undemocratic.

Turning to the Electoral College, we can again see the effect of having a minimum of two Senators regardless of population, which means that each state (and the District of Columbia) has a minimum of three electors in the Electoral College. For example, the Real Clear Politics Electoral College map lists just 11 states and the District of Columbia as likely Obama, whereas 17 states are likely Romney. Even though the likely Obama states have more electoral votes than the likely Romney states (161 to 131), 6 of the Democratic states have double-digit electoral votes whereas only two of the Republican states do, underlining how Romney benefits from the overrepresentation of rural states.

Finally, remembering the 2000 election, where President Bush was awarded more electoral votes despite losing the popular vote nationally, we can ask what the minimum percentage of population for the 50 states plus DC is needed to win the Electoral College. To answer this question, I tallied from the bottom to see how many states were required to top 270 electoral votes. According to Wikipedia (as I tell my students, only a potentially reliable source for non-controversial information, like this), you have to have New Jersey to top 270, but it actually takes you to 282. So I subtracted three Democratic states (DE, VT, and DC) with 3 electoral votes as well as Montana’s 3 electoral votes (since it’s the most competitive of the remaining states with 3 EVs) to get down to 270. The 37 remaining states have only 45% of the nation’s population eligible to elect the President. Yet theoretically they could do just that.

This post has merely scratched the surface of the deep historical and constitutional questions that have led to Wyoming’s 564,000 people having as many Senators as California’s 37.7 million. The rural bias of the Senate and Electoral College make major political changes difficult to achieve, yet it is even more difficult to imagine that they could possibly be fundamentally altered, especially the Senate. Still, it is worth reflecting on these imbalances in order to understand the shortcomings that exist in American democracy.

crossposted with Middle Class Political Economist

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Romney to Replace Obamacare with…Essentially Nothing

by Kenneth Thomas

Romney to Replace Obamacare with…Essentially Nothing

Tommy Christopher (via @rcooley123) at Mediaite has a good catch on Mitt Romney’s health care proposals, from an interview Romney gave to Mark Halperin of Time magazine. Asked what would happen to people with pre-existing conditions after he were to repeal Obamacare, Romney said:

If people have been continuously insured, and then they decide to change jobs or change locations, they should not be denied coverage if they go to a new place or have to get a new policy. So people continuously insured should be able to get new insurance.

As Christopher points out, people who have been continuously insured already have this right, and have since 1996, under Title 1 of HIPAA. As he puts it, Romney “is selling you something you already owned.” And lest you think maybe Romney just misspoke, you can see the very same words in his platform: “Prevent discrimination against individuals with pre-existing conditions who maintain continuous coverage.” So, on the critical question of pre-existing conditions, Romney is offering precisely nothing.

That is hardly the end of Romney’s useless ideas on health care. His platform says we should return control over health insurance to the states. In principle, this could be workable; after all, in Canada each province has its own health insurance plan. States are big enough entities to do this: if Prince Edward Island can have its own plan, so could Rhode Island. And there is diversity in the provincial plans: Quebec’s covers prescription medicine, while Ontario’s does not. But this only works because the federal government has strong conditions on what level of coverage the provinces can provide. Romney, on the other hand, says we should “Limit federal standards and requirements on both private insurance and Medicaid coverage.” This is a sure recipe for bad health insurance regulation at the state level.

Another plank in his health care platform is to “Empower individuals and small businesses to form purchasing pools.” This will not enable individuals or small businesses to have anywhere near as much bargaining power as the state insurance exchanges in the Affordable Care Act.
Romney also says we should turn Medicaid into a block grant, giving states more flexibility. As Aaron Carroll points out, states acquired a great deal of flexibility with Medicaid during the GW Bush Administration, but have not introduced any great innovations. Why Romney thinks that would change is anyone’s guess.
And of course, what would a Republican health care proposal be without the usual references to tort reform, “innovation grants to explore non-litigation alternatives to dispute resolution” (tort reform again), allowing insurance to be sold against state lines (which would weaken state’s ability to regulate; isn’t that where Romney said authority should be?) and getting rid of the tax deduction for employer-provided health care?

