Tag: corporate welfare

Feds and the States Tag-Teaming on Corporate Welfare

In a recent op-ed for the Indianapolis Star I discussed the symbiotic relationship between federal and state government when it comes to doling out corporate welfare subsidies. The focus was primarily on Indiana, but the issue is a national concern. 

A good example is the $2 billion Shepherd’s Flat wind farm in Oregon that was largely financed with federal and state taxpayer support. Ted Sickinger, a reporter for the Oregonian, has done an excellent job of digging into details behind the project (see here then here then here) and it appears that Shepherd’s Flat was one big taxpayer handout. In fact, the Obama administration signed off on the federal government’s share of the subsidies even though it knew the project didn’t need any support from taxpayers: 

In 2010, Shepherd’s Flat attracted national notoriety for its subsidies. In a briefing memo for the President leaked to the media, Obama’s top advisors worried that the U.S. Department of Energy’s loan guarantee program was subsidizing projects that didn’t need it. 

Shepherd’s Flat was their case in point. 

Treasury Secretary Larry Summers, energy czar Carol Browner, and Vice President Joe Biden’s chief of staff Ron Klain said Shepherd’s Flat was “double-dipping” on $1.2 billion in federal and state subsidies – 65 percent of its projected cost. The incentives included a $500 million federal grant, $200 million in federal and state tax benefits from accelerated depreciation, $220 million in premium power prices attributed to state renewable energy mandates, and a $1 billion loan guarantee with a value of $300 million to the developers. 

They concluded that Caithness has “little skin in the game” – about 10 percent of the project’s cost – but stood to earn a 30 percent return on its investment. It also speculated that Shepherd’s Flat would likely go ahead without the federal loan guarantee because “the economics are favorable for wind investment given tax credits and state renewable energy standards.” 

Caithness Energy is the wind farm’s owner and operator. General Electric supplied the wind turbines (a $1.4 billion contract with Caithness) and part of the financing – financing backed by the federal loan guarantee. Both companies made sure they had Washington’s attention: 

Nationally, powerful interests were pushing in the same direction. A new president’s desire to build environmental credibility became an economic keystone to restore the collapsed economy. The Obama administration fast tracked loan guarantees to pump stimulus money into job-generating projects. Meanwhile, deep-pocketed companies with powerful lobbying arms were busy greasing the skids. 

The political action committee, employees and affiliates of General Electric - Shepherds Flat’s turbine supplier and an equity investor - gave more than a half million dollars to Obama’s 2008 campaign. The PACs for both GE and Caithness also have sprinkled sprinkled money among Oregon’s congressional delegation during the last five years, including Sens. Ron Wyden and Jeff Merkley, Reps. Earl Blumenauer, Greg Walden and Peter DeFazio. 

According to e-mails released by the House Oversight Committee investigating federal subsidies after the bankruptcy of solar startup Solyndra, the Obama administration pushed hard on incentives for Shepherds Flat. Months before officials at the U.S. Department of Energy approved a loan guarantee for the project, General Electric was being told it was a done deal. 

In April 2010, Kevin Walsh, managing director of GE’s renewables business, emailed the director of the U.S. DOE’s loan program: “We have been advised by the White House and other sources that we are likely to get the “green light” this week to move forward with the Shepherds Flat wind project…Les Gelber (a partner at Caithness Energy) and I will be in DC tomorrow and would like to stop by any time between noon and 2pm to briefly discuss.” 

The deal took more time to fully bake. Four months later, DOE Loan Program Office Credit Advisor Jim McCrea emailed a contractor: “Pressure is on real heavy on SF due to interest from VP.” 

Later that day, McCrea sent staff an all points bulletin to promptly provide answers on Shepherds Flat: “To do otherwise would leave us firmly on the political path and give agencies an opportunity to blame us when they are pressures (sic) to make decisions. As you all know, the pressures to make decisions on this transaction are high so speed is of the essence.” 

