Middle Class Political Economist

Swiss Bank Secrecy Reform

2012-03-04T20:55:00.000-05:00

Reprinted by permission of Mark Morris, h/t Tax Research UK.

The Travails of People with Health Insurance Are Not Trivial!

2012-03-04T19:27:00.001-05:00

Austin Carroll at The Incidental Economist has posted what is at least the third installment of his saga to keep getting medication for a chronic condition. This is an excellent reminder that American health care does not just let down the 49.9 million uninsured, but fails those who have health insurance, too.

By way of background, it is important to note that Carroll is not just an expert on health care policy and IT, he is also a physician. He is, of course, insured by his employer, Indiana University. And it is there that this installment of his story begins:

Indiana University, in its infinite wisdom, changed the health care plans for the gazillionth time on January 1. This means that the laboratory I used to have to go to (which is NOT an IU [Indiana University - KT] lab – crazy) is no longer covered. So I needed to search for a new lab that would qualify as in-network. Of course, that meant that the standing order I had at the old lab needed to be reissued. So I had to call my doctor and wait for them to get me a new prescription for my labs. That took a few tries, because they couldn’t understand why I needed a new prescription. But, eventually, I got it.

End of story? Hardly. His insurance had tripled in price, he had to get a new pharmacy, he had to navigate a labyrinthine website to request a new prescription from his doctor, only to find that the links were broken!

For those keeping score at home, none of the expense of working one's way through the bureaucracy of health insurance is counted as an expense when you see data on how much the United States spends on health care.

Is this an isolated story? Ask the approximately 6 million people who had to change pharmacies in January because Express Scripts and Walgreens couldn't reach agreement on reimbursement rates. My father, a military retiree on Tricare, was one of them. I was another one. I complained to the benefits people at University of Missouri-St. Louis that this would be horribly inconvenient to people like me who need to fill prescriptions in multiple parts of the country and benefit from Walgreens' nationwide reach. Of course this was in vain. Express Scripts is headquartered literally on my campus. The building next to mine is now Express Scripts Hall. The University of Missouri will never get rid of Express Scripts as its prescription benefits manager.

Having health insurance in America doesn't guarantee you access to health care (you have seen "Sicko," haven't you?), it doesn't deliver low costs, and it certainly throws up new kinds of bureaucratic roadblocks on a daily basis. As Carroll says, there is no way we have the best health care system in the world. Even Reason magazine editor-in-chief Matt Welch is convinced in practice, if not in theory (h/t to commenter Steve on Carroll's post).

Top Sign That Austerity Doesn't Work

2012-03-02T15:23:00.000-05:00

The Washington Post (via Calculated Risk) reported yesterday that the Eurozone, the 17 European Union nations that use the euro, hit its highest unemployment rate since the currency was created in 1999, at 10.7% in January. The Eurozone (and since the election of the Conservative-Liberal Democratic coalition government, the UK as well) has been giving us the world's largest experiment in the effect of austerity policies in the wake of the economic crisis. The results are definitive, and not pretty. The Eurozone economy is shrinking again (h/t Paul Krugman), and the four countries that have had the most severe budget cuts have the highest unemployment rates.

Select Unemployment Rates

Date     Eurozone     Spain     Greece     Portugal     Ireland     UK     USA

1/2011   10.0%         20.6%    14.7%     12.3%      14.4%    7.8% 9.1%
1/2012   10.7%       23.3%    19.9% 14.8%    14.8%    8.4% 8.3%

Note: Greece and UK figures are for November 2011
Source: Eurostat, 1 March 2012

The European Central Bank, in contrast to the Federal Reserve, raised interest rates twice in 2011, due to its singular mandate to fight inflation rather than fight inflation and unemployment as the Fed is charged with doing. The U.K., since electing its new government in 2010, has engaged in sharp budget cuts. From the table above, we can see how well those austerity measures are working. While unemployment has fallen in five Eurozone countries (Germany, Estonia, Austria, Slovakia, and Finland), this has been more than outweighed by increases in the rest of the Eurozone, including France, Italy, and the Netherlands, as well as the four members in the table which have had the most substantial budget cuts. Indeed, the U.S. situation would have made more progress than it has (and it has been far too slow) if not for what Paul Krugman has called the 50 Herbert Hoovers of state budgets constrained by balanced budget requirements.

What does this mean for the United States? In 2011, the U.S. exported $268.6 billion worth of goods to the European Union. While the U.S. had a trade deficit with the EU, if the EU goes into recession its imports from the U.S. will fall much faster than U.S. imports from Europe, making it more likely that the U.S. recovery will stall. But the big takeaway is that the politics of austerity are proving themselves a failure, and the U.S. should resist calls to cut the budget here as long as unemployment remains so high.

Medical Costs Help Drive United States to Highest Bankruptcy Rate in OECD

2012-02-29T06:29:00.000-05:00

As I have discussed before, medical bills are one of the leading causes of bankruptcy in the United States. In fact a 2009 study by David Himmelstein et al. in the American Journal of Medicine (abstract here, news story here) shows that there was a sharp increase in the proportion of bankruptcies with significant medical causes (defined as debts over $5,000, loss of income due to health problems, or mortgaging of the debtor's home to help meet medical expenses) between 2001 and 2007. According to their study, 46.2% of bankruptcies in 2001 were medically-related, while by 2007 the level had grown to 62.1%, even though bankruptcy laws had become more restrictive in the interim.

These figures have sometimes been disputed by other scholars, for example this article by Dranove and Millenson in a 2006 symposium in the journal Health Affairs, which argued that the definition of medically related used by Himmelstein et al. was far too broad.

If medical bills are contributing to a higher proportion of bankruptcies in the U.S., we should expect to see this reflected in a higher overall bankruptcy rate than for countries where universal health insurance makes medical bankruptcy impossible. It turns out that this hunch is correct.

In 2006, Rigmar Osterkamp of the Ifo Institute for Economic Research in Munich, Germany, analyzed select OECD countries that had bankruptcy data extending over many years and which clearly distinguished between personal and business bankruptcies. Between 1980 and 2005, the United States opened up a steadily widening margin over #2 Canada, which itself was significantly ahead of the other OECD members studied (Australia, Germany, the Netherlands, Sweden, and the United Kingdom). According to Osterkamp, the U.S. and Canada had the two most debtor-friendly bankruptcy systems, though he noted that Germany's had become much more debtor-friendly in 1999 (leading to a sharp increase in bankruptcy filings), whereas U.S. law had become more restrictive in 2005. He saw this relative debtor-friendliness as the explanation for why Canada and the United States had higher rates of bankruptcy. However, he did not consider what differentiated the two countries.

As we can see from the chart, in 1982 the U.S. and Canada had virtually identical rates of around 1200 per million population, whereas by 2005 the United States was around 6000 per million while Canada was just a little over half that rate. (As Michelle White notes, the 2005 figure was inflated by consumers wanting to file under the more favorable law. According to the American Bankruptcy Institute, the figure plunged to 597,000 in 2006 but by 2010 had again topped 1.5 million filings.)

Without a detailed statistical analysis, I can't prove that the rise in medical bankruptcies accounts for the growing gap between U.S. and other OECD bankruptcy rates. But besides the suggestive fact that the proportion of medical bankruptcies grew in at least the latter part of the 1980-2005 period, we also know that U.S. per capita health care spending opened up a very similarly shaped gap relative to the rest of the OECD over the entire time span. And the finding that the U.S. personal bankruptcy rate is so much higher than that of other rich countries suggests that Himmelstein et al. are more likely closer to the truth in their estimation of the level of medical reasons for bankruptcy than are their critics.

Tax Expenditures Don't Make America Europe

2012-02-27T02:54:00.000-05:00

Via Calculated Risk, Dean Baker takes David Brooks to task for his claim that "America is Europe." Brooks tells us:

The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.

These tax breaks, more technically called "tax expenditures," are indeed large (Brooks cites an estimate of $600 billion for 2007) and not transparent. But they have more problems than that. As the influential Citizens for Tax Justice report linked above points out, tax expenditures have further drawbacks:

1. They are essentially entitlements: If you qualify for the tax break, you get it. Following on this,
2. They are generally uncapped. It is possible to specify a maximum overall amount that can be taken through a tax expenditure (many states do this with various tax credit programs which are first come, first served, until the annual allocation runs out), but in most cases at the federal level an entity takes advantage of the tax provision when it files its taxes, so no capping is possible.
3. Unlike on-budget programs, tax expenditures rarely undergo annual review, though again in principle one could specify a sunset date to force periodic evaluation.
4. The benefits go mainly to corporations and the rich. This is even true of such "middle-class" tax expenditures such as the mortgage interest deduction, from which those in higher tax brackets and larger mortgage balances benefit the most.
5. Tax expenditures are not designed for efficient program management: why should we expect the IRS to run subsidy programs any more than we would have the Defense Department oversee Food Stamps?

Moreover, as Baker points out, there is a big difference between what we pay for social benefits and what we actually get. He highlights our grossly inefficient health care system and notes that " if we add in ...the deduction for employer provided health insurance.., the government in the United States commits a larger share of GDP for health care than almost anyone." Despite this, he adds, the U.S. does not match the European countries in terms of universal insurance (nor, for that matter, life expectancy).

The preference for non-transparency in the U.S. extends beyond the welfare state. As I showed in my book, Competing for Capital, in the European Union, subsidies to industry and services tend to be paid in the form of grants (on budget), whereas in the United States, tax expenditures are the overwhelming mechanism for such subsidies by state and local governments. Moreover, because tax expenditures do not show up in national accounts data (i.e., adding up to gross domestic product) while on-budget subsidies do, looking at "subsidies" as a percentage of GDP makes the U.S. look like less of a subsidizer than it is compared to Europe.

As a result, in the U.S. we have a patchwork system of expenditures and tax expenditures for social welfare and industrial development that is more costly and less effective than what we see in Europe. This system, if you can call it that, is also less transparent and contributes to U.S. inequality being virtually the worst in the OECD. Bottom line: America isn't Europe.

Iceland Solves Banking Crisis by Indicting CEOs, Forcing Mortgage Relief

2012-02-23T17:16:00.003-05:00

Via Mark Thoma's Economist View, I came across an interesting blog on financial regulation called Trust Your Instincts. Lately, the author, "Richard," has written a set of posts comparing two models of dealing with the financial crisis, which he calls the Swedish model (used by Sweden and Iceland) and the Japanese model (used by Japan, the U.S., and the U.K.).

Here is his description of the two models:

Regular readers know that under the Japanese model losses on the excesses in the financial system are only recognized as banks generate the capital to absorb them. This is good for banks because the model involves hiding their true condition and pursuing policies designed to boost bank earnings. It is bad for the economy because it distorts asset prices and access to capital (for proof, look at the performance of Japan's economy).

The alternative is a Swedish model that is bad for banks and good for the economy. It is bad for banks because they are required to recognize the losses on the excesses in the financial system today. It is good for the economy because it avoids the distortion in asset prices and access to funding associated with hiding the losses under the Japanese model (for proof, look at the performance of Sweden's economy).

Richard points to recent events in Iceland as another successful application of Sweden's model. There, the country's banks forgave loans equivalent to 13% of gross domestic product, according to a Bloomberg article Richard cites. The equivalent in the United States would be about $1.95 trillion of mortgage debt writedowns. Icelandic banks agreed to forgive all mortgage debt over 110% of a home's value.