So, instead of the Affordable Care Act, Romney promises to give us what we already have on pre-existing conditions, plus junk to give insurance companies even more control over the health care market than ever.

Middle Class Political Economist

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Guest post: Kabuki Theater Probably Won’t Shake Up NY Fed

by Kenneth Thomas

Kabuki Theater Probably Won’t Shake Up NY Fed

Via @MarkThoma, Simon Johnson reports that Treasury Secretary Tim Geithner has called (very diplomatically, of course) for JP Morgan Chase CEO to resign from his position with the New York Federal Reserve Bank in the wake of risk control failures that have already led to $3 billion in losses for the bank.. Johnson comments:

Mr. Geithner’s call is a major and perhaps unprecedented development which can go in one of two ways.

If Mr. Dimon resigns, that is a major humiliation and recognition – at the highest levels of government – that even the country’s best connected banker has overstepped his limits. This would be a major victory for democracy and a step towards reopening the debate on financial reform, including introducing more restrictions on what global megabanks can do.

Alternatively, Johnson says, if Dimon manages to stay on to the end of his term December 31, it will mean a defeat for democracy and a victory for the big banks.

Of course, there would be nothing new about this: one of the striking developments since the 2008 financial meltdown is that not a single major bank executive in the United States has gone to jail for their wrecking of the global economy. Moreover, the five largest banks in the country have seen their assets increase from $6.1 trillion in 2008 to $8.5 trillion today. By contrast, in Iceland, 200 bank officials, including the CEOs of the country’s three largest banks, are all facing criminal charges for their actions leading up to the crisis. To use Richard Fields’ terms, Iceland followed the Swedish model (make the banks take charges against profits immediately: bad for the banks, good for the economy) while the U.S. has followed the Japanese model (good for the banks, bad for the economy).

While I have no special insight into the kabuki theater of high official pronouncements, I tend to agree with Johnson’s assessment that Dimon will probably remain on the New York Fed board. I say this for no other reason than the fact that, as the NY Fed’s website points out, commercial banks who are members of the Federal Reserve System appoint 2/3 of the Board members. Three are appointed by the banks to represent themselves; Dimon is one of these. Another three are appointed by the banks ostensibly to represent the public. The banks selected the co-founder of a technology investment company, the CEO of HealthNow New York, and the CEO of Macy’s to represent “the public.” Hmm. The final three members are selected by the Fed’s Board of Governors to represent the public, but all are presidents of major institutions: Columbia University, the Metropolitan Museum of Art, and the Partnership for New York City. So, 2/3 of the Board is selected to represent the public, but I feel pretty safe in saying that all nine Board members are in the 1%.

Readers, what do you think? Will Jamie Dimon resign from the New York Fed? Take our poll and let us know.

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Guest post: Another Romney/Bain Firm Got Subsidies (Then Closed a Plant)

by Kenneth Thomas

Another Romney/Bain Firm Got Subsidies (Then Closed a Plant)

The Tampa Bay Times reports (via Jed Lewison) that another Bain-owned company, Dade Behring, was a recipient of $7.1 million in subsidies from Puerto Rico and the federal government the year before it laid off 300 workers there. A common problem with many subsidized projects, it took the money and ran without any consequences.
As I have pointed out before, another Bain-owned company, Steel Dynamics, received at least $95 million in incentives from state and local governments in Indiana, for two separate investments. In fact, this exceeds the $85 million Bain made in profit from the firm.

Now we have a third example of Bain-owned companies getting government subsidies. For a candidate who claims to be about private enterprise, Romney clearly doesn’t walk the walk. As Jed Lewison has noted before, it’s clear that when Romney talks about crony capitalism, he’s talking about himself.