But the shenanigans don’t stop at the federal level. 

Even though the wind farm is clearly a single entity, it somehow managed to qualify for three separate $10 million state tax credits after the Oregon Department of Energy (ODOE) agreed with Caithness’s claim that Shepherd’s Flat was three separate entities. According to Sickinger, the ODOE’s decision was bogus: 

Yet limited and often non-responsive information about the review provided to The Oregonian suggests it was neither rigorous nor consistent with state rules governing tax credits. In its review, ODOE ignored clear evidence in its own files and additional records identified by The Oregonian that should have disqualified $20 million of the $30 million in tax credits. It failed to ask for contracts or other documentation to answer fundamental questions that state rules pose about ownership, financing, construction, operation and maintenance.

Instead, ODOE made assumptions, relied again on statements made by developers before the project was built, and reversed its own analysts’ earlier conclusions. Its review apparently tapped only one new source: a report by ODOE’s own staff for an entirely different purpose and largely irrelevant regarding tax credit eligibility. In the end, ODOE failed to apply its rules on separate and distinct facilities to Shepherd’s Flat. 

The result: “free” money for Caithness: 

The company, like many other tax credit recipients, received approval to sell the credit in exchange for cash. The pass-through option will net Caithness $20 million, but leave the state’s general fund out the full $30 million. 

There are more stories like the crony Shepherd’s Flat deal out there waiting to be uncovered. More state and local reporters should follow Sickinger’s example and start digging into these shady government-private collaborations that politicians and the financially-benefitting interests want the public to believe are so critical for “creating jobs.”     

Big Sugar Tries to Protect Its Sweet Deal from “Big Candy”

We’ve written about the outrageous sugar import quotas here many times. And Chris Edwards wrote in March about the American Sugar Alliance’s ad in the Washington Post titled “Big Candy’s Greed.” But we couldn’t link to the ad because for some reason the American Sugar Alliance has not chosen to put a version of the ad on its website. But the Alliance ran its expensive quarter-page ad in the Post last week, so we’re now able to provide the public service of making it available online.

Note that what candy producers and other sugar users want is to be allowed to buy sugar from the world’s most efficient producers at world market prices—just like every company in a free market. This protectionist nonsense “Big Candy” is fighting has been going on for decades. In 1985, the Wall Street Journal and then the New York Times reported that the Reagan administration had slapped emergency quotas on “edible preparations” such as jams, candies, and glazes—and even imported frozen pizzas from Israel—lest American companies import such products for the purpose of extracting the sugar from them. Apparently it might have been cheaper to import pizzas, squeeze the tiny amount of sugar out of them, and throw away the rest of the pizza than to buy sugar at U.S. producers’ protected prices.

As Chris Edwards noted, a critic of Big Sugar quoted in this article summarized the sad reality of sugar growers: “They are unlike any other industry in Florida in that they aren’t in the agricultural business, they are in the corporate welfare business.” 

Please enjoy “Big Candy’s Greed,” brought to you by the coddled, protected, price-supported, politically active U.S. sugar industry:

Big Sugar Ad

Pennsylvania’s Solyndra

Another government-subsidized solar energy company is headed to bankruptcy. The latest casualty is Flabeg Solar U.S. Corp, a subsidiary of a German company. Flabeg’s Pittsburgh plant has been shuttered and its employees laid off. 

In 2009, the Obama administration awarded Flabeg $10 million in federal green energy tax credits. Flabeg also reportedly received a $1 million federal grant. According to the Pittsburgh Tribune-Review, the state of Pennsylvania and Allegheny County kicked in another “$9 million in job creation grants, loans and other financial aid.” 

Flabeg apparently never had a chance to use the tax credits because it was never profitable, but federal taxpayers will likely be out $1 million for the grant. State and local taxpayers are unlikely to be as fortunate. And while taxpayers lose when government places a bad bet, the broader economy also loses when politicians redirect capital toward less productive uses (in this case, completely unproductive). 

