Blowing the Budget on Subsidies

The Red Wings want a new stadium and, despite Detroit's bankruptcy, the governor is in favor of a taxpayer subsidy for the $650 million project,

“This is a catalyst project,” Governor Rick Snyder said, according to Crain’s Detroit Business. “This is going to be where the Red Wings are. Who doesn't get fired up in Detroit about the Red Wings? Come on now, the people that are criticizing are people from outside of Michigan. This is something that is important to all of us.”

There are plenty of reasons to criticize massive government subsidies of sporting arenas, including the fact that sports owners tend to be extraordinarily rich people who can afford their own arenas - and if they're not, there's probably a richer person who will be happy to acquire the team. The subsidies have created an unhealthy market in which a team's value can be increased by tens or hundreds of millions of dollars to the owner based upon the taxpayer subsidy for a stadium. From Crain's,

Detroit's Downtown Development Authority intends to use $284.5 million in property taxes captured within its 615-acre downtown district to pay off the bonds issued by the state to build the 18,000-seat arena west of Woodward Avenue and I-75.

The remainder of the district costs, or $365.5 million, will be picked up by Olympia Development of Michigan, the property development arm of Mike and Marian Ilitch's $2 billion Detroit business empire that includes the Red Wings, Detroit Tigers and Little Caesars pizza chain.

Snynder also defends the project on the basis that it will "create 2,900 direct construction jobs" and "another 1,480 [ancillayr] construction jobs." The subsidy works out to $65,000 per job - and recall, we're talking about temporary jobs. Really, you can't justify this probject on "job creation". The American Prospect notes that some shady land deals have already been detected, with people on the inside maneuvering to profiteer.

An obscure new owner took over three low-income apartment buildings in the area targeted for development this spring. This mysterious landlord gave residents 30 days to leave. A Detroit News expose led to an extended eviction deadline, and then no eviction at all—but not until after many residents had already left. Following the press conference on the arena, the newspaper wrote that, “Since 2012, The Detroit News has reported on a series of mysterious land deals in the Cass Corridor—mainly involving blighted properties. Although it was widely speculated that the property was being amassed for an arena project, the deals have been cloaked in secrecy, with sellers signing confidentiality agreements and buyers not revealing themselves through public documents. The buyers in the land deals, (it was) revealed Wednesday, have been ‘a mix’ of city and Ilitch Holdings.” (Illitch Holdings is affiliated with Olympia Development).

Obviously, work needs to be done to keep that sort of thing to a minimum. It's painful to see Ilitch's fingerprints on that deal, through his companies, given that he's already the primary beneficiary of this subsidy of the new sports arena.

This isn't the worst example of government subsidy that I've seen. Detroit needs something to help drive investment and to bring more people to the city. But for the state as a whole, and Detroit's not the only troubled area, the governor's arguments also applies to subsidies to the film industry. The movie subsidies that were initiated toward the end of the Granholm Adminisration brought a lot of money, energy and excitement to local communties, created a number of temporary jobs, had the prospect of creating some permanent jobs, and seemed to be doing at least as good of a job of promoting Michigan's attractions than the much ballyhooed "Pure Michigan" ad campaign. The Governor's cuts of subsidies to the film industry, and subsequent equivocating over how much to extend, have dramatically reduced the interest of the film industry in Michigan while creating a climate of uncertainty that is likely to cause the industry to choose other states with more consistent, reliable approaches to the industry. The larger subsidies of the Granholm era seemed poised to help establish permanent movie facilities and jobs in the state, while Snyder's approach undermined local ventures and thus has resulted in at best temporary jobs with the remaining subsidies largely flowing out of the state. It may have been possible to reduce the Granholm-era subsidies while retaining the local benefit, but that opportunity seems to have passed.

As with sports teams, whether we like it or not, significant subsidies are part of how the movie game is played. I don't mind people taking the philosophical stance that you shouldn't subsidize the entertainment industry - and even less the profitable entertainment ventures that could and would continue to operate without subsidies - or, for that matter, profitable companies that want huge tax breaks and subsidies to open a new factory, server farm, headquarters, or other facility in your state. But once you decide you're going to offer subsidies, it makes sense to try to apply a consistent, predictable approach to those subsidies - both in terms of who will qualify and how much you will budget for subsidies in any given year.

David Stockman, Government Subsidies and the Minimum Wage

As David Stockman makes the rounds to promote his new book, I caught a few of his bon mots on government intervention in the economy. He takes the position that the technological advances we attribute to government programs would have emerged from the private sector, or that their rough equivalent would have emerged, and that the government should not be investing in private companies. I'm not entirely sold on his former point - yes, private industry might have come up with some of the technological advances resulting from projects spearheaded by the government, but there's no guarantee that it would have happened, that the process would have been more efficient, or the outcome better. At a minimum, we can say that those advancements would have taken considerably longer to develop - otherwise there would have been no need for the government-funded research. But sure, there's a cost-benefit equation to apply, reasonable minds can disagree on how much weight to assign to those costs and benefits, and we aren't able to test alternate time lines to see how the world would have turned out had the government not funded the space race, Manhattan project, military and defense R&D....

