Reality Over Hope - Three Jobs Saved

We cannot solve our problems with the same thinking we used when we created them. Albert Einstein 

President Obama has explained his new stimulus program. Let’s see how the old one did. Obama’s Council of Economic Advisors (CEA) reports that the American Recovery and Reinvestment Act (ARRA) has been a success, creating or saving 2.4 million jobs through the first quarter of 2011 at a cost of $666 billion. As pointed out by The Weekly Standard, this comes to approximately $278,000 per job. We’d have saved $427 billion by just writing $100,000 checks to each person who has a job because of the stimulus.

The CEA is a group of three economists appointed by the President to…advise the President on economics. Being economic advisor to the man that spent $278,000 per job only to see unemployment stuck at over 9% would be a tough job. How do you tell the President that he wasted oodles of money and prolonged the recession –without losing your job? The report relies on Obama’s old campaign slogan. Heavily invested in HOPE, the president might see only what he wants to see in the report, and believe the skewed conclusions.

The report mentions twice that nobody can observe what would have happened in the absence of the stimulus. We can observe that the economy reversed its downward trend one quarter before the stimulus, and that the biggest positive jump was in the first quarter before 98% of ARRA funds had been spent. And we can see that as stimulus spending increased, the economic growth trend reversed again, going down. The report says that it can’t determine the cause of what happened, but in a triumph of hope over reality, it misconstrues facts, confuses correlation with causation, and lays the groundwork for more stimulus. 

It gets worse. The first company that got a government guaranteed loan under ARRA was Solyndra, a California solar panel manufacturer. Government guaranteed loans, by the way, are actually guaranteed by you and me. Solyndra got $535 million. Assuming all of its 1100 workers were hired because of the stimulus money, that’s over $486,000 per job. Now Solyndra is bankrupt. Solyndra’s 1100 jobs were lost because Obama was mistaken in his choice of handout recipients. How many more failures will we see? If a company requires a subsidy, it probably doesn’t deserve it. 

We’re not done with that CEA report yet. It relies on “independent approaches and supplements those estimates with those of numerous outside analysts”. The data was cherry-picked to create the desired outcome: Impress the President and save the jobs of three economists. If outside data is included, where is data from other countries that demonstrate whether their stimulus programs worked? 

Our nearest “rich country” neighbor is the closest thing to that which the CEA said could not be observed – the effect of doing nothing. Canada did next to nothing. According to David Lee, writing for the Mises Daily, Canada’s stimulus package “was little more than a clever display of political gamesmanship whereby the appearance of action was maximized, while the action itself was minimized…It is precisely in this abstinence that we find Canada's source of relative success”. Canada’s economy grew 3.3% in 2010. Job losses have been recouped. Their unemployment rate is 7.2%, compared with ours at 9.1%. A recent business survey indicates record hiring expectations and optimism about future demand. 

Canada is perceived as the hope-over-reality bastion of socialism in North America. But the truth is that in 1993 “Canada underwent one of the most fiscally responsible periods in its history…[Finance Minister] Martin made it clear from the start that the priorities of the government would be fixed squarely on eliminating the deficit and the record of the following decade leaves little doubt that this was a commitment that was delivered upon powerfully”. 

While the CEA shows us that they can save their own jobs, Canada shows us that government non-interference is how job creation really works.

Gambling With Our Tax Dollars

Fired. Can you believe it? Governor Hickenlooper fired the entire gaming commission board. Their sin? They granted a tax rate reduction for Colorado’s casinos. When Coloradans are facing layoffs, wage cuts, increasing energy and grocery costs; and when the State is short on revenue and struggles to close budget shortfalls, these commissioners granted a tax rate reduction to one industry. Hickenlooper, in a fit of populist rage, appointed a new board that he hopes will reverse the tax cut.

The gaming commission is charged to “encourage business growth and investment in the gaming industry and to permit licensed operations…to realize a fair and just profit.” Isn’t that what the commissioners tried to do? In their judgment, a 5% tax rate cut would help the gaming industry achieve a “fair and just profit.” Keep in mind that statewide gaming revenue dropped an average of 7% during the last three years. 

You might ask, “Where’s the tax cut for all the other businesses in Colorado? What’s fair about that?” That question assumes the gaming industry starts from a fair position. They don’t. The gaming commission sets tax rates for the industry. Whereas other businesses pay 4.63% of their profits, the gaming industry pays a graduated tax on their Adjusted Gross Proceeds. The tax rate can vary from 0% up to 40%. Adjusted Gross Proceeds means the tax is based, not on profits, but on revenue less payouts, which is a higher portion of the same income. Casinos can’t deduct wages, benefits, capital expenditures, interest, depreciation or other normal business expenses. 

This is an industry that asked permission to operate in Colorado.  Colorado said, “Okay, but you’re going to pay dearly for that permission. You will be subject to the whims of an unelected commission. If the Governor doesn’t like what the commission does, you’ll be subject to a whole new commission. You really can’t guess how to budget for Colorado taxes, but rest assured: YOU WILL PAY THEM!” 

Compare that to the tax situation for Gaylord Entertainment’s proposed project in Aurora. We’re not talking quarter slots, this is real money - $300 million in public financing. It’s your money and politicians are gambling with it. 