Not only that, Bloomberg relates a development that would meet, I believe, with the approval of Tea Party members and Occupy protesters alike: Bankers were held personally liable for crashing the country's economy. The CEO's of the country's three largest banks are among 200 who are facing criminal charges, and a special prosecutor expects up to 90 more indictments. The contrast with the United States could not be more obvious.

While Iceland is a tiny country with a population of only 317,000 and a $13 billion GDP, Trust Your Instincts is not the only blog paying attention to it. As Paul Krugman wrote yesterday, "I think I may have been one of the first commentators with a wide audience to point out how relatively well Iceland was doing." What he didn't mention, though his commentator "iInfoliner" did, is that the credit rating agency Fitch upgraded Iceland's debt to investment grade last week. Moreover, according to the Business Week story, the country can now borrow in U.S. dollars at a mere 4.77%. Compare this to Greece at 35.98% and Portugal at 12.77%; even Spain and Italy are a little over 5% (the FT link has no rates listed for Ireland).

The moral of the story is that a different approach to dealing with the banks is necessary, both to restore the U.S. economy but to prosecute financiers who broke the law. As it stands, bankers have gotten off scot-free while the country's economic growth has been largely anemic. While the job market has shown a few flickers of life recently, the country needs millions of jobs just to get back where it was before the crash, which actually wasn't all that good a situation for the middle class to begin with.

It could be worse, I suppose. As Richard says, Japan's economy remains smaller than 15 years ago. But Ben Bernanke was rumored to have learned the lessons of the Japanese experience. Whatever happened to that guy?

Romney Tax Plan Blows Hole in Budget, Remains Short on Specifics

2012-02-22T20:38:00.000-05:00

Mitt Romney unveiled his tax plan today, but it revealed few surprises except for surprisingly few specifics. Via Chris Hayes (@chrislhayes), conservative economist Josh Barro estimates that the Romney plan consists of $5 trillion in tax cuts over 10 years, divided as follows:

$1 trillion from cutting the corporate income tax
$3 trillion from cutting all personal income tax rates by 20% (not 20 percentage points, by the way)
$1 trillion from miscellaneous tax cuts like abolishing the alternative minimum tax (AMT)

According to the Romney plan, the corporate income tax rate would fall from 35% to 25% and the U.S. would stop taxing countries on their foreign profits. Contrary to Romney's claim, making foreign profits tax-free would not encourage their investment in the U.S., but would instead give companies an incentive to make more of their profits appear to be foreign by creative use of transfer pricing to make profits show up in tax havens instead of the U.S. Under the Romney plan, companies would then be free to bring that money back to the U.S. without facing any tax, anywhere in the world.

Among the other non-surprises in the plan, Romney would not increase the 15% tax rate on his own main source of income, capital gains. He would repeal the Affordable Care Act, even though his version of it in Massachusetts gave the state the highest level of insurance coverage in the country at 95%. He would raise the eligibility age for Social Security and end Medicare as we know it a la the Ryan Plan, two staples of conservative talking points that would negatively affect the middle class.

As Barro points out, Romney has said before that he will increase American military spending (already tops in the world by far). This makes it even more difficult for him to offset the $5 billion in tax cuts without huge cuts to programs that the middle class depends on. Thus, I think the inescapable conclusion is that of Benjy Sarlin: "Romney's Tax Plan Still a Boon to the Rich, Despite 1% Talk."

Bad Trends in Economic Development: Weak Negotiating, Job Piracy and Blackmail

2012-02-21T03:54:00.000-05:00

Greg LeRoy at Good Jobs First's "Clawback" blog reports that Sears has now announced 100 layoffs in its headquarters in Illinois, despite receiving a subsidy of $275 million (nominal value) to stay in the state when it threatened to move last year. It's bad enough that Sears threatened relocation in order to extract subsidies from the state, as Julie Irwin Zimmerman ably discussed in December. What's more troubling, as LeRoy points out, is that under the agreement Sears can lay off a total of 1750 headquarters workers (which would take the firm from its initial 6000 jobs to 4250) without penalty. This is a stunning capitulation that represents backsliding from a trend to require more of subsidized companies (see the December 2011 Good Jobs First report Money for Something).

But it's not the only example of this sort of backsliding. As I reported in September, the state of Tennessee did not include clawback clauses in huge subsidy agreements with Electrolux, Hemlock Semiconductor, and Wacker Chemie. The jobs crisis apparently has made some states afraid to assert themselves in investment incentive negotiations.

Sears is only one high-profile example of actual or threatened relocations that resulted in subsidies. As Good Jobs First reports on Minnesota (2006) and Ohio (2011) have documented, 250 companies and over 24,000 jobs were relocated on the taxpayer's dime over various study periods in the Minneapolis/St. Paul, Cleveland, and Cincinnati metro areas alone, with sprawl-enhancing effects in all three cases.

To see how widespread subsidized relocation is, I performed a simple search in the Nexis news database (subscription required). It was:

relocat! AND "tax incentives" OR "tax breaks"

With the wildcard "!" symbol, Nexis searches for all variants of the word "relocation." When I set the time period for articles in the last year, I got 1,000 results, the maximum it will return. Searching for the last six months: 1,000 results. Searching for the last three months: 998 results. Only when I narrowed the search to the last month did I get a mere 519 results.

Of course, not all the stories are from the U.S., many are not about job piracy, and there are often duplicate articles. But these huge numbers over such a short period of time suggest that there is a great deal we have yet to discover about relocation incentives, and they may be far more prevalent than I would ever have imagined.

Basics: Length of Unemployment is Worst Since World War II.

2012-02-19T21:47:00.001-05:00

Update: As has been pointed out to me several times, "historically unprecedented" is not correct. I assume that duration of unemployment was longer during the Great Depression. The FRED data below obviously only goes back to 1947. So while "completely unprecedented historically" is literally not correct, duration of unemployment is still off the charts for the postwar era, at just under twice the previous peak.

One thing I've learned since I started blogging is how much people want to see information that puts our current economic situation in perspective. One way to do that, a natural one to me since my specialty is international relations, is to use multi-country comparisons to see where the U.S. stands. Usually this means comparisons with other industrialized countries, although my post on employment protection had data for Brazil, Russia, India, and China as well because the Organization for Economic Cooperation and Development provided it. Moreover, it was striking that the United States would have even worse standards than some developing countries.

Besides that kind of "cross-sectional" comparison of multiple countries at a single point in time, another way to gain perspective is through "longitudinal" comparison of data on one issue through time. Today's post takes that approach. I decided to learn how to use the St. Louis Federal Reserve Bank data you often see in other blogs--although it turns out "learn" is too strong a word because the "FRED" website (https://research.stlouisfed.org/fred2/) is so simple to use. That set me up for a shock to find out how bad long-term unemployment (usually defined as 26 weeks or more) is today. This is a critical issue because the longer you are out of work, the less likely you are to ever find a job again. Unemployment is also critical for health care, as most Americans still get their health insurance through their employers.

As everyone knows, long-term unemployment has been a big problem in the current crisis. But "knowing" isn't the same as having perspective. For that, we need a comparison. It turns out that the average duration of unemployment over the last few months is almost exactly twice as high as the previous peak in 1983 in the aftermath of the Reagan recession. The current average of over 40 weeks is completely unprecedented historically (as is the median length of unemployment, which was also twice that of prior peaks at about 22 weeks when Politifact reported on it in May 2011). But you have to see it to really understand it: Unemployment duration has increased steadily even since the end of the official recession, and may finally have topped out at 40.9 weeks in November 2011. Let's hope we're finally seeing a reduction.

Drug Shortages Highlight Failures of For-Profit Health Care

2012-02-14T23:00:00.000-05:00

Rick Ungar (via @Captain Clarion and @AggressiveProgresive) has a great catch and analysis at Forbes, "Proof of the Failure of Free Markets in Medicine." He discusses the shortage of the cancer drug methotrexate, which has an 80-90% success rate in treating the most common (and once always fatal) form of leukemia, acute lymphoblastic leukemia (ALL). The medication, now off patent, is apparently no longer profitable enough for the five U.S. makers of this drug, and methotrexate is one of a number of life-saving medicines in short supply. There are approximately 3000 new cases of ALL each year diagnosed in young children.

As Ungar argues, it is implausible that all five current manufacturers of methotrexate are simultaneously having production delays:

What are the odds that 100 percent of these companies are, somehow, each experiencing manufacturing delays? Does anyone imagine that these manufacturing delays were occurring back when these companies were making big bucks on the product, achieved by the huge mark-ups that accompany receipt of the patent protection that bars others from competing?

The Huffington Post's Linda A. Johnson reports that the five companies are Ben Venue Laboratories Inc., APP Pharmaceuticals LLC, Hospira Inc., Sandoz Inc., and Mylan Inc. She also notes that Ben Venue was the sole U.S. producer of the breast cancer drug doxil, which with methotrexate was affected by a November shutdown of a company plant in Ohio after regulators found recurrent drug safety problems.

When production of these drugs falters, people die. As Ungar puts it, "This means that kids are dying —and will continue dying— because the money just isn’t what it used to be for the five manufacturers who have long supplied the critical medicine."

If we think that's wrong, it's necessary to address the problems of the patent system, which leads to high profits (and medicines unaffordable in developing countries, according to Susan Sell) during the patent's life but abandonment of vital medications after the end of the patent. Instead, we are at present having to fight off attempts to expand protection of patents and other intellectual property: the for-now neutralized SOPA and PIPA, as well as the Anti Counterfeiting Trade Agreement and the Trans-Pacific Partnership. Ungar suggests that the patent system be modified to take into account whether companies stopped making needed drugs after previous patents expired. This could be helpful, but the deeper question is whether patent protections are too strong already and need to reduced.

Basics: U.S. Students Score About Average in OECD Testing Program

2012-02-14T00:59:00.000-05:00

Every three years, the Organization for Economic Cooperation and Development carries out its Program for International Student Assessment, PISA. The 2009 edition covered 65 countries and focused on reading, but included test results for math and science as well. PISA tests students who are 15 years, 3 months old to 16 years, two months old to

assess the extent to which students near the end of compulsory education have acquired some of the knowledge and skills that are essential for full participation in modern societies (PISA Results, Volume I, p. 19)

In addition to the 34 OECD member nations, a further 31 "partner countries" take part. Some of these partners, such as Shanghai, were among the top performers, despite lower education budgets than in the OECD and wide socioeconomic disparities within them. In fact, Shanghai topped the list in all three categories (see below).

The U.S. scores on the high end of average in reading and science, and just below average in math. As the table below shows, America scores better than a few countries often thought of as more "socially advanced," such as Sweden. Though there is obviously room for improvement (and the PISA report discusses improved scores in countries as diverse as South Korea, Poland, Germany, and Brazil), the sky is not falling on U.S. education just yet.