What I found more interesting... in a facepalm sort of way... was Stockman's position on the minimum wage. Stockman takes the position that the minimum wage is an incredible burden on business, and that there should be no minimum wage. Okay, standard libertarian home-brew thinking. Nothing to see there, right? He's the sort that would happily see somebody work two, three jobs and still not make enough money to support himself (let alone a family) because markets are groovy. And if Stockman left it there I would be willing to quip, "My reasonable mind can disagree with your unreasonable mind."

But Stockman's not that much of a libertarian. Not even close. He proposed that the government subsidize workers who cannot earn enough money to support themselves. I've not tried to delve into Stockman's reasoning - but if he's not going to eliminate much of the remaining 'safety net', it's difficult to imagine workers opting to work for 5 cents per hour (or whatever "the market" dictates) unless the subsidy provided by the taxpayer results in significantly higher remuneration than public assistance. If the subsidy is tied to hours worked, "the market" may well find five cents per hour to be reasonable - the worker will want more hours to get a greater subsidy, and the employer will not have to worry about paying a competitive wage because the government is picking up the bulk of the worker's compensation. And if you don't tie the subsidy to the number of hours worked, or cap the number of hours that will be subsidized, you introduce even more distortion. What such an approach might mean for the work environment or employee motivation, your guess is as good as mind... but my guess is that things would turn pretty ugly.

But more than that, if this is about "the markets", how is increasing the cost of minimum wage-level labor more of a distortion than passing along the bulk of an employee's compensation to the taxpayer? A great deal of the automation that has made lower-wage industries more efficient was created to reduce labor cost. Nations with the lowest labor costs are associated with slums and sweatshops, not innovation. Within the context of our society, why is it better to allow business to pay wages that require their employees to be subsidized by the taxpayer to maintain even a basic standard of living? Is it at all unfair to respond, "If a business cannot survive if it has to pay its employees enough money to support themselves, it's time for that business to innovate or die"?

Stockman would find it appalling if a business required copper to be available at $100 cents per ton in order to compete, with the government responding by picking up the difference between that and market price. So what is it that he sees as different about the cost of labor - which in this context is simply another line on the balance sheet. Why does the company that says, "Materials cost us $100,000 per week and we can't compete unless the taxpayer picks up 80% of our materials cost" undeserving of help, with any government intervention being an unacceptable manipulation of the markets, but when the same company says, "Labor costs us $100,000 per week and we can't compete unless the taxpayer picks up 80% of our labor cost"?

Also, frankly, Stockman's insistence that the minimum wage is harming the economy is not particularly consistent with the facts. The argument reminds me a bit of the person who rails against strong unions, then laments in the next breath that fewer and fewer blue collar jobs no longer pay a middle class salary. Might there be a connection between lower wages and the decline of labor unions? You would think that if the minimum wage destroys jobs, we would see some evidence of that destruction - of a minimum wage hike followed by a rash of business closures and bankruptcies. It's possible to imagine a minimum wage hike so high that it would make labor truly unaffordable for businesses that rely on minimum wage labor, but that's neither something that is going to happen in this country nor the basis of Stockman's argument. Why should we believe Stockman instead of our own lying eyes?

All that said, eliminating the minimum wage remains one of Stockman's better ideas....

Should Social Security Retirement Be Subsidized?

One of the central features of Social Security, and one that has helped insulate it from decades of effort to scale it back, is that it is designed to be self-funding, and to pay out an amount that is roughly consistent with what a retired worker paid into the program. The history of Social Security stands as a strong argument against turning it into a means-tested program, requiring higher-earning workers to contribute an even greater share of the cost of the program, or making benefits more contingent upon a retiree's assets and other sources of income than on his past contributions.

A few days ago, David Brooks argued that Medicare is too good of a deal for retirees - that, according to the Urban Institute, a couple of average income receive far more in Medicare benefits than they paid for over the course of their careers. Brooks did not offer a link to the Urban Institute's data and, in this era, the absence of a link makes me suspicious... so I searched until I found the source. Sure enough, the authors found that for a married couple earning an average wage and retiring in 2011 at age 65, under the author's formula the cost of Medicare to the couple was $119,000 and the benefit was $357,000.

Why wouldn't Brooks have linked to that? Because the figure for Social Security was contributions of $598,000, benefits of only $556,000. That is, if Brooks wants to argue that the couple is getting a great deal on Medicare, he has to admit that under the exact same analysis they're getting a raw deal on Social Security, and he apparently decided that rather than trying to reconcile his argument with the facts it would be better to play "hide the ball" with the numbers.

As it turns out, Social Security isn't a good deal for a single person earning an average wage - $299,000 in, and $290,000 out for a female recipient vs. $266,000 for a male. At average wage (or higher) the couple that sees a tremendous return on their investment is the one-earner couple, paying in the same $299,000 but receiving $448,000 in benefits. Looking at other data from the same authors, the subsidy to a couple with one low-earning partner and one partner with average earnings is modest, and everybody else earning an average or higher wage is providing a modest subsidy to other recipients.

