May 31, 2004
Cheaper toys for your kid
Some people act like that's a bad thing.
From the Washington Post:
In 1997, Tree Top Toys Inc., an independent retailer with stores in the District and McLean, began carrying a nifty children's toy called Chunky Farm. At $32, the collection of large plastic farm items, including a barn, a rig and a cow, sold briskly and earned Tree Top a nice profit because each cost Tree Top only $16.
About 18 months ago, however, the store dropped Chunky Farm from its lineup, not because it sold poorly but because it had suddenly begun flying off the shelves at a nearby Wal-Mart. Tree Top's toy buyer spotted it there for about $14."I can't compete with that," said the buyer, Susan Hancuff-Sellers.
Looks like an increase in consumer surplus to me.
Everybody seems to agree that "fierce" competition from Wal-Mart drives down toy prices.
Less understood is Wal-Mart's impact on smaller retailers such as Tree Top, which appeal to wealthier customers who do not necessarily make purchases based on price. It is those stores that take big gambles on new toys, only to see them snatched up by Wal-Mart.
If the stores aren't competing on price (which would contradict Ms. Hancuff-Sellers' statement about not being able to compete) then Wal-Mart wouldn't have any effect.
If they are, then it looks like some of the rich folk may have to go rub elbows with the hoi polloi to buy the toys they want.
What about this?
When Tree Top employees believe the stores must keep a more expensive product on the shelves, they often cut back on quantity, leaving just enough inventory to satisfy demand.
I'm no retail expert, but isn't matching inventory to demand a good idea in any case?
May 30, 2004
I never would have guessed...
These two pictures would be among Yahoo's Most Viewed Photos:
Go figure.
Just plain wrong
Wrong, wrong, wrong. From the Miami Herald:
A group of Miami-Dade County commissioners want to use taxpayer money to defeat a citizen's initiative that would create an independent airport authority -- a referendum that many civic leaders say is needed to keep politics out of lucrative airport contracts.
At a hastily called commission meeting Thursday -- only advertised a day in advance -- five commissioners agreed to try to persuade the other eight board members to fund a fight against one of the most influential business groups in the county.
Commissioner Dennis Moss, who represents South Dade, called for the special meeting at the end of Tuesday's commission hearing, saying the board cannot wait any longer to plan its counteroffensive.
''Certainly those people opposed have the same right,'' Moss said. ``The business community paints itself as having a corner on the market on morals.''
I think the people opposed have the same right to spend their own money -- but not to use public funds to fight to maintain their fiefdom over the airport.
And it does appear to be a fiefdom:
Thursday's meeting came two weeks after a powerful civic group cobbled out an ordinance to strip commissioners of their power to control the fate of contracts at county airports, including Miami International Airport. MIA has seen its share of problems in recent years, with its former construction chief imprisoned and questionable contracts awarded to lobbyists who contribute to commission races.
Add a generous portion of personal indignation:
Some commissioners say they consider the proposed referendum a personal affront. Seijas said someone recently approached her to sign the petition.
''The verbal message was . . . disrespectful and offensive to anybody that was elected,'' she said.
Said Moss: ``If the BCC [Board of County Commissioners] is as corrupt as we're made out to be, by now someone would have been indicted, someone would have gone to jail.''
Hopefully, those options aren't yet ruled out.
More on the role of tax incentives
In an article about the high cost of doing business in Seattle, a business location consultant discusses the role of incentives:
Operating costs are mostly shaped by market forces, Boyd said.
"There's very little the government can do -- most of these cost structures are market-driven," Boyd said. "The only thing the government can do is resist pressure to raise taxes," he said.
Tax breaks and other incentives play only a small role in a location decision, and only when a company is deciding among top candidates, he said.
"If (incentives) were that important, you wouldn't be losing industry to smaller communities that can't afford to offer incentives," he said.
But "corporations won't tell you that, because they want everything, and politicians won't talk about it because they run on being friendly to business," Boyd said.
That's in general agreement with what I posted here.
Economic development tax incentives
In this week's Economic View column, Daniel Gross relates the findings of a study by the Economic Policy Institute concerning the effects of taxes and tax incentives on economic growth.
Economic development officials almost always are armed with data on state and local taxes, and with a portfolio of tax incentives. The amount of such taxes paid, they argue, can make a huge difference in a company's profitability and prospects.