In future posts, I plan to take up more education-related issues. Here, I wanted to show that the U.S. is not starting from as bad a baseline as it does, for example, in health care. Without further ado, here are the PISA scores for the top 50 countries:

Country	Reading	Math	Science

Shanghai-China	556	600	575
Korea	539	546	538
Finland	536	541	554
Hong Kong-China	533	555	549
Singapore	526	562	542
Canada	524	527	529
New Zealand	521	519	532
Japan	520	529	539
Australia	515	514	527
Netherlands	508	526	522
Belgium	506	515	507
Norway	503	498	500
Estonia	501	512	528
Switzerland	501	534	517
Poland	500	495	508
Iceland	500	507	496
United States	500	487	502
Liechtenstein	499	536	520
Sweden	497	494	495
Germany	497	513	520
Ireland	496	487	508
France	496	497	498
Chinese Taipei	495	543	520
Denmark	495	503	499
United Kingdom	494	492	514
Hungary	494	490	503
Portugal	489	487	493
Macao-China	487	525	511
Italy	486	483	489
Latvia	484	482	494
Slovenia	483	501	512
Greece	483	466	470
Spain	481	483	488
Czech Republic	478	493	500
Slovak Republic	477	497	490
Croatia	476	460	486
Israel	474	447	455
Luxembourg	472	489	484
Austria	470	496	494
Lithuania	468	477	491
Turkey	464	445	454
Dubai (UAE)	459	453	466
Russian Federation	459	468	478
Chile	449	421	447
Serbia	442	442	443
Bulgaria	429	428	439
Uruguay	426	427	427
Mexico	425	419	416
Romania	424	427	428
Thailand	421	419	425

Source: OECD, PISA 2009 Database
http://dx.doi.org/10.1787/888932343342

Conservatives Refute Butler/Heritage Revisionism

2012-02-09T00:29:00.000-05:00

@gregvarner points me to a new article at Forbes where Avik Roy tries in vain to find a reference to the individual mandate before the Heritage Foundation, specifically Stuart Butler, started publishing research on it in 1989. Citing the same 1989 lecture I did (and Krugman before me) in my last post, Roy concludes:

Based on my research, I see no contravening evidence to the claim that Stuart Butler and Heritage were the first people to advocate the individual mandate, in the context of a private-sector health-care system.

Roy is at pains to say that Heritage and Butler are now right to oppose the individual mandate, but nowhere does he give any evidence that they changed their minds on it prior to President Obama's election. Unless he (or Butler) give such evidence, it will be hard to take seriously the claim that the "change of heart" isn't merely political opportunism.

As I mentioned in my last post, you can't give a lecture on something without previously researching it, and Roy gives an update linking to James Taranto at the Wall Street Journal, who also isn't buying "Butler's claim of unoriginality," and who finds the research piece that preceded the lecture. "A National Health System for America," edited by Butler and Edmund Haislmaier, is a major 140-page research document. Although it is dated on the Heritage website as January 2, 1989, as Taranto says the Washington Post news story about the book states it was released June 1 of that year (which I verified using the Nexis subscription service). What Taranto does not notice is that this document is clearly labeled on its cover "Revised Edition." This could well push the original version and the original research back into 1988 or earlier.

Not only that, Taranto finds multiple elements of the Affordable Care Act in the research monograph, including its enforcement mechanism.

To Heritage's credit, it has not scrubbed its website of either the lecture or the research document, but the fact remains that these documents appear to be the ultimate source of the individual mandate. Butler has yet to cite another source or acknowledge that he was working on it in the 1980s, not just the 1990s. As Taranto concludes in Butler's case, "Acknowledging error is a sign of integrity, but you have to be truthful about it." Amen to that.

Heritage Doubles Down on Individual Mandate Denialism

2012-02-08T03:15:00.000-05:00

As I reported in July, the Heritage Foundation has been bellowing against the Affordable Care Act despite the fact that the critical elements (individual mandate, community rating, and subsidies so everyone can afford insurance) were first proposed by -- the Heritage Foundation!

In USA Today (via Don Taylor) Stuart Butler, author of the Heritage lecture linked above, says "Don't Blame Heritage for ObamaCare Mandate." He writes:

The confusion arises from the fact that 20 years ago, I held the view that as a technical matter, some form of requirement to purchase insurance was needed in a near-universal insurance market to avoid massive instability through "adverse selection" (insurers avoiding bad risks and healthy people declining coverage). At that time, President Clinton was proposing a universal health care plan, and Heritage and I devised a viable alternative.

My view was shared at the time by many conservative experts, including American Enterprise Institute (AEI) scholars, as well as most non-conservative analysts. Even libertarian-conservative icon Milton Friedman, in a 1991 Wall Street Journal article, advocated replacing Medicare and Medicaid "with a requirement that every U.S. family unit have a major medical insurance policy."

My idea was hardly new. Heritage did not invent the individual mandate.

What this self-serving narrative omits, as Taylor points out, is any mention of Butler's original proposal, linked above, from October 1989. This is more than three years prior to the Clinton health care legislation he claimed to be opposing. Butler's entire article puts his support of the mandate in "the 1990s," despite the fact that he had to have been conducting research on it prior to lecturing on it in 1989. Indeed, he cites no publication prior to his own where an individual mandate was proposed. That doesn't mean one isn't out there, but he gives us no reason to think there is.

He continues:

Additionally, the meaning of the individual mandate we are said to have "invented" has changed over time. Today it means the government makes people buy comprehensive benefits for their own good, rather than our original emphasis on protecting society from the heavy medical costs of free riders.

This is a very strained distinction. I'm not aware of the President or any other supporter of the mandate (I myself would prefer single payer) claiming people are to be forced to buy insurance "for their own good." Just as with Governor Romney's health care reform in Massachusetts, the idea behind the individual mandate remains preventing free riders from not getting insurance until they are sick. That is crucial in making it possible to require insurance companies to insure anyone regardless of pre-existing conditions.

Taylor's colleague at The Incidental Economist, Aaron Carroll, is even more skeptical than Taylor. Carroll argues that nothing in Butler's article supports the view that the mandate in unconstitutional, least of all the claim that the mandate is "for their own good." He also rejects Butler's claim that the Heritage mandate used carrots while the ACA's uses sticks as "just semantics." Whether you raise taxes and give a credit to those who buy insurance, or don't raise taxes and penalize those who don't buy insurance, the bottom line, Carroll points out, is the same.

While I guess it is in some way intellectually appealing to see Butler try to explicitly defend his changed position, the fact of the matter is that his defense is entirely bogus. You don't craft a policy in 1989 to defend against a proposal in 1993 by a President who hasn't been elected yet. No, the truth of the matter is that the individual mandate was the conservative approach to expanding health care access right up until the time President Obama advanced it as his own. Then it became both bad policy and unconstitutional, to boot.

And at night all cats are gray.

California, Birthplace of TIF, Axes It

2012-02-06T02:24:00.000-05:00

One of the many innovations California has given the country is that it was the first to adopt tax increment financing, or TIF. TIF is an extremely popular local subsidy tool that is funded through the anticipated increase in tax revenues (the "tax increment") resulting from a development project. TIF projects sometimes issue revenue bonds against this expected revenue to finance the project, and in some cases projects are financed on a pay-as-you-go basis as the anticipated revenue materialize over the life of a project.

On February 1, however, TIF came to an end in California, 60 years after its introduction there, as legislation abolishing the redevelopment agencies that used TIF came into effect. By 2010, there were approximately 425 redevelopment agencies statewide overseeing about $8 billion of tax increment per year. As far as I know, this exceeds TIF in the rest of the country put together.

How did this happen? When Governor Jerry Brown was elected in 2010, he inherited a state budget deficit of over $20 billion. He decided, as I had recommended for Missouri in 2009, that the huge amount of money going to subsidies and debt service should be returned to state and local governments instead, as a way of paring down the state's deficit. As KABC reported, over $1 billion a year would be returned to school districts, and $500 million annually to local governments.

The abolition of redevelopment agencies was passed primarily with Democratic votes (Contra Costa Times 3/16/11, via Nexis subscription service), but it had the support of Republican assemblyman Chris Norby of Fullerton, who had been an early critic of the agencies in the 1990s (the 2006 version of his publication, "Redevelopment: The Unknown Government" is here).

While other states have been spurred by the budget crisis to cut some of their subsidies to business, California has gone the farthest by eliminating tax increment financing. I have argued before that subsidy cuts could offset a large part of state and local budget deficits, and it's heartening to see it happen in the birthplace of TIF. Let's hope we see more of this before the year is out.

Tax Justice Network Inaugurates Podcast Series, TaxCast

2012-02-02T01:13:00.000-05:00

The Tax Justice Network has just begun making podcasts on issues of tax havens, tax evasion, and so forth. Called TaxCast, the first podcast contains the following:

In our inaugural TaxCast, we discuss the implications of the Vodafone vs India landmark tax case, compare Bill Gates and Mitt Romney’s attitudes to taxation and visit the Occupy camp outside St Paul’s Cathedral in London.

You can subscribe to the TaxCast RSS feed at http://taxcast.libsyn.com/rss

Expensive Subsidies Help State and Local Governments Drag Down Recovery

2012-01-31T03:43:00.000-05:00

The release of gross domestic product data on Friday highlighted how the contraction of state and local governments has been a drag on economic recovery since the end of the official recession. As Nicholas Johnson of the Center on Budget and Policy Priorities explains, 2011 was the third straight year that state and local government output has fallen, reaching -2.3% in 2011, the worst since 1944, as shown in the chart below.

Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009.

As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.

It's important to emphasize that from a national point of view, this spending actually creates very few new jobs. While a multi-hundred-million incentive may appear to attract a new automobile assembly plant in one state, this will be offset by reduced sales from existing plants, which eventually leads to one closing (James Rubenstein, in 1992, indeed found a one-to-one relationship of auto plants opening and closing in North America). Similarly, local governments in the St. Louis metropolitan area poured over $2 billion in subsidies to retail between 1990 and 2007, with the net increase in jobs, 5400 ($370,370 per job!) not exceeding the percentage increase in local income, according to a report by the regional planning organization, the East-West Gateway Council of Governments. In other words, no jobs were actually created by these incentives, as the growth in retail would have occurred anyway due to income growth.

While it would not offset the entire state/local budget deficit, cutting subsidies would go a long way toward that goal, allowing the "Fifty Herbert Hoovers" to rehire workers and cut less from their budgets. Moreover, it would reduce income inequality slightly by ending these transfers from average taxpayers to subsidy recipients who are richer on average.

Basics: America's Relative Decline in Health in One Table

2012-01-28T01:21:00.003-05:00

I've reported before on how the U.S. has seen less life expectancy growth than other rich countries, while at the same time increasing health care spending at a more rapid rate. Another way to see America's relative decline in health outcomes is through the evolution of life expectancy compared to all rich countries over a longer period of time. The World Bank's World Development Indicators database goes back to 1960 and its most recent figures are for 2009. We can see, then, what has happened over a 49-year period.

The table below includes all members of the Organization for Economic Cooperation and Development, excluding former Communist countries (most of which were not independent in 1960) and Israel (for which World Bank data does not go back to 1960). Of the 27 OECD members included, only four (Denmark, Iceland, Netherlands, and Norway) have seen less growth in life expectancy since 1960, and Sweden's growth has been the same at 8.3 years. Only two OECD members today have a lower life expectancy than the U.S., and both (Mexico and Turkey) are much poorer than the U.S. South Korea and Chile, both developing countries in 1960, have now surpassed the U.S. in life expectancy.

