Tag: corporate welfare

Scott Walker Hands $250 Million in Taxpayers’ Money to Billionaire Bucks Owners

Scott Walker touts his record as a fiscal conservative. But this morning, reports the Associated Press

Wisconsin Gov. Scott Walker took a break from the presidential campaign trail Wednesday to commit $250 million in taxpayer money to pay for a new arena for the Milwaukee Bucks.

Walker’s come under a lot of criticism from both left and right for his arena funding plan, including an article I wrote at the Huffington Post after he defended his plan on ABC’s “This Week.” Such deals are paid for by average taxpayers to benefit millionaire players and billionaire owners. But millionaires and billionaires have more influence than average taxpayers, and the pictures around stadium deals are great: 

Calling the new NBA stadium a “dynamic attraction for the entire state of Wisconsin,” Walker signed the bill at the Wisconsin State Fair Park surrounded by state lawmakers, local officials and Bucks team president Peter Feigin.

The economics, not so good. Walker has claimed a ”return on investment” of three to one, which he says is “a good deal” for the taxpayers. Economists disagree. As Dennis Coates and Brad Humphreys wrote in a 2004 Cato study criticizing the proposed D.C. stadium subsidy, “The wonder is that anyone finds such figures credible….

Our conclusion, and that of nearly all academic economists studying this issue, is that professional sports generally have little, if any, positive effect on a city’s economy. The net economic impact of professional sports in Washington, D.C., and the 36 other cities that hosted professional sports teams over nearly 30 years, was a reduction in real per capita income over the entire metropolitan area.

Republican voters are looking for fiscal conservatives and straight talkers. We’re hearing a lot of denunciations of corporate welfare and crony capitalism. And here’s a leading conservative candidate for president sitting down in front of cameras to sign a bill handing $250 million in taxpayers’ money (Bloomberg says $400 million with interest) to wealthy owners of a sports team (some of whom, no doubt coincidentally, are large donors to his campaign), in defiance of free-market advocates and virtually all economists. Will the other Republican candidates take him on? Will they denounce this wasteful extravagance?

Or will we have to rely on John Oliver to do the job small-government Republicans ought to be doing?

Subsidies Make Businesses Weaker

The technical arguments against the Export-Import Bank are provided in this excellent summary by Veronique de Rugy. However, one argument against Ex-Im and other business subsidies is not stressed enough in policy debates: subsidies weaken the businesses that receive them.

Subsidies change the behavior of recipients. Just like individual welfare reduces work incentives, corporate welfare dulls business competitiveness. Subsidies give companies a crutch, an incentive not to improve efficiency or to innovate, as I noted here.

Yesterday, I looked at Chapter 1 of Burton and Anita Folsom’s new book, Uncle Sam Can’t Count, which examines federal fur trading boondoggles of 1795-1822. 

Now let’s look at Chapter 2, which focuses on the steamboat industry of the 19th century. The historical lesson is clear: subsidies make companies weak, inefficient, and resistant to innovation.

Here is a thumbnail sketch of the Folsoms’ steamboat story:

  • In 1806 New York gives Robert Fulton a legal monopoly on steamboat travel in the state. Breaking this misguided law, a young Cornelius Vanderbilt launches a competitive service in 1817.
  • The U.S. Supreme Court strikes down the New York law in 1824. The effect is to usher in an era of steamboat innovation and falling prices for consumers.
  • Vanderbilt launches many new steamboat routes whenever he sees an opportunity to drive down prices.
  • With subsidies from the British government, Samuel Cunard launches a steamship service from England to North America in 1840. In response, Edward Collins successfully lobbies Congress to give him subsidies to challenge Cunard on the Atlantic route. With this unfortunate precedent, Congress proceeds to hand out subsidies to steamship firms on other routes.
  • By the 1850s, Congress is providing Collins a huge annual subsidy of $858,000. Irked by the subsidies and Collins’ inefficient service, Vanderbilt builds a better and faster ship and launches his own Atlantic service.
  • In 1856 two of Collins’ inferior ships sink, killing almost 500 people. Collins builds a new ship, but it is so shoddy that it is scrapped after only two trips.
  • Congress finally realizes that the aid to Collins is damaging, as it has spawned an inferior and mismanaged business. Congress cuts off the subsidies in 1858. Without subsidies, Collins’ steamship company collapses.
  • Vanderbilt also out-competes subsidized steamship companies on the East Coast-to-West Coast route through Central America.
  • In England, an unsubsidized competitor to Cunard—the Inman Line—is launched and begins out-competing and out-innovating the subsidized incumbent.
  • The subsidized Cunard and Collins aim their services at the high-end luxury market. The more efficient and unsubsidized Vanderbilt and Inman focus on driving down prices for people with more moderate incomes.
  • Government subsidies “actually retarded progress because Cunard and Collins both used their monopolies to stifle innovation and delay technological changes in steamship construction.”

Government subsidies have similar negative effects today, whether it is subsidies to energy companies, aid to farm businesses, or the Ex-Im program.

The difference is that in the 19th century Congress eventually cut off subsidies when the damage became clear, as it did with steamship subsidies in 1858 and fur trading subsidies in 1822. Maybe I’m overlooking something, but I can’t think of a business subsidy program terminated by Congress in recent years, or even in recent decades.  

Big Business Clashes with Libertarians and Tea Party over Ex-Im Bank

Two weeks ago I wrote about the efforts of big business to defeat libertarian-leaning legislators in states across the country. To confirm my point, on the same day the article appeared the Michigan Chamber of Commerce endorsed the opponent of Rep. Justin Amash, the one of whom I had written, “Most members of Congress vote for unconstitutional bills. Few of them make it an explicit campaign promise.”

Now a battle is brewing in Congress that pits libertarians and Tea Party supporters against the country’s biggest businesses. The Wall Street Journal headlines, “GOP’s Attack on Export-Import Bank Alarms Business Allies.” The “rise of tea-party-aligned lawmakers” is threatening this most visible example of corporate welfare, and David Brat’s attacks on “crony capitalism” in his surprise defeat of Eric Cantor have made some Republicans nervous. Amash told the Journal, “There are some large corporations that would like corporate welfare to continue.”

The biggest beneficiaries of Ex-Im’s billions are companies such as Boeing, General Electric and Caterpillar,  according to Veronique de Rugy, a senior research fellow at the Mercatus Center. Cato scholars have made the same point, including Aaron Lukas and Ian Vasquez in 2002 and Sallie James in 2011.

Matthew Yglesias of Vox notes, “The Export-Import Bank is a great example of the kind of thing a libertarian populist might oppose. That’s because the bank is a pretty textbook example of the government stepping in to arbitrarily help certain business owners.” And he points out that supporters of the Bank include the U.S. Chamber of Commerce, the National Association of Manufacturers, the AFL-CIO, Haley Barbour, and Dick Gephardt. He could have added Tom Donnelly of the American Enterprise Institute.

Rep. Adam Kinzinger (R-IL) said he worried about “a libertarian theology that’s really starting to creep in.” I hope he’s right.

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.