But a study released this spring by the Economic Policy Institute, a nonprofit research group based in Washington, says that state and local taxes do not matter all that much to corporations. "The vast majority of the studies find that there is little or no effect of state taxes on where firms invest, and little economic effect in terms of job creation," said the study's author, Robert G. Lynch, an associate professor of economics at Washington College in Chestertown, Md.
State and local taxes paid directly by businesses - corporate income taxes, sales taxes on equipment, property taxes - account for 30 percent of all state and local taxes paid. But in 2000, Dr. Lynch concluded, these taxes were just 1.2 percent of total operating costs for companies. Because companies deduct the payments from their federal tax liability, state and local taxes eat up only 0.8 percent of total costs, or 80 cents of every $100 - hardly enough to mean the difference between profit and loss.
The executive summary of the report explains further:
All state and local taxes combined make up but a small share of business costs and reduce profits only to a limited extent. Indeed, the costs of taxes pale in comparison to many other location-specific costs, and numerous location factors—including qualified workers, proximity to customers, and quality public services—can be more critical than taxes. The availability of these vital location factors depends in large part on each state and locality's commitment to public investment—and their ability to pay for it. Research, in fact, substantiates that public investment plays a positive role in helping lower costs for firms.
He's correct. The factors he mentions -- particularly the nature of the workforce and access to markets -- are critical in identifying potential locations for a new firm or branch plant. I've read other research that indicates that state and local tax systems play a role in the initial screening also. States that have taxes that are way out of line with other states are more likely to be eliminated early in the process.
When the firm has whittled the potential locations down to the final short list of two or three is when taxes and incentives start playing a more prominent role. Ideally, the firm has shortened the list to communities between which it is indifferent; they are all equally sutiable -- or nearly so. The incentives that result from the final competition do no more than tip the scales between close competitors.
So why doesn't research show an effect? Well, actually some research does show an effect of taxes and incentives on location decisions, but it is of small magnitude. Furthermore, under the competitive theory described above the incentives come into play at the end of the process after the most suitable locations have been identified -- mostly on other criteria. Finally, some researchers suggest that since most communities are offering similar incentives and aren't necessarily showing a lot of savvy in how they negotiate, it is hard to pick out the incentive effect from among all the other factors.
So why do local governments keep offering incentives? Wouldn't they be better off if they just concentrated on providing efficient, reasonably-priced public services? Yeah, probably. But there are several reasons why it is hard for them to quit.
First, there are political considerations. Once a town has been selected as a finalist for a new branch plant, the local officials don't want to be seen as not trying to land it. What if they refuse to offer additional incentives and "lose" the plant to another community that does offer them. Politician's have a low tolerance for accepting blame. In most areas they'll catch much more flack for offering too little in the way of incentives and not being selected, than they will for winning the plant with a too-generous incentive package.
So communities (actually their officials) find themselves in a sort of prisoners' dilemma. They would probably all be better off if they didn't offer specific incentives. But if incentives offer even a small chance of tipping the balance in your favor, it's to your advantage to offer them -- especially if the competing communities don't. Consequently, they all tend to offer them.
There are some economic theories that somewhat justify the offer of incentives as a rational (if not necessarily wise) strategy for local governments. The one that I find most convincing has to do with the notion the local property taxes on business capital exceed the value of the benefits to business of the public services they fund.
I don't think that's too controversial; it seems to be fairly widely accepted that residential development doesn't generate enough additional tax revenue to pay for the services it consumes. Someone else must be picking up the slack.
In this case, the theory suggests, mobile firms (and there is no firm so mobile as one that hasn't yet selected a location) are able to use the competition between communities to bid their tax burden down to the benefit level. From the community's point of view this can be good, so long as two conditions are met:
1) the incentive was instrumental in tipping the firm's decision, and
2) they don't drop the firm's tax burden below cost of service.
Together, I think the benefit tax theory and game theory offer a good explanation of why industrial location incentives happen -- although they fall short of justifying them as a "good thing" in the sense that we are all better off with them than without them.
There are other economic theories -- such as agglomeration theory -- that I find less compelling as a justification for incentives. There are also theories that lie more in the political science field, mostly having to do with interest groups, with which I'm not yet really familiar. So my views may change as I get further in my research. But today, based on what I've learned so far, this seems to me to be the most compelling explanation of why incentives happen.
Libertarian Bookworm
Timothy Sandefur has kindly provided an index of his Libertarian Bookworm book reviews.
Very handy.