While health outcomes have certainly improved over the last 50 years, we can see from the table just how small those gains are relative to what other countries have been able to achieve. And remember, these gains have come at much greater economic cost.

Country Name	2009	1960	Increase
Australia	81.5	70.8	10.7
Austria	80.1	68.6	11.5
Belgium	79.7	70.1	9.7
Canada	80.7	71.1	9.5
Chile	78.8	57.0	21.7
Denmark	78.6	72.2	6.4
Finland	79.7	68.8	10.9
France	81.1	69.9	11.2
Germany	79.8	69.6	10.2
Greece	80.2	68.7	11.5
Iceland	81.5	73.4	8.0
Ireland	79.5	69.7	9.8
Italy	81.4	69.1	12.3
Japan	82.9	67.7	15.3
Korea, Rep.	80.3	53.0	27.3
Luxembourg	80.1	68.3	11.8
Mexico	76.5	57.0	19.4
Netherlands	80.5	73.4	7.2
New Zealand	80.3	71.2	9.1
Norway	80.8	73.5	7.2
Portugal	78.7	63.0	15.7
Spain	81.5	69.1	12.4
Sweden	81.4	73.0	8.3
Switzerland	82.0	71.3	10.7
Turkey	73.4	48.3	25.2
United Kingdom	80.1	71.1	8.9
United States	78.1	69.8	8.3

Jon Stewart Delivers the Goods on Mitt Romney's Taxes

2012-01-25T03:08:00.000-05:00

Mitt Romney claims to simply have been following the law in how he paid his taxes for 2010 and 2011. As we have seen, he was able to use the carried interest loophole (taxing hedge fund managers' fees as if they were profits and therefore subject to the 15% capital gains rate rather than being ordinary income) to reduce his tax rate below 14%. But how is that loophole still in existence, despite a bipartisan effort to kill it in 2007?

Building on a recent New York Times story*, Jon Stewart spilled the beans on Romney tonight. On "The Daily Show" (via Mediate, h/t @Phostir), Stewart poses and answers that question. Starting at 3:27 into the clip, Stewart notes Romney's claim to be simply following the tax laws as written. He hows a 2007 video of co-sponsor Sen. Charles Grassley (R-Iowa) talking about how heavily lobbied it was. At 4:51, Stewart answers the question of who was fighting repeal: The Private Equity Council, started in 2007 by, among other firms, Bain Capital. He then plays a clip of Romney himself telling a TV reporter he "doesn't think it's a good idea to raise taxes" in response to a question about this bill.

What Stewart has laid bare for all to see, of course, is exactly how much influence Romney had on the laws that today he claims simply to be following. I'm shocked, shocked... Occupy Wall Street proven right once again.

* "As Romney Campaign Advances, Private Equity Becomes Part of the Debate," NYT, Jan. 11, 2012, p. A17, via Lexis-Nexis Academic.

New Reports Highlight Bad Companies, Variable State Subsidy Enforcement

2012-01-23T21:17:00.000-05:00

In case you missed it, two reports came out last week highlighting two of my favorite topics, tax havens/tax avoidance and economic development. The first is "Representation Without Taxation," a report identifying the Dirty Thirty companies that paid more for lobbying than they did in taxes. The second is "Money Back Guarantees for Taxpayers," a study of state enforcement of subsidized companies' job commitments.

"Representation Without Taxation" was published by the U.S. Public Interest Research Group and Citizens for Tax Justice. It combines data on the taxes of the 280 Fortune 500 companies that were profitable in every year from 2008 through 2010 with what they spent on lobbying. Of the Dirty Thirty, they write:

These companies so deftly exploited carve outs and loopholes in the tax code that all but one of them enjoyed a negative tax rate over the three year period of the study, while spending nearly half a billion dollars to lobby Congress on issues including tax policy. Altogether they collected $10.6 billion in tax rebates from the federal government.

Ordinary American taxpayers and small businesses must pick up the tab when major corporations avoid their taxes. Spread out over every individual tax filer in America, the taxes avoided by the Dirty Thirty break down to an average of $481 per taxpayer over the three years.

Remember, this is just for 30 companies! On the list are well-known names like General Electric (a $4.7 billion refund on $10.5 billion in U.S. profits, $84 million in lobbying!), DuPont, Verizon, Boeing, Wells Fargo, and Mattel. At least 22 of the firms had subsidiaries in tax havens.

I disagree with the report's use of the term "tax subsidy" to describe the results of tax avoidance, but I wholeheartedly agree with its major recommendations to fight tax havens: end deferral of foreign profits, treat U.S.-controlled foreign subsidiaries as domestic for tax purposes, and reporting profits country by country rather than in consolidated fashion (Publish What You Pay).

Good Jobs First released "Money Back Guarantees for Taxpayers," a look at states' use of clawbacks against subsidized companies that fail to keep their job promises. The result was a "good news, bad news" pattern: On reporting job performance, the good news is that 90% of 238 programs studied require it, but the bad news is that in 78 cases there is no verification of the job numbers. On clawbacks, the good news is that 178 programs had penalties and another 41 were pay-for-performance (the subsidy is not paid until the jobs are created), but the bad news is that for 84 programs, the penalties can be waived.

I should note the recent trend by some companies to demand "no clawbacks" in their agreements, as for example in the recent case of Electrolux in Memphis.

The worst news is that states disclose very little of their enforcement action: For example, only 38 programs publish the names of companies that don't fulfill their job commitments, and a mere 14 programs publish information on which companies are penalized and how much.

Combining scores for what states require from subsidy recipients (from last month's Good Jobs First Report "Money for Something") with clawback scores, the states with the best programs are Vermont, North Carolina, and Nevada. The three worst are DC, Alaska, and North Dakota.

As you can see, we have plenty of work cut out for us in both of these issue areas. Both reports should find their way to your virtual library

Feedburner Feeds Now Available

2012-01-22T18:19:00.000-05:00

I've been doing some technical updating this weekend. As a result, you can now subscribe through Feedburner in your reader or via email. Apparently, there is now an option to redirect the existing subscriptions into the Feedburner feed. Please let me know in comments if you have any experience with this sort of thing and whether it's a good idea or not.

In addition, I have added a set of links to my most popular posts. Because for some reason Blogger Stats went down when I had "The Massachusetts Miracle" posted, it does not show up in proper #3 slot (according to my Google Analytics data). I guess that's technology...

I hope you enjoy these features!

Romney's Cayman Explanations Don't Tell the Whole Story, Says Tax Haven Expert

2012-01-20T04:32:00.001-05:00

Brian Beutler at Talking Points Memo has a story purporting to tell us the "real deal" on Mitt Romney's investments in secret Cayman Island corporations. Surprising, given the ABC News (which originally broke the story) and Wall Street Journal articles he links to, Beutler nowhere mentions that these accounts are secret, in accordance with Cayman Islands bank secrecy provisions, which are some of the toughest in the world.

Worse still, Beutler gives the impression that there is nothing unusual about Romney's use of these accounts. He writes:

The offshore funds story is about a strategy investors use not to defer income and reduce their tax burden, but to attract foreign investors who want to avoid U.S. taxation.

“One of the reasons to have a Cayman Islands entity is so that foreign investors will not get hit with U.S. income, and that’s consistent with our general tax policy,” says Victor Fleischer, a tax professor at the University of Colorado Law School. This can give American investors who offshore a competitive advantage over those who don’t, and can cost the Treasury revenue, but it’s on the level.

I contacted Richard Murphy, head of Tax Research UK and an internationally known expert on tax havens. He called this argument "ludicrous."

Remember, there is nothing of significance in Cayman, and no money of any significance is made in Cayman. Nor is there indigenous wealth. So all money coming into the US from Cayman came from somewhere else. Now where is the most likely source? I'll wager it's the USA. So money flees illicitly out of the US to Cayman so it can come back in a supposedly tax free structure - that's called "round tripping." Not all is that way - some will come from South America and very little from Europe - wrong time zone - but the sole reason for Cayman secrecy is mainly to hide the round tripping and that's the most venal tax sin. So to argue that you're luring money in requires you to lure money out of somewhere first - and there's the weakness in the argument presented - precisely because that dimension of the story is ignored in all the reports on this issue.

In other words, following this logic, if Romney (and Bain) secretly put millions of dollars into the Cayman Islands to attract funds into the U.S., as he has claimed, he's ignoring or not saying where he thinks those funds came from, and that's the weakness in his position. It's at least possible that those funds were round tripping as Murphy suggests, and in that case the so-called foreign investment is in fact just U.S.-based investment repackaged to look like foreign investment with all the tax advantages that attach to that.

The round-tripping phenomenon is well-known in China, where Chinese investors put money into a Hong Kong or other location, and then send the money right back to China so it can claim subsidies not available to domestic Chinese companies.It's entirely possible that U.S. citizens have done the same using the Cayman Islands, and Romney does not appear to be addressing that issue.

Amazingly, the Romney camp claims that the Caymans are not a tax haven. Beutler's article misses the entire round-tripping aspect and focuses too much on legality. While at present there is no indication that he broke any laws, Romney's actions highlight that there is one tax system for the 1%, and a different one for the rest of us. As David Cay Johnston put it, the real scandal in U.S. tax law is what is "Perfectly Legal."

The Case Against SOPA and PIPA in Plain English

2012-01-18T13:00:00.000-05:00

If you read the Internet much at all, you have probably heard (or seen) that Wikipedia and many other websites are blacked out today in protest of the Stop Online Piracy Act (SOPA) and the Protect Intellectual Property Act (PIPA). James Kwak at the Baseline Scenario today posted an easy-to-understand explanation of some of the main problems with this legislation.

The main issue is that these bills would give copyright holders the power to impose draconian penalties on websites for apparent violations of copyright -- with no due process. How draconian? Just by sending a letter, they could force PayPal or credit card companies to cut off payments to websites.

Moreover, websites could be held accountable not just for their own content, but for comments on their website (and any links in them), for the contents of websites they link to, and for comments on the websites they link to (and links in them). Can you say "burdensome regulation"? So I would have to monitor all the comment sections of every website I link to, most of which are much bigger than this one, in order to be sure there were no copyright violations in them. Under current law, all I'm required to do is take down copyright violations that occur on this website after notification by the copyright holder. Big difference!

As I discussed in late October, there has been a strenuous effort by intellectual property rights (copyrights, patents, trademarks, etc.) holders to enshrine and expand their powers through the use of trade law over the last 20 years. SOPA and PIPA should be seen as another manifestation of that effort. George Washington University political scientist Susan Sell has written some of the most important work on this subject (see her book Private Power, Public Law) and, lately, Matt Yglesias has frequently written about intellectual property bullying by the United States.

These laws would tilt the playing field on intellectual property even further than the current unfair reach of IP laws. I'll just conclude with the device Kwak starts his post with, Google's home page today:

Tell Congress: Please don't censor the web!

S&P 500 Company Aon to Flee Taxes by Redomiciling in London

2012-01-16T18:08:00.000-05:00

Giant insurance firm Aon has decided to break new ground in corporate redomiciling by moving its headquarters to the United Kingdom from Chicago. As Richard Murphy writes, this is because the City of London is a tax haven, and because the UK does not tax worldwide income like the U.S. does. According to the Financial Times (via Murphy due to paywall):

Aon is to become the first ever US S&P 500 company to become domiciled in the UK after the insurance broker unveiled plans to shift its headquarters from Chicago to London.