Flabeg’s demise is a reminder that it isn’t just the federal government that’s shoveling corporate welfare. Not only do state and local government subsidize commercial interests, but the handouts are often coordinated with the feds. With Uncle Sam putting money in the pot, state and local governments can find the temptation to participate in a press release announcing the creation of X number of jobs irresistible. 

Just ask former Indiana Gov. Mitch Daniels (see here, here, and here). 

On a final note, the head of a Pennsylvania environmental group offered this reaction to the Flabeg news: 

The reason government steps into these cases is because they are too risky to get private capital…But as with private investments, some companies fail.

Yes, private investments do fail. But as I note in a paper on corporate welfare, “Businesses and venture capital firms make many mistakes as well, but their losses are private and not foisted involuntarily on taxpayers.” 

Enron: Dependent on Government

A new piece at the Library of Economics and Liberty written by Robert J. Bradley is a timely reminder that it’s often government policies that fosters bad corporate behavior—not the “free market” as the left likes to claim.

Bradley, a sixteen year employee of the now defunct Enron Corporation, demonstrates that the company was actually “a political colossus with a unique range of rent-seeking and subsidy-receiving operations.” Manipulating the tax code, pushing for self-serving government regulations, and grabbing taxpayer handouts were all key components of Enron’s energy empire. It’s not a stretch to suggest that in the absence of government, the Enron story never happens.

In my recent Cato paper on corporate welfare in the federal budget, I discuss the government subsidies that Enron received:

Enron Corporation is a poster child for the harm of business subsidies, particularly with regard to its disastrous foreign investments. Enron lobbied government officials to expand export subsidy programs, and it received billions of dollars in aid for its projects from the Export-Import Bank, the Overseas Private Investment Corporation, the U.S. Trade and Development Agency, the U.S. Maritime Administration, and other agencies. Enron received about $3.7 billion in financing through federal government agencies.

Business subsidies create damaging economic distortions. All those subsidies to Enron induced the firm to make exceptionally risky foreign investments. And the resulting losses were an important factor in the company’s implosion.

A 2010 Bloomberg investigation, which looked at the Ex-Im Bank, found that companies seeking financing aid from this agency had been paying the travel expenses of government employees on visits to projects under consideration. For instance, Exxon Mobil spent almost $100,000 on Ex-Im Bank employees responsible for helping the agency decide whether it should aid Exxon on a major gas project in Papua New Guinea. Eleven months later, the Ex-Im Bank approved $3 billion in financing for the venture.

Early in the Bush administration, high-level officials went to considerable lengths to help Enron on an investment in India that had gone bad. When the Washington Post reported this in 2002, the administration argued that it was simply trying to guard taxpayer interests in the more than $600 million in federal loans that had been given to Enron by Ex-Im and the Overseas Private Investment Corporation. However, the government should not be putting taxpayer money into such risky private schemes in the first place.

Corporate Welfare Fail in Indiana

Corporate welfare is a bipartisan problem, and it’s a problem at both the federal and state level. Yesterday, I discussed the recent demise of Obama-subsidized Abound Solar and the fact that Indiana Republicans were also involved in helping the company obtain taxpayer handouts. Adding insult to injury is another example of “crony capitalism” gone awry in Indiana.

The Indy Star recently reported on an attempt by the state’s Indiana Economic Development Corporation to pressure the city of Madison into subsidizing a manufacturing facility for a shady California businesswoman. The entire investigative report needs to be read in order to fully appreciate the incompetence displayed by the IEDC’s wannabe venture capitalists, but here are some excerpts:

Build us a 40,000-square-foot manufacturing facility, throw in some needed equipment – all for around $5 million – and we’ll create up to 200 new jobs. That was the pitch by a California businesswoman and her renewable energy company, Global Energy Solutions, to officials at the Indiana Economic Development Corp. and, ultimately, the city of Madison.