There are plenty of reasons why we, as a society, would want to ensure that stay-at-home spouses will not be impoverished in their retirement in the event of divorce or the death of the spouse who was employed outside of the home.¹ The very fact that the phrase, "worked outside of the home" is preferred by many over "had a job" reflects a cultural value. If in fact we, as a society, choose to value and privilege the role of homemaker, that's fine - but taking that position raises the reasonable argument that it should be society, not other working adults, who subsidize that cultural value. We fund SSI benefits out of the general fund due to the disconnect between those benefits and an employment history; why not do the same for retirement benefits extended to people who lack a sufficient work history of their own to otherwise qualify?

To look at it another way, if a Member of Congress were to propose eliminating or substantially reducing the subsidy to retirees in households in which only one spouse worked outside the home, what sort of firestorm would be unleashed? If our societal feelings are so strong that we can't even discuss the economic side of the picture, then we should be willing to address the cultural issue and the benefit we receive as a society by providing a very large subsidy to those households in retirement.

If the program is largely in balance other than for our determination as a society that stay-at-home partners of wage earners should receive most of the benefits that they would obtain had they also been employed outside of the home, it's reasonable to argue that the subsidy should come from the general fund and not by increasing the Social Security taxes upon or decreasing the retirement benefits that would otherwise flow to other retirees.

Don't Save The Dealerships

There's an old joke that, had Congress followed its present practices at the time, we would still have (heavily subsidized) local blacksmith shops.

Faced with a sharply reduced market for new automobiles, and creaky, oversized dealer networks that are protected by state franchise laws, one of the key benefits Chrysler and GM sought through their bankruptcies was to reduce the size of their dealer networks. In my opinion the deal was too protective of dealerships. Don't get me wrong - I like the dealership where I last purchased a vehicle (as much as one can like a car dealership), and I like the service I receive at the dealerships where we get our cars serviced. There's value to the brand, and (if they're doing their job) to having the manufacturer protect its brand by requiring certain levels of quality and consistency in the level of service provided by authorized dealers and service centers. But a huge part of the current customer-dealer encounter - most notably picking out (settling for) a vehicle from the lot, negotiating price (and wondering if you were given a reasonable deal) - are relics of an era gone by.

There's no reason why a customer should not be able to customize a vehicle online. In fact, before you get to the dealership and find out that the configuration and color you want aren't "on the lot", pretty much every manufacturer lets you "build your own car" online. Why, as a matter of course, can't you order that car through the manufacturer's website, or get competitive bids from dealers within a specified geographic range? We tolerate what amounts to bad customer service in the sale of new vehicles because we're used to it, but can you imagine a new business that tried to impose a similar model?

Congress, in the manner of the aforementioned joke, wants to take us backwards:

The bankruptcy cleared the way for GM and Chrysler to eliminate more than 2,000 dealerships, with GM estimating that it would save $2 million per shuttered outlet. But on Thursday, the House passed a measure, attached to a must-pass spending bill, that largely undoes this vital reform. Headed for likely passage in the Senate and unavoidable signing by the president, the bill lets dealers threatened with closure take GM and Chrysler to arbitration on terms considerably more favorable to dealers than the companies had previously been willing to accept. The result will be hundreds of time-consuming cases - or demands by dealers that the companies pay them to go away. Either way, the taxpayers, who own most of GM and much of Chrysler, will bear the cost.

I have a great deal of sympathy for dealers who were running profitable enterprises (even if more from the sale of used cars and service than the sale of new cars) who are losing their franchises. Just as I have sympathy for the guy who profitably sold buggies before horseless carriages put him(and the village blacksmith) out of business.

Keep in mind also what this same Congress would do if this were workers asking for job protections - "Don't let GM close our plant. Don't let GM cut our hours." That would be quickly dismissed as interfering with the business strategies and profitability of a corporation. With due respect for Congress's greater sympathy for corporate subsidies (or perhaps it's the greater efficacy... or deeper pockets of corporate lobbyists), this is another side of the same coin.

Subsidizing Poor Building Decisions

As we again see the catastrophic consequence of developing flood plains into cities and villages, the question should arise - should the government be subsidizing this type of development? Granted, to some degree this is a special case - New Orleans wasn't constructed in the modern era, and greater public expense can be justified in relation to historic towns and villages. But why are we spending billions of dollars in an effort to transform flood plains into buildable lots? Why are we spending billions providing subsidized insurance - or with the government stepping in to provide insurance for buildings which are otherwise completely uninsurable - rather than letting market forces prevail?

Would it be wrong to declare, in relation to properties destroyed in this catastrophe, that property owners will be able to collect on their insurance policies, but if they choose to rebuild in their present location they won't be eligible for future insurance subsidies? To follow the model started under the Clinton Administration, by moving people out of areas particularly vulnerable to flooding? Or even to offer a relocation subsidy (particularly to people too poor to otherwise move out of inexpensive properties situated on flood plains) to encourage people to move to less vulnerable areas?

Would it be politically impossible, given that better public policy would impede the ability of the wealthy to get subsidized insurance for their coastal vacation properties?