Murphy points out that the company could pay as little as 5.75% in taxes, depending on how it structures its corporate empire. Aon is already well-positioned to take advantage of British tax laws, with subsidiaries in such UK-related tax havens as the Isle of Man, Gibraltar, the Cayman Islands, the British Virgin Islands, Bermuda, and Guernsey.

Unlike Sears, for example, which used the threat of moving to extract up to $275 million in tax breaks from Illinois (and then announced it was shutting 100-120 Sears and Kmart stores nationwide), Aon actually is leaving Chicago, although it is only moving the CEO and about 20 employees while changing its legal place of incorporation.

I hate to sound like a broken record, but it bears repeating: what Aon saves in taxes will be borne by the middle class, either through higher taxes, cuts in government programs, or higher government budget deficits. It's time for the Obama administration to do more about tax haven than just talk about reform; it's past time for action.

U.S. Health Not #1: Deconstructing Legatum Part 2 of 2

2012-01-15T23:15:00.000-05:00

As I reported on December 9, London's Legatum Institute issued the 2011 edition of its Prosperity Index, in which the United States scored #1 in health in the world. As Aaron Carroll said, "color me dubious." Yet despite the seeming incongruity of this result, the Legatum Institute is a well-funded think tank that will not be going away any time in the near future. Moreover, one of the key ideas behind the Index is a good one, that we shouldn't measure countries purely on economic outcomes alone -- and it executes this concept with a strong set of outside advisers including the guy who literally "wrote the book" on social capital, Robert Putnam.

The reason that the health sub-index gas the U.S. #1 is, as Carroll pointed out, due to the fact that health care spending per capita is part of the calculation, and the U.S. outspends the next highest spender, Norway, by 66%. In fact, not only is the U.S. #1, it has an index score that is 16% higher than #2 ranked Switzerland. As I discussed December 23, this is backward, because we should be looking at actual health outcomes, not inputs. In that post, I showed how France exceeded the U.S. on almost all objective outcome measures, was about equal on subjective measures like having natural beauty to appreciate, but of course was far behind on health spending per capita. But the Legatum methodology is backward in another critical way.

The variables that are included in calculating the health care sub-index, and the weights given to them, are chosen by how well they perform in regressions for 1) income per capita (natural log) and 2) answers to a Gallup Poll survey on life satisfaction. (See Methodology here.) This is completely backward on the income side: certainly if a population is healthy, it will earn more per capita, but income is a much more important driver of differences in health outcomes by far. For example, if you look at the CIA World Factbook's table of life expectancy at birth, rich countries are at the top and poor countries are at the bottom. Income aids health both directly and indirectly (through a country's ability to afford clean water and sanitation, for example). In terms of several of the variables in the health index for the income regression, income in fact reduces malnourishment and enables countries to spend more on health and for components such as inoculations.

Because of the use of a methodology that chooses health variables to consider based on whether they are correlated with income or subjective well-being, Legatum included health care spending, on which the U.S. is a gigantic outlier, and followed the results to their extreme conclusion that the U.S. ranks #1 in health despite lagging behind numerous countries in terms of health status outcomes like life expectancy. This undermines our confidence in their other results despite the laudable goal to get beyond a purely economic metric.

Mitt Romney's Steel Dynamics Took Subsidies Not Once, But Twice, Under Bain's Ownership

2012-01-15T02:10:00.000-05:00

Mitt Romney touts the virtues of free markets and the dangers of government intervention, yet when Bain Capital became the largest owner of Steel Dynamics in 1994, the company was already looking for state and local incentives for its first plant in DeKalb County, Indiana, according to the Los Angeles Times (h/t Jed Lewison). The same month Bain invested $18.2 million in the company, June 1994, state and local governments in Indiana approved a $77.84 million incentive package after months of negotiations with the company (Fort Wayne Journal Gazette June 23, 1994, via Nexis, h/t Phil Mattera).

The Steel Dynamics subsidy story doesn't end there, however. Four years later, while still owned by Bain Capital, the company got $18 million in local tax incentives for a structural steel mill in Whitley County, Indiana (AP State & Local Wire, October 21, 1998, via Nexis).

Even after Bain cashed out with an $85 million profit, the company continued its subsidy seeking ways, getting state tax incentives and training grants for an expansion in Indiana in 2005 (M2 EquityBites, December 1, 2005, via Nexis), a $52,886 property tax break in Continental, Ohio, in 2007 (Toledo Business Journal, February 2007, via Nexis), and other deals.

The Bain Capital subsidy saga does not end with Steel Dynamics. Phil Mattera of Good Jobs First has the best rundown, covering a total of nine companies Bain owned, including Sealy Mattress, which received $600,000 to move from Ohio to North Carolina.

As Jed Lewison points out, when Romney talks about "crony capitalism," he ought to be talking about himself. Steel Dynamics has from its outset been a subsidy-generating machine, and Bain dove right into it.

You Can't Fire Your Insurance Company When You're Sick

2012-01-10T11:33:00.000-05:00

Aaron Carroll (h/t Brad DeLong and Mark Thoma) takes down Mitt Romney on what he really meant by his "I like to fire people" quote. In context, Romney was talking about firing your insurance company (though as commenter "Tom" on Paul Krugman's blog points out, this is a telling way of talking about your relationship to your insurance company). Carroll:

The real issue, unfortunately, is that very, very few people have the luxury that Gov. Romney is endorsing. Let’s say that you are self-employed, and lucky enough to have found a company to provide you with health insurance. Then, let’s say you develop cancer. You suddenly find out that your insurance company stinks. So you fire them, right?

Of course not. You’re screwed. Now you have a pre-existing condition. There’s not an insurance company out there that wants to cover you. So you don’t fire them. You scream, and curse, and cry, but you’re stuck. Only healthy people have the luxury of picking and choosing.

Moreover, most people are insured through their employer and only have whatever limited choice of insurance their employer gives them. The possibility of "firing" your insurance company and having a large choice of companies seeking your business exists only, as Carroll points out -- in Massachusetts, under Romneycare.. And it will be true in the U.S. under the Affordable Care Act. But of course Romney has pledged to repeal that.

As Krugman says, "It's as if Romney doesn’t understand his own health reform, which was in large part about ensuring not that you can fire your insurance company, but rather about ensuring that your insurance company can’t fire YOU." That's exactly right: the problem for too many Americans in the private (non-group) health insurance market isn't the lack of a wide choice, it's the unavailability of any choice, especially if they have a pre-existing condition. And until the recission provisions of the Affordable Care Act kicked in, people in the private market could indeed be fired by their insurance company. Now they can't, and in a few years individuals in the private market will not be getting denied insurance due to pre-existing conditions.

So Romney wasn't really talking about firing workers, though it seems like he does like to that. But Romney's vow to repeal the Affordable Care Act, even though it provides people the rights he signed into law in Massachusetts, is, as Krugman says, even worse.

IRS finds U.S. tax evasion $385 billion per year, suggesting Tax Justice Network numbers are right

2012-01-09T13:36:00.000-05:00

On Friday, the IRS released a new report on tax evasion in the U.S. (via Demos' Policy Shop and h/t to @BlogWood). Using data for 2006 (its previous tax gap report used 2001 data), it found a gross tax gap (income tax due but not paid on time) of $450 billion and a net tax gap (factoring in tax paid late) of $385 billion for 2006, versus $345 billion gross and $290 billion net in 2001. This was due almost entirely to higher income and tax liability, not an increased percentage of cheating. As Policy Shop points out, over 10 years, this will get us to well over $3 trillion in lost taxes.

As I reported last month, the Tax Justice Network estimated that global tax evasion was over $3 trillion annually. TJN's estimate for the U.S. was $337 billion for 2010, less than the IRS figure of $385 billion for 2006 even though GDP was higher in 2010 than 2006. Thus, the IRS figures confirm the validity of the TJN estimates. Indeed, it is quite possible that Richard Murphy's estimate in the TJN report actually understates the amount of tax evasion globally.

There are a number of eye-popping numbers in the IRS report, beyond simply the magnitude of tax evasion. Most evasion takes the form of underreporting and underpayment, not non-filing. The amount of dollars lost to underreporting rose by 32% between 2001 and 2006; one-third of that increase came in the corporate income tax.As another sign of growing inequality in the U.S., between 2001 and 2006 corporate income tax due doubled (meaning that profits approximately doubled), while individual income only rose by 15%.

Not surprising, but still striking, is what the report says about who cheats on their taxes. People subject to both information and withholding requirements only underreport 1% of their income; people or businesses subject to information reporting but not withholding misreport 8%, but entities subject to neither information or reporting requirement, "such as business income" [on the individual, not corporate, income tax] has a 56% misreporting ratio. Since middle class taxpayers mainly fall in the first group, it is obvious that most of the opportunities for cheating belong to the wealthy.

To put this in dollar terms, of the $450 billion gross tax gap, $376 billion of it comes from underreporting income. $235 billion is on individual income tax, of which $122 billion is business income (in addition, there is another $57 billion in self-employment tax that is underreported). Finally, $67 billion of corporate income tax due was underreported. (And this is only illegal tax evasion. Abusive corporate tax avoidance, some of which will be declared illegal retroactively, would add many billions more.)

What rich individuals and corporations don't pay in taxes, shows up as higher taxes on the middle class, bigger budget deficits, program cuts, or some combination of the three. 2006's $385 billion in net evasion of federal taxes would cover about 1/4 of the FY 2011 budget deficit (and, as Policy Shop notes, it exceeded the $248 billion budget deficit of 2006). As Policy Shop says, the case for giving the IRS further resources for enforcement is a strong one, but Republicans in Congress are actually trying to reduce enforcement resources.

That opposition needs to be overcome.

Job Flight from Canada Highlights U.S. Inequality and Low Wages

2012-01-06T18:40:00.000-05:00

The fact that middle class living standards have been falling for decades is no secret. One way to put this in sharp relief, however, is through international comparisons. Alexander Eichler at the Huffington Post reports today that Caterpillar Inc. is demanding that its locomotive manufacturing workers in Canada take a 50% pay cut to bring them more in line with what its workers in Illinois make.

How is it that the Canadian Caterpillar workers get more than twice as much in wages and benefits as their Illinois counterparts when income per capita is lower in Canada than in the U.S.? According to the 2009 UN Human Development Report (Table M, p. 195), gross domestic product per capita in the U.S. in 2007 was $45,592 but only $40,329* in Canada. The first part of the answer is inequality. The same table shows that the U.S. has a Gini coefficient (an inequality measure in which 0 equals complete equality, and 100 when one person has all the income) of 40.8, compared with Canada's 32.6. The richest 10% of Americans make 15.9 times as much as the poorest 10%, while the figure in Canada is only 9.4 times as much.

The second part of the answer is unionization and union strength. As I noted in September, the U.S. has the fifth-lowest unionization rate of the 34 industrialized democracies in the Organization for Economic Cooperation and Development. Only 11.4% of the American workforce is organized, compared with 27.5% in Canada.