Gaylord Entertainment wants to open a convention center and hotel with 1500 rooms and 400,000 square feet of conference space. Aurora, Denver, and the State of Colorado are offering subsidies worth over 36% of the projected cost of the project. Governor Hickenlooper, where is your rage? 

They justify this under the premise that it will bring conferences, people, and money to Colorado. The new activity is supposed to generate new tax revenue. According to their website, Gaylord Hotels “strive to make planning easier for you by providing ‘everything in one place.’ From guest rooms and meeting space, to recreation and dining, in a self-contained environment…” Any conventioneers that come to Colorado will not need to visit anyplace other than Gaylord Hotels. 

Reality check: what are the chances that the CEO of a large corporation will say, “Let’s have a convention, hold it in Aurora, and stay inside”? No offense, but…Aurora? Yet that’s what will be required for Gaylord to generate new revenue.  Here are three possible and obvious ways that your tax dollars will fail to generate the predicted tax revenue: 

1. Tax revenue might be diverted from other local hotels, restaurants, and other businesses to Gaylord. Instead of generating new revenue it just relocates it. Businesses that once depended on that revenue could be hurt.

2.  Conferences might very likely continue going to convention centers that are in more exciting locations than Aurora.

3. Gaylord appears to be a healthy, profitable corporation. So did Enron. If Gaylord fails, our tax money has been wasted. 

If it’s a viable, worthwhile project, private investors will invest in it. If it isn’t worthy of private investment, why should government force us to invest? Let’s leave the gambling where it belongs - in Blackhawk, Central City, and Cripple Creek.

House Paint, Stock Shows, and Shopping Malls

Backyard Bail-Outs?

 Sometime soon my house will need a paint job (I mention this at risk of an onslaught of painting companies soliciting my business).  If I don’t repaint, my house will likely lose value.  If I neglect it long enough, my neighborhood will lose some of its value.  As values go down, property taxes go down.  Clearly it’s in the best interest of my neighbors and government to get my house painted.

But we are in a depression.  I mean a recession.  Pardon me, we are officially in a recovery.  Somehow that doesn’t help me afford paint. My income has taken a drastic hit due to this economy, no matter what it’s called.

So here’s my plan: If all my neighbors pitch in and help me buy the paint and rent the equipment, I’ll paint my house.  All will benefit by having a nicer neighborhood with higher home values.  The taxing districts that rely on property taxes will benefit as valuations rise.

Some of my neighbors might not want to help. That’s not fair to the others since all will benefit.  We’ll create a Paint Renewal Authority.  The Authority will borrow the money and give it to me.  They will repay the debt with the higher property taxes in my neighborhood.  After all, those higher taxes won’t happen if my house remains unpainted.  Which I won’t do if I can’t afford it.

Trust me: I’ll use good paint and superior workmanship. I won’t sell my house to an illegal drug or prostitution ring.  I’ll faithfully water my lawn and maintain my property so that the Authority’s investment in my property will be safe, and all my neighbors will benefit. And you can rest assured that the higher property values in my neighborhood are entirely attributable to my fresh paint.

Economic Development?

On a much larger scale this is just one form of tax incentive that economic development authorities use. It’s called Tax Increment Financing, and this ridiculous scenario takes place across the country.  Economic development authorities use these incentives to attract developers to build malls, office parks, industrial complexes, etc.  And taxpayers are on the hook if the authority invests poorly.

Democrats hate Wal-Mart because their low prices make it hard for Mom-and-Pop businesses to compete.  Republicans praise Wal-Mart because they offer goods at lower prices, which raise our standard of living.  But Wal-Mart is the beneficiary of tax incentives, a valuable advantage that Mom-and-Pop aren’t able to access.  A government subsidy to Wal-Mart is a disadvantage to competing businesses that don’t get a similar subsidy.  It’s a grand example of government choosing winners and losers. 

Politicians get the immediate benefit of a visible improvement to the community and can point to new jobs. What isn’t seen is the loss of small businesses and their jobs. Also, the project might not work out as well as hoped, and the additional taxes might not come in.  Perhaps the development would have occurred without the subsidy. Or, as often happens, a new subsidized project will make the old one obsolete, perhaps even before higher tax revenues can retire the debt.  The politicians may be long gone before that happens.

Recent Examples

The National Western Stock Show might move to a new location. Taxpayers may be forced to fund development of the new site, a private enterprise. Walt Isenberg, CEO of Sage Hospitality said of the plan, “Colorado…and…Denver have spent a significant amount of money building a conference center downtown.  If this hotel and conference center is built, will they cannibalize that investment?” 

The Westminster Mall has received millions in taxpayer “investments” over the years.  It was once home to 300 shops.  Then Westminster helped develop the Westminster Promenade, and then the Shops at Walnut Creek. Now Westminster Mall has 15 shops. The city is buying the mall, and you and I are once again “investing” in the property. And the Promenade is losing tenants.

Look around at the major malls and developments in our Metro North area.  Chances are they have been subsidized by you and me and Mom-and-Pop who have to compete with them. Can you feel the despair of store owners who, by virtue of years of hard work, paid taxes to fund the superstore that runs them out of business? Who will bail them out?