The company was searching for a site in Indiana – and the purpose of the IEDC, which reports to the Indiana secretary of commerce, is to lure jobs to Indiana and often provide incentives. IEDC officials did just that. They approved $1.5 million in tax credit and training incentives. They also began pressuring the city of Madison to act on the proposal – and quickly.

“Secretary of Commerce Dan Hasler asked me to send the following message,” an IEDC official emailed City Council President Laura Hodges. “If Madison is not going to take advantage of the job creation and investment opportunity being presented by Global Energy Solutions (and that’s OK), don’t further frustrate the company with delays. We do not want to lose this project for Indiana.”

In their rush to generate a favorable press release for Gov. Mitch Daniels, which is the IEDC’s real mission, IEDC officials apparently didn’t bother to look into the background of the character they were anxious to fork over taxpayer money to:

An Indianapolis Star investigation has uncovered numerous red flags regarding Global Energy Solutions and its president, Mynette Boykin – red flags that experts say raise questions about the IEDC’s due diligence on a project that would have cost local and regional taxpayers several million dollars:

Boykin claimed that another company of hers, Secured Capital Investment Group, would eventually commit $500,000 to the Indiana project, emails show. That company, however, forfeited its California business license in 2011 because it didn’t pay more than $40,000 in taxes.

Boykin noted in her business plan that DC Solar Solutions would be “working in collaboration” with her on the project. When The Star contacted the owners of DC Solar Solutions, they said they never agreed to work with Boykin.

Boykin filed for bankruptcy in 2005 with $1 million in debts. In April of this year, a company filed suit against her for an unpaid $100,000 loan.

The Star shared Boykin’s business plan with an industry expert, who called it “extremely amateurish” and questioned the validity and viability of the proposal.

The Star also determined that other parts of Boykin’s plan are identical to a sample business plan posted on the website bplans.com. The sample plan was for a company that makes auto tools.

The good news is that, unlike the IEDC, the locals in Madison did some probing. As they should have given that the cost to the city would have been $4 to $5 million. When a presentation given by Boykin failed to impress Madison’s city council, it became clear that the deal was dead. That didn’t sit well with the IEDC’s representing bureaucrat:

Regardless, IEDC official Wanda Heath was there, and she addressed the council for the first time. She sounded irritated. “You could tell she wasn’t happy,” said Councilman Darrell Henderson, a Democrat.

She also made it clear that she felt that Madison council members weren’t doing their job properly. “She said, ‘You guys are moving way too slow; you’re making Madison look bad; this process should never take this long; no business is ever going to come to Madison being treated like this,’” said Councilman Rick Berry, a Republican.

“I really thought that was out of order,” another councilman, Republican Jim Lee, said. Lee told The Star that in his 12-plus years as a councilman, he had never before seen a representative from the state at an executive session. He felt like he and the other council members were being talked down to.

After leaving town, a defiant Boykin told the Star that “We will come to a different state. Probably right next to you guys.” Unfortunately, it’s not implausible that another state’s Department of Corporate Welfare will eventually come to her aid as this sort of scheming with taxpayer money is definitely not a problem that is unique to Indiana.

CBO Perpetuates Small Business Administration Myth

A new brief from the Congressional Budget Office discusses the role of small businesses in the economy and how they’re affected by federal policy. The CBO cites the Small Business Administration as one example of how federal policy favors small businesses over larger businesses:

Assistance from the Small Business Administration (SBA), through loan guarantees that enable small firms to borrow at more attractive terms (for example, lower interest rates and fees) than they might otherwise obtain.

