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Friday, June 1, 2012

How bad can "corporate socialism" get? David Cay Johnston gives us a glimpse

David Cay Johnston has a new column up today showing us some of the worst outcomes from corporate subsidies: incentives for retail development.

Johnston analyzes the case of a proposed redevelopment of the nearly-shuttered Medley Centre Mall in Irondequoit, Monroe County, New York, where developer Scott Congel is seeking a $250 million sales tax TIF. Originally a $260 million project, Congel now says he will invest $750 million to build a hotel and condos as well.

Johnston points out that retail is practically the worst thing government can subsidize, because it is almost entirely derivative of a region's population and income. If income falls (actually, even if it stays the same), the new mall can only succeed if it takes sales away from other existing outlets. And it's even worse than Johnston says, because retail jobs tend to have relatively poor pay and benefits.

The best study on this subject was conducted by the East-West Gateway Council of Governments, which is the regional planning agency for the St. Louis metropolitan area. This report found that from 1990 to 2007, local governments in the region had spent $2 billion in retail subsidies, repeatedly shifting the location of sales but generating no tax growth beyond the area's income growth. This comes to an astonishing $370,000 per net job if we believe that the incentives created the jobs, which is unlikely since sales growth did not exceed regional income growth. The cost per job is actually infinite.

Johnston points out more outrageous aspects to the Medley Centre proposal. Instead of conducting its own analysis of the economic impact of mall redevelopment, the developer commissioned and paid for a report, which "found" that the subsidized mall would see its sales grow from $30 million a year to $420 million per year. Johnston, by contrast, found that real income had fallen by $2.5 billion (13%) from 2000 to 2008 in Monroe County, and rightly argues that it makes the 14-fold increase in sales predicted "unlikely." Similarly, Johnston found that hotel demand in Monroe County had been flat for two decades.

Johnston also reviewed building costs for condos and hotels, finding that the $750 million price tag was "wildly inflated." As he points out, even if the figure was right, the subsidy has an aid intensity (subsidy divided by investment) of 1/3, whereas if the investment is only $260 million as earlier promised, the aid intensity comes to 96%. This would rival the 98% aid intensity on the Electrolux manufacturing plant being built in Memphis, itself an absurd level of subsidization, but at least for manufacturing rather than retail jobs.

The Medley Centre project has not yet received final approval, but it is an excellent example of all that is wrong with subsidized retail development. It won't create any new net jobs, the jobs at the mall will be low quality, the economic "analysis" was bought and paid for by the beneficiary, and the cost will be outrageously high. Let's hope there is some way it may yet be stopped.

Wednesday, May 30, 2012

Basics: U.S. One of Worst Rich Countries for Child Poverty

Pat Garofolo of Think Progress reports on new data published by UNICEF on child poverty among rich countries. The study covered all 27 European Union members, plus Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland, and the United States. Of the 35 countries studied, the U.S. ranks second-worst in the percentage of children living in relative poverty (half of median GDP per capita; see further below), with 23.1% below this poverty level, above only Romania at 25.5%. Romania is the second poorest member of the EU and not an OECD member country. The table below sums up the results (most data are for 2009):

Source: UNICEF via Think Progress

As the report says:
Previous reports in this series have shown that failure to protect children from poverty is one of the most costly mistakes a society can make....The economic argument, in anything but the shortest term, is therefore heavily on the side of protecting children from poverty. Even more important is the argument in principle. Because children have only one opportunity to develop normally in mind and body, the commitment to protection from poverty must be upheld in good times and in bad. A society that fails to maintain that commitment, even in difficult economic times, is a society that is failing its most vulnerable citizens and storing up intractable social and economic problems for the years immediately ahead.
Some people object to the use of this relative poverty measure, which is the OECD standard. Certainly, for the poorer EU Member States, their absolute levels of child deprivation are worse than that in the U.S. because their income per capita is so much lower. For example, Romania's GDP per capita is $12,300 at purchasing power parity (PPP) compared to $48,100 for the United States. The UNICEF report actually has an absolute measure of child deprivation based on lack of access to two or more of 14 resources it estimates are essential for children in an industrialized society (including everything from three meals a day to a quiet place to do homework to an Internet connection). 72.6% of Romania's children and 56.6% of Bulgaria's are deprived by this standard, but only four more EU members exceed 20% by this measure. (Comparable data were not available for the U.S.)