As Eichler points out, a third reason wages are often higher in Canada is that its unemployment rate is lower than the U.S. rate, 7.5% vs. 8.5%. Higher unemployment means lower bargaining power for workers.

Caterpillar is not an isolated example. As I discussed in September, Electrolux actually moved from the Montreal suburbs to Memphis, saving over $4 per hour by ditching its unionized workforce for right-to-work Tennessee, and getting a free factory in the bargain.

This comparison with Canada helps us see, from another angle, just how much pressure the middle class is under in this country. The fact that Canada is very similar to the U.S. economically suggests that it is not impossible to strengthen the union movement and hence, the middle class, here.

* Technical note: The comparison of GDP per capita is not adjusted for purchasing power parity. Companies have to pay their workers in actual U.S. dollars or Canadian dollars, so the adjustment is not appropriate for this comparison.

Show Me an Emergency Room that Provides Chemotherapy

2012-01-05T02:39:00.000-05:00

I don't usually post stuff I receive in fundraising emails, but the one I received from former Rep. Alan Grayson arrived at just the right time, emotionally, for me this afternoon. I had watched former Senator Rick Santorum's speech after the Iowa Caucus and was put out by his comparison of social welfare programs with Benito Mussolini's fascism. Indeed, Santorum specifically included Medicaid among the programs he said are making people more dependent, one element of how more government is fascism. (Yes, I know that makes no sense. He apparently doesn't.)

Grayson's email, which he also posted to Daily Kos, went after Santorum on health care. The best part, to me, was his takedown of the argument that people can always go to the emergency room if they need health care. Maybe it's an obvious retort, but it had never occurred to me before, and I try to follow this issue because it is close to my heart. Grayson said:

I remember the same response from right-wingers then as we hear from Santorum today – anyone can go to an emergency room. I ask them to show me an emergency room that will provide chemotherapy to a cancer victim. There isn’t one.

If you need chemotherapy, your cancer is life-threatening, and the treatment is grossly expensive. According to the American Cancer Society, over 577,000 Americans will die of cancer this year. And as Grayson says, you can't go to the ER for treatment. So the view that all Americans can receive health care, and that lack of health insurance isn't bad for your health, is cruelly false.

Investment Incentives and the Global Competition for Capital

2012-01-02T23:15:00.001-05:00

The Vale Columbia Center on Sustainable International Investment has just published my new article in its "FDI [foreign direct investment] Perspectives" series, "Investment Incentives and the Global Competition for Capital." This piece summarizes my book of the same name, and makes the following main points:

Investment incentives (subsidies designed to attract investment) are widely used around the world at all levels of government.
Incentives are expensive. As I have discussed before, the cost to U.S. state and local governments is $50-70 billion per year. In the Philippines, the cost has been estimated to equal 1% of gross domestic product.
Investment subsidies tend to be both economically inefficient and inegalitarian (average taxpayers pay subsidies to richer owners of capital), while some incentives subsidize environmentally harmful projects.
Companies have more information about governments than governments do about the companies with which they are bargaining ("information asymmetry"), leading to a tendency for governments to pay more for an investment than they need to.
Developing countries sometimes pay far more in incentives than developing countries do for a similar investment. Goias state in Brazil gave Usina Canada $125 million in tax breaks for a $25 million ethanol facility, for example.
The best control mechanism for controlling investment incentives exists in the European Union, where the "state aid" rules require advance notification of all subsidy programs and all large individual subsidies (which also provides the best transparency in the world), advance approval by the European Commission, aid limits no higher than 50% of the investment tied to specific regions' income per capita, and sharp reductions in the maximum aid available to projects over 50 million euro. As a result, large projects receive considerably less in the EU than they do in the United States.
Outside the European Union, transparency is the first important reform needed in most of the world.

The book, of course, goes into much greater detail on these and many more points I could not cover in the 850-word format of the Perspectives series. Thanks to Editor-in-Chief Karl P. Sauvant and Managing Editor Jennifer Reimer for their help in bringing this article to completion. You can browse the entire Perspectives series here.

U.S. Health Not #1: Deconstructing Legatum Part 1

2011-12-23T03:46:00.000-05:00

As I reported on December 9, the Legatum Prosperity Index claims that the U.S. ranks #1 in the world in health. Like Aaron Carroll, I find this to be a dubious proposition. In the meantime, Nathan Gamester of the Legatum Institute was kind enough to help me learn my way around the website and find the data I wanted. He is not responsible for my conclusions, which still view the idea that the U.S. has the best health in the world as unsupported by the evidence.

To review, Legatum ranks the U.S. #1 largely based on the fact that it has by far the highest level of health care spending per capita in the world. In a defense of this outcome, the report states (p. 46):

Furthermore, the health expenditure variable is only one of the 17 variables in our Health sub-index and one of modest importance in comparison to the others....To further explore the importance of the healthcare expenditure on the overall performance of the United States, we conducted a simple exercise in which we substituted US expenditure with that of Norway. The result is that United States would rank 7th, still among the top 10 best performing countries in the Health sub index.

This is more confusing than illuminating. While some variables are more highly weighted than health spending, for example, individuals' satisfaction with their health, the difference in scores are tiny; by contrast, the differences in health care spending are gigantic. As the report states, the U.S. spends "66% more than the next country (Norway), 84% more than Canada, 133% more than the UK, and 205% more than New Zealand." Let's take a look at the actual values for the 17 variables, which I will divide up between objective measures of health care outcomes, subjective measures of satisfaction with aspects of health, and health care inputs. I will compare the U.S. (health sub-index score of 3.54) with France (7th ranked with a health sub-index score of 2.77, but once ranked best in the world by the World Health Organization.

Variable	France	U.S.	Measure

Infant mortality	3.2	6.8	Per 1000 live births
Life expectancy	81.07	78.66	Years
HALE*	73	70	Years
Death from respiratory disease	26	66	Per 100,000 population
Tuberculosis incidence	6.1	4.1	Per 100,000 population
Undernourishment	5	5	Percent
DPT immunization rate	99	95	Percent
Measles immunization rate	90	92	Percent

Water quality satisfaction	85.72	89.65	Percent
Health satisfaction	86.49	85.81	Percent
Level of worrying	30.04	33	Percent
Well rested	67.07	71.72	Percent
Health problems	22.86	21.26	Percent
Environmental beauty satisfaction	90.57	89.91	Percent

Health expend per capita	3778	7536	PPP USD
Hospital beds	7.11	3.1	Per 1000 population
Sanitation 100% 100%	100	100	Percent

Health sub-index score	2.77	3.54

* Health-adjusted life expectancy

France has substantial edges on all but one of the objective measures (infant mortality is less than half the U.S. rate), is essentially tied on the satisfaction measures, provides more than twice as many hospital beds per thousand population, and only trails - by a huge margin, of course - in spending on health care. Spending almost exactly half what the U.S. spends, the French get an extra 3 years of healthy life, fewer than half the deaths from respiratory diseases, and less than half the infant mortality. As Carroll asked, how is spending a measure of health? This is a more methodological question I'll take up in a future post.

Why am I taking the time to show the weakness in this analysis? The short answer is that Legatum will not be going away anytime in the near future. It is funded by a Dubai-based investment firm that has founded, in addition to the Legatum Institute in London, the Legatum Center for Development and Entrepreneurship at MIT. We will be seeing a lot more of this report in the future.

Democrats' Continued Caves Threaten Middle Class

2011-12-17T10:17:00.000-05:00

Via Mark Thoma, David Graham points out that Senate Democrats are caving in on an issue that looked won a week ago, the millionaire's tax.

[Democrats] were calling for a tax cut, after all, and they had Republicans tying themselves in knots explaining why the party of Reagan and Tea didn't want lower taxes. All the Democrats wanted in exchange for extending the reduction was a small increase in how much the wealthy paid -- a position that was widely popular among voters.

And then Senate Democrats caved, without a peep from the President, despite his "big speech" in Kansas last week on economic inequality.

So what did Democrats get from the apparent deal to avert a government shutdown? A measly two months' extension of unemployment benefits and the payroll tax cut with the extraneous inclusion of language to force a decision within 60 days on the Keystone XL pipeline. No millionaire's tax. And it's not like tax cuts are the most effective form of economic stimulus anyway -- and this one takes money from Social Security.

Let's get a little historical perspective here. Political scientist Sven Steinmo, in his book Taxation and Democracy (1996), wrote that polls had long showed that Americans thought a major problem with the tax system was that the wealthy didn't pay enough tax. Yet the political system then, and in the 15 years since, has been delivering "tax reform" that has done exactly the opposite, reducing taxes on the rich. One has to question exactly how democratic a political system is that cannot deliver a reform favored by a large majority for at least 30 years.

So, here we stood on the verge of getting at least a little movement in the direction favored by a big majority, and Senate Democrats pull the rug out from under us again. As the Occupy movement has pointed out, something is very rotten in the state of American democracy.

As I wrote earlier, we face lots of hostage-taking opportunities in the future, especially if we are getting shutdown-averting deals that only last two months. If the Democrats keep caving in at this rate, they could give away most of the welfare state by election day.

Good story at Atlantic Cities on Job Piracy

2011-12-16T13:46:00.000-05:00

Julie Irwin Zimmerman has a story at Atlantic Cities on job piracy, "The Folly or Corporate Relocation Incentives." She tells the story of Sears and other job blackmailers in Illinois in detail and quotes me on the failure of previous no-raiding agreements by states in the past. She points out that there are multiple reasons for opposing these subsidies, an equity argument that attracts liberals and an efficiency argument that brings conservatives and libertarians to the issue of investment subsidies.

Zimmerman does a great job; go read it.

FYI, when she quotes me as saying the cost of location incentives is almost $50 billion a year, that's correct. My other frequently quoted estimate of $70 billion annually includes all subsidies to business, including those which do not require an investment to receive them. Many sales tax subsidies don't require an investment, for example.

Whatever Happened to John Kasich?

2011-12-15T20:27:00.000-05:00

Back in the 1990s, there was a Republican Congressman from Ohio named John Kasich who was a scourge on corporate subsidies. He even ran a "Stop Corporate Welfare Coalition" and had a joint news conference with Ralph Nader, Grover Norquist, and others to oppose it on January 29, 1997. "We've reformed welfare for those who don't have money or powerful Washington lobbyists," he said there. "Now it's time we did the same for those corporate welfare programs that aid the rich and powerful." (Newark Star-Ledger, Jan. 29, 1997, no link).

Interestingly, a guy with a similar name was elected governor of Ohio last year. But this Kasich indulges in the worst kind of subsidy abuse, offering incentives to companies to move existing facilities. Governor Kasich is offering Sears $400 million to move its headquarters, with 6100 jobs, from the Chicago suburbs to Columbus. At a time when the state is engaging in substantial budget cuts including, according to the linked story, funds for local governments and school districts, it's hard to justify $400 million subsidies that create zero net jobs for the country. Moreover, by dangling these subsidies in front of Sears, Kasich (and others like him in other states) is enabling the company to extort retention subsidies out of Illinois, just like it did in 1989 when it left the Sears Tower for Hoffman Estates.

Yet this Kasich has no shame. After poaching 500 jobs from Kentucky in September, he told Sean Hannity, "I was accused in the front page of the Cincinnati Enquirer by people in Kentucky of wanting to steal all their jobs. And guess what? They're right."