How many other government subsidies are in Bain’s past? Inquiring minds want to know.

crossposted with Middle class political economist

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A good result in economic development

by Kenneth Thomas

Leigh McIlvaine at Clawback reports that Colorado Governor John Hickenlooper has vetoed SB 124, a bill that would have expanded the use of sales tax for tax increment financing of tourist projects under the Regional Tourism Act. While subsidy reformers in the state have so far been able to defeat sales tax TIF at the local level (unlike, for example, Missouri), the Regional Tourism Act allows this at the state level, but only for two projects per year expected to bring in tourists from out of state — not that interstate sales tax competition is such a great use of subsidy dollars anyway.
The bill would have made it possible to approve six projects in a single year. This would weaken oversight of the program since all the projects would have been approved at one time. As McIlvaine points out, the bill was especially controversial because Gaylord Entertainment in Aurora (near Denver International Airport), already heavily subsidized, had applied to receive a further subsidy through the Regional Tourism Act. Gaylord has already lured a major convention, the Western Stock Show, to relocate from Denver.

Gaylord, already in the top 25 subsidies in the U.S. since 2000 (a revised version of my paper on this is almost ready to go back to the journal) at $300 million, is demanding that the state provide the full $85.4 million it has requested under the Regional Tourism Act or the $824 million project will not be built at all. This represents a nominal aid intensity of 46.8% of the investment and, according to Denver Business Journal, is more than twice as high a subsidy as Gaylord has ever received. The Colorado Economic Development Commission must make a decision on this and five other applications for the two awards on May 18.
The Governor’s veto ensures that only two projects can be approved this year and allows him to “keep limits on the on the new tax-incentive program before the state committed too much money on an annual basis to tourism projects,” as the Denver Business Journal said Tuesday. The story notes that the bill only passed the House of Representatives by a 37-27 vote. This guarantees that the veto will not be overridden.
Though it was a bad move to approve state sales tax TIF at all, Hickenlooper’s veto prevents it from becoming a worse problem and slows the likely push to increase total subsidies under the program and weaken the targeting inherent in authorizing only two projects per year. For this, he is to be commended. crossposted with Middle Class Political Economist

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New York’s City Council passed a living wage ordinance

by Kenneth Thomas

New York’s City Council passed a living wage ordinance

On Monday, New York’s City Council passed a living wage ordinance, reports Good Jobs New York’s Bettina Damiani. The 45-5 vote means the Council can easily override a threatened veto by Mayor Michael Bloomberg (New York Post, May 1, via Nexis subscription service).

As I analyzed in Competing for Capital, the Living Wage movement attempts to reform, rather than abolish, economic development subsidies. The basic idea is the same as performance requirements in international investment negotiations, i.e., that a company that receives subsidies has to provide additional benefits to the city providing those incentives. As its name suggest, the most common demand is that subsidized firms have to pay a specified wage that is higher than the usual minimum wage. According to Living Wage NYC, over 140 cities in the U.S. have living wage ordinances, and the idea has spread to the U.K., Canada, and New Zealand.

In New York’s case, the law specifies that companies receiving at least $1 million in subsidies must pay $10/hour if they provide health benefits, or $11.50/hour otherwise. This is not a lot of money in New York City, yet a study by the Fiscal Policy Institute, Good Jobs New York, and the National Employment Law Project found multiple cases where subsidized projects paid even less, such as the Bronx Gateway Mall, which the study found had starting wages of $8.80 per hour. According to the study, the city spends over $2 billion annually on economic development incentives.

Mayor Bloomberg blasted the measure as a “jobs killer,” language reminiscent of minimum wage critics. We should remember that, according to Paul Krugman (Conscience of a Liberal) recent studies of the minimum wage do not uphold the long-claimed negative effects of the minimum wage on jobs. In fact, work beginning with that of David Card and Alan Krueger (now the chair of the Council of Economic Advisers) deftly picked apart previous studies in a process known as meta-analysis.