But we in America should not get too excited by this fact. If we compare poverty across the major OECD economies, we find that the rankings change very little whether we use the OECD's relative measure or an absolute measure. We know this because for a time the UN Development Programme's Human Development Report listed data for an absolute poverty threshold of $11/day in 1994-5, which comes to $16,060 per year for four people, little different than the Census Bureau's figure of $15,569 for a family of four in 1995. So, measuring major European economies plus Australia and Canada, which generally have a lower GDP per capita at PPP than the U.S. does, against the U.S. poverty line, what do we find? From the 2006 Human Development Report, , page 295, here are all the "high human development" countries with poverty data using both the relative and absolute scales (listed in order of their Human Development Index score):

Country          50% of Median Income Rate          $11 a Day Poverty Rate
                                   1994-2002                                1994-95

Norway                          6.4%                                         4.3%
Australia                        14.3%                                       17.6%
Sweden                           6.5%                                         6.3%
Canada                          11.4%                                         7.4%
United States                  17.0%                                      13.6%
Netherlands                      7.3%                                        7.1%
Finland                             5.4%                                         4.8%
Luxembourg                     6.0%                                         0.3%
France                             8.0%                                         9.9%
United Kingdom             12.4%                                       15.7%
Germany                          8.3%                                         7.3%

As we can see, the shift to the absolute rate improves the U.S. rank from only 11th (last) to 9th. As long as restrict ourselves to the richest of rich countries, it makes little difference whether we use a relative or absolute measure of poverty. Either way, the U.S. does very poorly. And because it does poorly in overall poverty, it does poorly in child poverty as well.

The U.S., with high levels of child poverty, is therefore setting itself up for permanently lower economic productivity, higher costs in social services and incarceration, and so forth. This is a powerful argument against cuts to safety net programs and to education. The only question is whether we can overcome the forces currently promoting such policies.

Monday, May 28, 2012

Basics: How Overrepresented Are Rural and Low-Population States?

We all kinda sorta know it: rural and small states are overrepresented in the Senate and, to a lesser extent, the Electoral College.This has deep roots in American history, of course: when the United States Constitution was drafted, small states demanded the Senate, with two votes for every state, to guarantee they would not be overwhelmed by the larger states politically. But today, when we have much greater population differences among states than in 1787, this takes on much more anti-democratic significance than it did then. Because each state has two Senators, political changes favoring the middle class are much harder to achieve than if everyone in the country were equally represented, in a mathematical sense, in Congress. Moreover, with the existence of the filibuster (recently challenged in court by Common Cause), the effect of this overrepresentation is substantially magnified. But how big is the effect after the 2010 Census?

Under the Senate's filibuster rules, 41 Senators can block debate on Senate bills and nomination confirmations. So the first question is what percentage of the 50 states' population do the 21 smallest states have. The 2010 Census showed the states to have 308.1 million (all quoted figures are subject to slight rounding error) population, with the smallest 21, from Wyoming's 564,000 to Iowa's 3 million, having a total of 34.8 million, or just 11.3% of the 50-state population. In theory, Senators representing those states could mount a successful filibuster. Of course, this is unrealistic, since some small states are heavily Democratic, such as Vermont, Rhode Island, Hawaii, and Delaware. Even Montana currently has two Democratic Senators.

Another way to look at the filibuster is to ask what percentage of the 50-state population is represented by the 41 Republican Senators from the least populous states. The answer takes the actual population of states with any Republican Senators, except Texas (Cornyn and Hutchison), Florida (Rubio), Illinois (Kirk), Pennsylvania (Toomey), and Ohio (Portman).  The population of the states represented by the other 41 Republican Senators is 104.7 million, or 34.0% of the population of the 50 states. Thus, states with just a third of the country's population can block legislation or Presidential nominations. With the recent skyrocketing use of the filibuster in the Senate, this is profoundly undemocratic.

Turning to the Electoral College, we can again see the effect of having a minimum of two Senators regardless of population, which means that each state (and the District of Columbia) has a minimum of three electors in the Electoral College. For example, the Real Clear Politics Electoral College map lists just 11 states and the District of Columbia as likely Obama, whereas 17 states are likely Romney. Even though the likely Obama states have more electoral votes than the likely Romney states (161 to 131), 6 of the Democratic states have double-digit  electoral votes whereas only two of the Republican states do, underlining how Romney benefits from the overrepresentation of rural states.

Finally, remembering the 2000 election, where President Bush was awarded more electoral votes despite losing the popular vote nationally, we can ask what the minimum percentage of population for the 50 states plus DC is needed to win the Electoral College. To answer this question, I tallied from the bottom to see how many states were required to top 270 electoral votes. According to Wikipedia (as I tell my students, only a potentially reliable source for non-controversial information, like this), you have to have New Jersey to top 270, but it actually takes you to 282. So I subtracted three Democratic states (DE, VT, and DC) with 3 electoral votes as well as Montana's 3 electoral votes (since it's the most competitive of the remaining states with 3 EVs) to get down to 270. The 37 remaining states have only 45% of the nation's population eligible to elect the President. Yet theoretically they could do just that.

This post has merely scratched the surface of the deep historical and constitutional questions that have led to Wyoming's 564,000 people having as many Senators as California's 37.7 million. The rural bias of the Senate and Electoral College make major political changes difficult to achieve, yet it is even more difficult to imagine that they could possibly be fundamentally altered, especially the Senate. Still, it is worth reflecting on these imbalances in order to understand the shortcomings that exist in American democracy.