The John Kasich I remember would have seen that since the states can't help themselves (two voluntary no-raiding agreements between states have collapsed in the past), there is a need for federal action. Only the federal government can pass laws to prevent subsidies from being given for relocations, or tax them so heavily a company would have no incentive to accept such inducements. If he were still in Congress, maybe he could even be persuaded to author a bill like that.

I wonder whatever happened to that guy.

Cost of Tax Evasion Estimated at Over $3 Trillion Annually

2011-12-11T21:05:00.001-05:00

The Tax Justice Network late last month published a new report that deserves much wider notice than it has received so far. Authored by Richard Murphy, it uses recent estimates by the World Bank on the size of the underground or shadow economy covering 98% of world gross domestic product to calculate the amount of tax lost as a result. The totals are simply staggering.

The report finds that over $3.1 trillion annually is lost to tax evasion worldwide. The calculation is quite simple, though necessarily imprecise. It takes the average size of the underground economy as given in the World Bank paper (1999-2006 average) and multiplies it by each country's GDP (mostly 2010) to determine the size of the shadow economy. This figure was then multiplied by the country's average tax burden (tax/GDP; 2010 or most recent available) as reported by the Heritage Foundation's 2011 Index of Economic Freedom.

Here are the top 10 countries in terms of gross dollars lost to tax evasion. The U.S. is number 1, by virtue of having the largest economy by far, even though it has relatively low tax rates and the second-smallest underground economy by percentage of GDP.

Country             GDP ($t)          Shadow Economy/GDP        Tax/GDP              Evasion ($b)

US                     14.6                          8.6%                           26.9%                   337.3
Brazil                    2.1                       39.0%                           34.4%                   280.1
Italy                      2.1                       27.0%                           43.1%                   238.7
Russia                  1.5                       43.8%                            34.1%                   221.0
Germany              3.3                       16.0%                            40.6%                   215.0
France                 2.6                       15.0%                            44.6%                   171.2
Japan                   5.5                       11.0%                            28.3%                   171.1
China                   5.9                       12.7%                            18.0%                   134.4
UK                      2.2                       12.5%                            38.9%                   109.2
Spain                   1.4                       22.5%                            33.9%                   107.4

As an example of the scale of tax evasion, the study ranks countries by tax evasion relative to a country's health care expenditures. Bolivia was the worst off, with tax evasion equal to 419% of health care spending; Russia was second at 311%. Overall, 67 countries saw tax evasion exceed health care spending, and for 119 countries total, it was 50% or greater.

The consequences of tax evasion are enormous. When we consider the European debt crisis or funding stress on social programs worldwide, it is clear that these figures mean the difference between solvency and insolvency for many countries. As a result, countries need a policy response equal to the task.

U.S. Health Care #1? Color Me Dubious, Too

2011-12-09T00:41:00.000-05:00

Aaron Carroll has a good catch on The Hill's "Healthwatch" blog giving an uncritical eye to a recent study by a British conservative thinktank, the Legatum Institute. Its 2011 "Prosperity Index" ranks the United States #1 in the world for health. Not only that, the U.S. is far ahead of #2 Switzerland, with an index of 3.54 vs. 3.03, over 16% higher. Problem is, the U.S. scores only so-so on what both Carroll and I would consider the most important variables, healthy life expectancy (27th) and infant mortality (36th), does pretty well on some measures (tuberculosis, sanitation) and poorly on others (respiratory diseases), and only ranks #1 on one of the index components: health care spending. Since the U.S. has been seeing worsening bang for our health care spending bucks, this does not compute.

As Carroll notes, it is not clear how you weight these variables in such a way that the U.S. could possibly come out #1, and the explanation gives no real clue of the relative weights, just longer and shorter lines that are supposed to tell us the relative weights without any actual numbers. More confusing still (and I think Carroll misses this), the health variables have weight in both "income" and "well-being" regression analyses. While health spending per capita is more highly weighted than life expectancy and infant mortality on the "well-being" side, as Carroll notes, on the "income" side the reverse is true. Not that the weights, whatever they really are, make sense.

Searching the prosperity.com website for the promised detail on the methodology, I was unable to find any rationale for the choice of variables (let alone their weights) beyond the bland claim that the eight sub-indices were based "on decades of empirical and theoretical research done by established experts." That certainly clears it up. More curiously still, in response to why it uses such a complicated methodology, the FAQs answer, "The Prosperity Index is an assessment of the DRIVERS of prosperity. We do not seek to identify which countries are prosperous or not." I would have thought the latter was the whole point, given that they have already imposed a concept of "prosperity" that is 50% income and 50% "well-being." Compare this with the UN's Human Development Index, which is 1/3 income, 1/3 health, and 1/3 education.

So I'll email the folks at prosperity.com and see if I can find out the answers to these methodological questions. Meanwhile, like Aaron Carroll, color me dubious, too.

Are Incentives Ever Good Policy?

2011-12-04T23:43:00.000-05:00

Most of my work on investment incentives is quite critical of their use. As a result, I often get questions about whether there are any good uses of incentives, or whether states have no choice but to offer them because other states or nations are using them. The research of Tim Bartik sheds important light on this topic, in terms of identifying types of incentives that can have positive national benefits. I consider also some circumstances in which using investment subsidies can be politically justified, as well as the question of whether governments are trapped in the incentive game.

According to Bartik, two types of intervention can have positive national benefits, as opposed to benefits for the local jurisdiction.His work shows that typical "smokestack chasing" incentives, while they have a positive local benefit, have negative consequences for other states, that exceeds the benefit to the state that offers the incentive: hence, a negative net national impact. This is consistent with my work at the theoretical level that governments face a collective action problem in their use of subsidies. It also is consistent with empirical finding in international work that when other countries in your region use incentives, it decreases the amount of investment your country receives.

As I said , Bartik identifies two types of cost-effective incentives: customized training for companies on the demand side, and early childhood education programs and generalized job training programs on the supply side. Neither of these is smokestack chasing, and they make up a small portion of the incentives most states offer. For example, in North Carolina, in fiscal year 2008-9, the state's Economic Development Inventory reports that total economic development spending came to $1.2 billion. Of this, less than $11 million (1%) was spent on all types of training programs. North Carolina has a well-known early childhood education program called Smart Start, which is not considered part of the economic development budget. After a "one-time reduction" (quotes because there was another reduction the following year), the program had $194 million in FY 2008-9, about 16% of what was spent on economic development subsidies.

There is one time when I consider smokestack chasing to be politically justifiable, when it is restricted to locations that meet objective criteria of economic deprivation. This is what the European Union does, and I show in Investment Incentives and the Global Competition for Capital that EU policy has reduced what individual governments have spent on incentives, and only allowed them in the poorer regions of the EU. Some U.S. states have crafted their incentive laws to favor poorer counties, but that targeting usually is weakened over time as big companies say they'll only come if they get the maximum subsidy in a richer county. With no centralized (federal) law to enforce targeting, states have repeatedly weakened it when they do have it. This is one reason I favor federal regulation of incentives.

The bigger reason is that the states don't take the impact of their incentives on other states into account when deciding their policies. Kansas' government is not elected to care if the jobs it "creates" are merely lured across the state line from Kansas City, Missouri, let alone whether Kansas' job creation indirectly reduces jobs in other states. Therefore, the states have to be restrained by federal action to get rid of the scores of billions spent on subsidies annually.

But what should states do until then? Can states unilaterally disarm? I think the answer is probably not, although the province of Alberta in Canada has done so (oil revenues are probably the reason it can do this). But you won't get credit from me for "responsible" policy if you aren't actively working for a federal solution to the problem. And as we saw as recently as 2006 when the U.S. Supreme Court ruled on Cuno v. Daimler-Chrysler, states were actively lobbying Congress to overturn the ruling should it have followed the Appellate Court's ruling in favor of plaintiffs. In other words, states don't want to give up their economic development tools, because they still fail to appreciate how they are bound in a collective action problem that is ultimately only solvable at the federal level.

In the meantime, critics need to highlight the enormous cost in cash and lost government jobs. Local successes do occur, such as the defeat this year of the $360 million Aerotropolis subsidy in St. Louis opposed by the liberal Missouri Budget Project and the libertarian Show-Me Institute. But there is still much work to do in ending the economic war between the states.

Update on Boeing: Union to Drop NLRB Complaint, but Will Subsidy Shoe Drop, Too?

2011-12-02T00:20:00.000-05:00

As I reported in September, Boeing and the Machinists' union were in a big dispute about awarding the second Dreamliner assembly line to South Carolina, rather than keeping it in Washington state, where the company had received $2 billion in tax breaks (present value) for the original production line. The battle reached the National Labor Relations Board because Boeing officials made public comments suggesting their decision was prompted by labor strife in Washington -- a prima facie violation of the National Labor Relations Act, because it is illegal to retaliate against workers engaging in their legally protected right to strike.

After rumors yesterday afternoon, it was officially announced late last night that a pact had been reached (h/t Talking Points Memo): in exchange for locating production of the new Boeing 737 MAX in Renton, Washington, Boeing and the union would sign a 4-year contract extension, and the union would drop its NLRB complaint against Boeing over the South Carolina plant. The company also said it would relocate defense work from Kansas to Washington if it closes what is reported to be a money-losing Kansas plant. The contract provides for a $5000 signing bonus for Boeing workers, 2% annual increases, and potential bonuses that could reach 4% per year. Boeing workers vote on the agreement December 7.

I can't help asking: what about subsidies? Basic bargaining theory in international political economy would say that if Boeing has no choice in where it locates the 737 MAX facility because of the union contract, it should not have any bargaining leverage over Washington state. Assuming the contract is ratified next week, Boeing can no longer tell state and local governments in Washington that it could move the plant somewhere else. It would be under a contractual obligation to put them in Washington, which should put the state in the driver's seat in subsidy negotiations. As we all know, that would be a very unusual outcome here in the U.S. After all, Boeing got a package for the Dreamliner equivalent to a $2 billion cash grant, more than twice the cost of the $900 million factory (see my new paper I mentioned in my last post). Are we going to find out in a couple of weeks, or a couple of months, that the state guaranteed subsidies as part of this deal? I'd say it's very possible, but if the Boeing-Machinists' union deal really did tie down the company, there is no reason for the state to give away the store again. As President Bush so eloquently put it, "You can't get fooled again."

State and Local Subsidies to Business More Out of Control than Ever

2011-11-27T21:33:00.000-05:00

I've just completed a new paper (not yet published, so I can't present it all here) showing the effectiveness of the European Union's rules to control investment incentives. Comparing U.S. bidding wars for investment with what happens under the EU's state of the art rules (see below) helps show just how much money is wasted by state and local governments here. As I have posted here before, the annual subsidies given could hire all laid-off state and local government workers. In this post, we examine incentives over $100 million as well as the top 25 incentives since 2000 in both the EU and U.S.

Since the beginning of 2010, there have been at least 20 $100 million incentive packages given in the U.S., compared to just four in the EU. This includes a $1 billion package (present value) given by the state of Michigan to Chrysler in 2010. By contrast, the largest package in the EU in this time was about $285 million. Overall, nine of the top 25 investment subsidies given since 2000 have been given in 2010 and 2011. This is twice as many as you would expect randomly (25*2/11=4.5), which suggests to me that things are more out of control than ever.