May 29, 2004
Attention: Globalization protestors
Tired of getting dissed for wearing sweatshop Nikes while protesting the WTO?
Well, buy your shoes from this company.
Before it goes out of business.
The Wal-Mart subsidy study
The New York Times reports a study conducted by Good Jobs First that claims Wal-Mart has been the recipient of over a billion dollars in government subsidies.
In the companies defense, Wal-Mart spokeswoman, Mona Williams said:
...if $1 billion is correct, Wal-Mart could make good use of the figure in its advertising. In the last 10 years, she said, Wal-Mart has collected more than $52 billion in sales taxes, paid $4 billion in local property taxes, and paid $192 million in income and unemployment taxes to local governments.
"It looks like offering tax incentives to Wal-Mart is a jackpot investment for local governments," she said.
Kevin at Always Low Prices notes that is sloppy analysis on the part of Wal-Mart:
That's an incorrect comparison. The question is whether, absent WM, the government tax revenue would have been the same--but without the subsidy.
Absolutely. Ms. Williams is definitely inflating the fiscal benefits to the subsidizing communities.
For what it's worth, I think Good Jobs First has inflated the cost of some of the subsidies they have identified.
First, they note in a correction to the report:
Good Jobs First has just learned that the subsidy listed for one of the Wal-Mart facilities mentioned in our report is incorrect. The report states that the distribution center in Olney, Illinois received a property tax abatement of $46 million. Actually, the $46 million figure was the cumulative land value over ten years on which taxes were to be abated. The actual abatement will be worth $2.5 million, so that the total of the various subsidies given to the facility should be stated as $4.6 million. We regret the error.
So there is one instance in which they inflated the value of a subsidy by a factor of 18. There could be others. That's not to be overly critical; these subsidy values are hard to dig out. It's not like either the businesses being subsidized or the public officials subsidizing them have an interest in making the costs easy to obtain. There is no central database.
But other errors in the report are harder to excuse. From the executive summary:
We supplemented the approaches described above with searches in a database
covering the one type of subsidy—industrial revenue bonds—for which some
centralized information is available. This enabled us to identify another 69
stores that received low-cost financing of approximately $138 million. This
brought the total number of subsidy deals we identified to 244. The total value
of all the subsidies was $1.008 billion.
GJF adds the $138 million in IRBs to the other subsidies they listed. But in the case of IRBs the subsidy isn't the total amount financed; it's the reduction in interest paid. IRBs didn't save Wal-Mart $138 million, nor did they cost the local governments $138 million. If the IRBs knocked two percentage points (to grab a number out of thin air) off of Wal-Marts financing costs over a period of ten years (to grab another number), they saved something on the order of $20 million. That's not chicken feed, but it's not $138 million either.
This isn't to defend the subsidies, just to add to Kevin's argument that there is a lot of sloppy analysis coming from both sides this argument.
May 28, 2004
Thomas L. Friedman outsourcing documentary
Thursday, June 3, at 10 p.m. ET on the Discovery Channel.
More details, related op-eds, and video clips here.
Other people's money
Bob Dudley at Truck and Barter has noted, in the case of Medicare, that you just don't spend it as wisely as your own.
There is a similar situation with E-rate computer purchases by schools. From the New York Times:
SAN FRANCISCO, May 27 - Criminal investigations into corruption and waste in the E-Rate program, a federal plan to bring Internet access to poor schools and libraries, yielded their biggest legal settlement to date on Thursday. NEC Business Network Solutions, a subsidiary of NEC, the computer giant, agreed to plead guilty to two federal felony counts, one for wire fraud and one for antitrust violation, and to pay $20.7 million in fines and restitution.
The settlement, announced in federal court in San Francisco, comes amid increasing scrutiny of the multibillion-dollar E-Rate program. Congressional hearings on the program may be held as early as next month, according to Congressional staff members. Lawyers involved in the case said there were likely to be additional, and even larger, settlements with other technology vendors.
...
Established with great fanfare in 1996, the E-Rate program added a tax to telephone bills, with the proceeds to be distributed mostly to poor and rural schools. The program has been used by school districts to pay for network infrastructure, like routers and switches to direct Internet traffic, computer servers to manage the system and cables to connect them.
The program gave schools the ability to seek competitive bids from vendors. But there is mounting evidence that some companies hired to provide equipment and services persuaded schools to forgo competitive bids, inflated their prices or defrauded administrators of the E-Rate program when presenting the final cost for services.