That’s the popular perception of the SBA’s loan guarantee programs, but I would argue that it’s inaccurate for two reasons:

  1. The Government Accountability Office has calculated that SBA 7(a) loans only account for a little more than one percent of total small business loans outstanding. Veronique de Rugy and I looked at the top 15 industries that received SBA-backed loans from 2001-2010 and found that only 0.5 percent of the small businesses that comprise these industries received loans backed by the SBA. Thus, rather than helping small businesses compete against big businesses, SBA loan guarantees mainly help a tiny share of small businesses compete against other small businesses.
  2. The real winner from the SBA’s loan guarantees is the banking industry—particularly large banks. In 2009, the top 10 lenders (out of 2,600 total lenders) accounted for close to one-quarter of the SBA’s flagship 7(a) loan guarantee program’s volume. Wells Fargo & Co. alone accounted for 7.3 percent of the total 7(a) loan volume. Other large banks in the top ten include J.P. Morgan Chase, U.S. Bancorp, and PNC Financial Services Group. Although lawmakers portray the SBA’s loan programs as a boost for small businesses, the programs are actually a form of corporate welfare for some of America’s largest banks.

See this Cato essay for more on why the Small Business Administration should be abolished.

Obama and Daniels Team Up to ‘Shovel’ Subsidies

(Credit: Westgate @ Crane)

The Indianapolis Star recently profiled local boy makes good (handing out other people’s money) John Fernandez, the ex-Bloomington mayor and Obama fundraiser who now heads up the Economic Development Administration. A reference to an EDA taxpayer handout to a technology park in southern Indiana caught my eye:

Southwestern Indiana got a $6.7 million boost from the EDA last year to create a multi-county technology park to tap into the research related to the Crane Division, Naval Surface Warfare Center in Martin County. At the July groundbreaking for the park, Gov. Mitch Daniels called it a ‘long-awaited development that will serve as an economic catalyst for the region.’

Why would Republican governor Mitch “Red Menace” Daniels want to help the Obama administration score public relations points with Hoosiers? One reason is Daniels’s favorite corporate welfare apparatus, the Indiana Economic Development Corporation, also handed out money from state taxpayers for the technology park.

From a WestGate @ Crane Technology Park press release:

The Indiana Economic Development Corporation offered WestGate @ Crane Authority, Inc. up to $1 million from the Technology Development Grand Fund as a local match to a U.S. Economic Development Administration grant commitment of $6.6 million.

So what is this technology park that U.S. and Indiana taxpayers are being forced to subsidize?

Qualified as a state Certified Technology Park (CTP) by the Indiana Economic Development Corporation (IEDC), the WestGate @ Crane Technology Park represents a natural marketplace for defense contractors currently providing technical support, and research and development services to the Naval Surface Warfare Center, Crane Division in southern Indiana. Operations of the $2 billion URS corporation, and SAIC, the nation’s 7th largest defense contractor, in addition to ITT, CACI, CSC, CLEC, MLE, Raydar & Associates, Novonics, NAVMAR, Stimulus Engineering and Technical Services Corporation (TSC), already maintain operations in the park.

Great. A high-tech playground for defense contractors—an industry that has enjoyed a taxpayer windfall thanks to Uncle Sam’s ten years of warring on terror.

In a blistering op-ed, Indiana Policy Review editor Craig Ladwig calls Daniels “more of an accountant than an economist, more Beltway than Hoosier” and says that “although he claims to admire the classical liberal philosophy, you strain to see any sign of it in his governing.” As evidence, Ladwig cites Daniels’s record of supporting “crony capitalist ventures.”

Craig is correct, but it’s not just Mitch Daniels. Support in the nation’s statehouses for crony capitalism is ubiquitous. And key enablers of state business subsidies are the numerous federal “economic development” programs—like the Economic Development Administration—that policymakers in Washington use to coddle special interests in the name of “job creation.”

As the Obama-Daniels tag-team demonstrates, corporate welfare is a bipartisan affliction. Indeed, back in February, Rep. Michael Michaud (D-ME) offered an amendment to restore $80 million in funding for the EDA. The amendment passed with 145 votes from Republicans and 160 from Democrats.