The biggest drawback to the New York law is that it was narrowly drawn by Council Speaker (and probable mayoral candidate) Christine Quinn in order to appease business interests. In fact, according to the Post story, it would affect “at least 600 employees a year,” which is hardly a big number in New York. But we can count on advocates to try to expand its scope in the next few years.

crossposted with Middle Class Political Economist

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Whiny Apple Pioneered Avoidance Strategies, Books Fictional Tax Rates

by Kenneth Thomas

Whiny Apple Pioneered Avoidance Strategies, Books Fictional Tax Rates

If you haven’t yet seen The New York Times article on Apple, go read it. I’ll wait. It’s a blockbuster.
As I wrote last month, Apple whines about the fact that it has to pay taxes. But of course, it does much more than whine. It sets up subsidiaries in tax haven states like Nevada to avoid U.S. state taxes, and establishes foreign tax haven subsidiaries in order to avoid U.S. and other government’s taxes. Then, through the magic of transfer pricing, profits made in high-tax jurisdictions becomes taxable only in Nevada, Ireland, Luxembourg, etc. The Times reports estimates by Martin Sullivan that this saves Apple $2.4 billion a year in U.S. federal taxes alone, not to mention what it save in U.S. states or foreign countries. This is a conservative estimate, based on only 50% of its profits being due to U.S. operations. A more realistic 70% allocation of profits to the U.S. would mean that Apple’s federal tax bill would be $4.8 billion higher, according to Sullivan.

Based on extensive interviews with former Apple executives as well as accountants for other firms, Charles Duhigg and David Kocieniewski show that not only does the company practice extensive legal avoidance of its taxes, but that the firm pioneered several of the most important tax avoidance techniques out there:

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

Not only that: Apple paid, according to The Times article, $3.3 billion in “cash taxes” on its $34.2 billion of worldwide profits, for a 9.8% tax rate, as opposed to the $8.3 billion the company’s 10-K report said it paid. As the article notes:

“The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”

Some commenters on my article last month actually cited these 10-K figures as proof that nothing was amiss at Apple. As it turns out, the company’s reporting has other major gaps. Its 2011 10-K Annual Report states that it has only two “significant” foreign subsidiaries, both based in Ireland. Apparently its Luxembourg subsidiary — with over $1 billion in 2011 sales, according to The Times — is not significant. Nor are its subsidiaries in the Netherlands and the British Virgin Islands, despite their importance in keeping Apple’s worldwide taxes low. Because Apple only deems its Irish subsidiaries “significant” and does not report on any others’ existence, the Government Accountability Office report of 2008 on tax haven subsidiaries was misled into saying that the company had only one such subsidiary. We can only wonder how many other tax haven subsidiaries are omitted from companies’ SEC filings.
Here’s the kicker: Even “cash taxes” is not a figure that accurately represents a given year’s tax payments, according to The Times.

As Richard Murphy points out, while Apple’s tax strategy is no doubt all legal (“perfectly legal,” as in the title of David Cay Johnston’s great book), “It’s also profoundly unethical.” Apple largely rejects its duty to help pay for living in a civilized society, even as state (like its home of California) and national governments flounder with debt. Its behavior forces one or more of three outcomes, as I have written many times before: shifting the tax burden to others, more government debt, or program cutbacks. Apple’s behavior shows that it’s clearly okay with that.

The solution starts with Murphy’s innovative “country-by-country” reporting, which does not require the tax havens to cooperate because all the information would be supplied by the company. Then, as I noted in November, we need worldwide unitary taxation to strip out the artificiality of companies’ allocation of assets and profits. We could treat Apple’s (and Microsoft’s, and…) “ownership” of patents in Ireland as the fiction it is, and force these companies to pay their fair share of taxes.

crossposyed with  Middle Class Political Economist

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