"Schools are being promised million-dollar systems when a system costing $10,000 would make more sense," said John Dunbar of the Center for Public Integrity, a public policy research group in Washington. "That's one of the flaws of the system. If the schools had vested interest in making sure that the money was being spent wisely, then it wouldn't be so easy to defraud the program."
Emphasis added.
Shame on NEC for defrauding the tax payers.
But also, shame on the schools (which had one employee go to jail for bribery) for not being more careful with taxpayer money.
And shame on Congress for either not realizing or not caring that this was the likely outcome and foisting this boondoggle onto the taxpayer.
The beginning of the end of sprawl?
Researchers at Rutgers find that "sprawl" may be self-limiting. I haven't read the study yet, but here is Otis White's summary:
Hughes and Seneca emphasize the tentativeness of their research, saying this may be “a short-term pause in the inexorable long-term pattern of deconcentration” rather than a fundamental change in growth, but clearly they don’t think so, and the data they marshal is convincing. Looking at the 23 suburban counties of the New York metro area and the eight counties of its “regional core” (the five boroughs of New York plus three urban New Jersey counties), they find that four important economic indicators — population, employment, income and housing growth — changed direction in the 1990s as the region’s urban core stopped losing ground and, in some ways, started regaining it.
Examples: From 1969 to 1990, the region’s suburbs added 11.2 percent in population while the urban counties lost 7.8 percent. But since then, the city and the suburbs have grown at almost exactly the same rate, 9.1 percent from 1990 to 2001. Urban income gains have been even more impressive. In 1987, per capita income in the nine inner-city counties was 91.8 percent of incomes in the region as a whole. By 2001, it was up to 93.3 percent. (Income gains in Manhattan were astonishing: from 165.6 percent of the regional average in 1987 to 228 percent by 2001.)
What could account for this shift? Two big factors, the academics say: Traffic congestion has turned suburban commuting into a nightmare, and suburbanites are increasingly resistant to more growth. Result: People and companies are turning to urban areas as places to live and do business. Footnote: The big change was the end of highway construction, Hughes and Seneca say. The freeways and toll roads built after World War II were the enablers of suburban growth, and by the mid-1990s road construction was, for all intents and purposes, finished in the New York area. “This already is constraining further suburban growth,” they write, “and it is making areas served by public transit more desirable as workplace locations.”
May 27, 2004
Segregation as an economic development policy
I've been reading The Selling of the South: The Southern Crusade for Industrial Development, 1936-1990, by UGA historian James Cobb. In it he recounts the spread of modern industrial location policy (i.e. "smokestack chasing") from depression-era Mississippi throughout the rest of the South, eventually influencing economic development policy throughout the country. Fascinating stuff.
So I was interested to run across (HT: Always Right) a recent Atlanta Journal-Constitution op-ed by Prof. Cobb that discusses the influence of economic development concerns in encouraging post-Reconstruction segregation in the South:
Far from a capitulation to the past, in the New South of the late 19th and early 20th centuries, segregation was the wave of the future. It was less the invention of self-styled champions of the rural white masses like Mississippi's infamous race-baiter James K. Vardaman (who generally preached that any education or public access for black people was a waste of time and money) than of the urban-oriented apostles of New South progress such as Atlanta's Henry W. Grady. More than a decade before the Plessy verdict, Grady had called for "equal accommodations for the two races, but separate" in Southern schools, transportation, theaters and elsewhere.
As they sought Northern industrial capital, Grady and his New South cohort insisted that restoring the racial and political supremacy of Southern whites by rolling back the civil rights initiatives of Reconstruction would stabilize the South's investment climate and assure its rapid return to prominence in the national economy. Segregation was vital to the success of the New South movement because a stable racial climate was essential to a stable "labor climate," which, in the euphemistic rhetoric of Southern industrial promoters, really meant an abundance of cheap, dependable and docile workers.
Disenfranchisement was justified on similar grounds:
Proponents of disenfranchisement made a starkly cynical pitch: White competition for black votes was fueling the violence and fraud that made Southern politics so chaotic. So, they asserted, taking the vote away from black citizens would actually restore honesty and rationality to the system. University of Virginia President Edwin A. Alderma hailed disenfranchisement as one of the "most constructive acts of Southern history."
So, they needed de jure disenfranchisement so they could stop the cheating involved in de facto disenfranchisement.
Ugh.
Another reminder that not everything that is "good for business" is good for the country -- or the people in it.