An important metric for comparing the size of incentives is what the EU calls “aid intensity,” which is the subsidy divided by the investment. This lets you compare incentives for projects of different sizes. Under the EU's current rules for large investments, which came into effect in 2002, the largest subsidy by aid intensity was 23.19%, a $161 million package that went to Ford Craiova in Romania in 2008. Of the top 25 packages in the U.S. since 2000, only three had a lower aid intensity than Ford Craiova, one was about equal, and the rest were higher, including four over 100%, with one as high as 385%, almost four times the cost of the investment! Thus, the highest aid intensity in the EU was virtually the lowest aid intensity for large projects in the U.S. And EU rules limit the highest subsidies to the poorest regions; the higher the GDP per capita, the lower the maximum allowable incentive, with the richest regions not allowed to give investment incentives at all.

What the EU originally called the Multisectoral Framework on Regional Aid to Large Investment Projects came into effect in 1998, and in 2002 the rules were tightened to sharply reduce the maximum subsidy the European Commission would allow* for investment projects over € 50 million. This can be clearly seen in a list of the top 25 incentives in the EU (you'll have to wait for the paper, or see Table 6.2 in Investment Incentives and the Global Competition for Capital as the top five have not changed since the book was published), where four of the five largest were given before the 2002 reform. Similarly, companies that received incentives under both the original rules and the reformed rules received much lower aid intensity under the new rules. For example, Advanced Micro Devices received a subsidy equal to 22.67% of its investment to locate in Dresden, Germany, in 2004 under the old rules, but only 11.9% in Dresden under the new rules in 2007, and 10.83% when its joint venture, Global Foundries, set up shop in Dresden in 2011. The rule change clearly worked to ratchet down incentives.

The European Union rules show that there is an alternative to giving large incentives to attract investment, that there is no reason to give away free factories to rich companies. But even in rich areas of the U.S., government officials do not want to give up their subsidy powers, so it will take constant political pressure to obtain what is ultimately a federal solution. The only way to make this politically feasible is through constantly reminding people of the high costs, what we have to give up to pay them, and pointing out feasible alternatives.

* Yes, you read that right. In the EU, the 27 independent Member States can only give a subsidy to a business if the European Commission authorizes them to do so.

How to Tackle the Tax Havens

2011-11-18T01:51:00.000-05:00

As I argued in a recent post, tax havens cost the middle class worldwide hundreds of billions of dollars a year, which has to be made up via higher taxes on the middle class, higher budget deficits, or program cuts. In this post, I will discuss several ways to cut the tax havens down to size. Broadly speaking, we need to expose tax haven activities, neutralize them, and ultimately roll back banking secrecy, the key element of havens' existence.

Just as with subsidies, tax havens can only emerge as a political issue if their activities are widely known. One element of this is simply to report on them and keep them in the spotlight. Stories like "Tax Me If You Can" on Frontline exposed tax scams run out of the Caymans that were promoted by one of the world's major accounting firms, KPMG. But the reform that would illuminate the largest dollar volume of tax haven activity would be to force companies to report their accounts on a country-by-country basis rather than the consolidated accounts they now publish. As Palan, Murphy, and Chavagneux point out, consolidated accounts let companies hide their transfer pricing abuses because they do not report inter-affiliate transactions. Being forced to report sales, profits, size of workforce, taxes paid, etc., by location would immediately expose cases where tiny workforces, or none at all, generated big profits in tax havens. Moreover, Palan et al. note, because this regulation is enforced via the companies, it would not require the cooperation of the tax havens, most of which have been uncooperative in providing information despite agreements they may have signed.

Once exposure generates enough political pressure to get something done, specific reforms can be enacted. One way to neutralize corporate use of tax havens is to prevent transfer pricing. This can be done through what is variously called "combined reporting" or worldwide unitary taxation. This approach ignores the legally separate existence of each of a multinational corporation's subsidiaries and treats them as a single entity, using a formula to determine what percentage of the company's profits to tax. For example, if BP makes $25 billion in 2012 and 20% of its operations are in the U.S., under combined reporting the U.S. would tax BP on $5 billion. If 5% of BP's operations are in Louisiana, the state could tax BP on $1.25 billion of income. Determining the proper percentage is done by formula, using factors such as sales, employment, and assets. With combined reporting, it doesn't matter where a company claims it made its income, because the formula overrides such shenanigans.

It should be noted that the Organization for Economic Cooperation and Development, which began targeting tax havens in 1998, opposes combined reporting, despite its efficacy, because multinational corporations oppose it, and the OECD's model tax rules strongly reflect the preferences of the multinationals. Hence, there is something of a contradiction in the OECD position, as I argued in 2002.

However, these reforms still would not get at individual tax evasion, which by itself is estimated to cost governments worldwide $255 billion a year. This requires tackling secrecy directly. One model is the European Union's Savings Tax Directive, which requires that Member States either withhold 35% of interest income earned or provide complete information on all interest income earned in their territories. As Palan et al. recommend, this can be expanded beyond individuals to corporations and trusts (currently a loophole in the directive); it could obviously be expanded to other forms of income. Other measures have been used over the years that can also be effective. One, used by the U.S. Internal Revenue Service in relation to Caribbean tax havens like the Netherlands Antilles, is simply to step up auditing on transactions involving tax havens.

There is still a long way to go in stamping out tax havens. Nevertheless, progress is being made in the EU, and the political climate in the U.S. is far more favorable now than under President Bush. Palan et al. are optimistic that tax havens will be subject to continuing pressure as a result.

Mississippi's Eminent Domain Reform Initiative Passes with 73%

2011-11-10T17:48:00.000-05:00

While national attention focused on the defeat of the "personhood" initiative in Mississippi on Tuesday, voters there approved Initiative 31, an amendment to the state constitution that bans the use of eminent domain to transfer property from one private owner to another (h/t Jim Roos, Missouri Eminent Domain Abuse Coalition) with 73% of the vote.

Eminent domain, where government takes private property for public use, is regulated by the Fifth Amendment to the Constitution, which says, "...nor shall private property be taken for public use, without just compensation." The issue of what constitutes a "public use" has been expanded by court decisions over several decades, with the U.S. Supreme Court's 5-4 ruling in Kelo v. City of New London that economic development qualifies as a public use, even when the property is being transferred to a different private owner.

Eminent domain is heavily entwined with economic development subsidies, in particular tax increment financing. Removing "blight" is often a reason a government can resort to eminent domain, and some variant of blight must be shown in most states to allow the use of tax increment financing. I argued in Competing for Capital that fighting subsidies often attracts "strange bedfellows" coalitions, because they can be criticized on efficiency, equity, and environmental grounds, potentially pulling opponents to subsidies from across the ideological spectrum.

For similar reasons, we see unusual political coalitions fighting private-to-private eminent domain. For one thing, these cases usually involve subsidies, as did Kelo. People understandably don't want to lose their homes, but they are especially incensed if they are losing their homes to enrich a company or private developer. Moreover, such cases can heavily impact minority communities (if property values are lower there) and small businesses (especially if compensation only takes property value into account, but not the value of the ongoing business). In Mississippi, the Southern Christian Leadership Conference and the National Federation of Independent Businesses filed a joint amicus brief with the state supreme court to keep Initiative 31 on the ballot, represented by the libertarian Institute for Justice. Talk about strange bedfellows!

This coalition can break down, however. As Ilya Somin at the Volokh Conspiracy points out, when eminent domain reform is paired with other measures, it often fails. He gives the examples of Proposition 98 in California, which included rent control restrictions, and Proposition 90, which included "regulatory takings" provisions (these limit government ability to adopt new regulations). Understandably, those additions saw off the liberal wing of the eminent domain reform coalition. "By contrast," he says, "all twelve 'clean' anti-Kelo measures have passed, usually by lopsided margins..." The Institute for Justice, however, does push "regulatory takings" provisions. To its credit, it did not demand them as a price for defending Initiative 31 in court.

With the passing of Initiative 31, Mississippi has given subsidy opponents leverage as well as protecting property owners from having to transfer their property to private developers, which often translates into an additional subsidy.

Republicans Prepare Ground to Renege on Debt Reduction Agreement

2011-11-08T14:41:00.000-05:00

Looks like Markos Moulitsas was right, as I suspected. Ali Gharib is reporting at Think Progress Security that Congressional Republicans, including Senators John McCain and Pat Toomey, are laying the groundwork for weaseling out of the August debt ceiling accord provisions that if the Super Committee reaches no agreement, it triggers $600 billion in defense cuts over 10 years. Gharib quotes McCain yesterday (emphasis Gharib's):

The sequestration is not engraved on golden tablets. It is a notional aspiration. And those of us — and I think we’d have sufficient support to prevent those kind of cuts from being enacted because of the impact it would have on national security.

We are looking at a stand-alone bill to negate what Republicans supposedly gave up in the debt ceiling negotiations, canceling the $600 billion in defense cuts. If it passes, Democrats will have given up $600 billion in cuts to domestic programs -- for exactly nothing in return. Yet another Lucy pulls away the football moment. Gharib recommends that President Obama issue a veto threat against such a bill now, but it's not like $1.5 trillion in cuts is good policy in a jobs recession. But Gharib may be right, on the grounds that the President needs to hold Republicans to their deals. Will the President hold his ground? Get ready for the cries of "You don't support the troops."

How Transfer Pricing Hurts the Middle Class

2011-11-08T00:09:00.000-05:00

One of the basic building blocs for understanding the effect of tax havens is the mechanism by which profits show up in the havens rather than the countries where they are really earned. This tool is known as “transfer pricing,” which at its most basic is simply the centralized setting of prices for transactions between two subsidiaries of the same company. The fact that intra-corporate sales make up much of world trade (estimates range between 33% and 60%) means that how the prices are set can have a huge economic impact.

When one subsidiary of a multinational company sells something to another one, the price for the good or service is not set in a market. A Ford transmission will not work in a Chevrolet, so there is no independent buyer for products like that. But for Ford Motor Company to know how well its various entities are doing, it has to have prices attached to intra-corporate sales. The pricing system is centralized, and can be used for multiple purposes; the most interesting for our purposes is shifting profits into lower tax jurisdictions. The charts below show how this works. In the example, it is the price of the transmission that is set via transfer pricing for the sale of French-made transmissions for use in final assembly in the U.K. All numbers are arbitrary.

	Ford France		Ford UK
		Price of car	15000
Price of transmission	1000	Price of transmission	1000
Cost of production	500	All other costs	12000
Pre-tax profit	500	Pre-tax profit	2000
Tax at 40%	200	Tax at 20%	400
Post-tax profit	300	Post-tax profit	1600

Total post-tax profit: $1900

	Ford France		Ford UK
		Price of car	15000
Price of transmission	600	Price of transmission	600
Cost of production	500	All other costs	12000
Pre-tax profit	100	Pre-tax profit	2400
Tax at 40%	40	Tax at 20%	480
Post-tax profit	60	Post-tax profit	1920

Total post-tax profit: $1980

We have the same car, the same final selling price, the same cost of production, the same pre-tax profit. But by reducing how much Ford France charged Ford UK for the transmission, profit was shifted into the lower tax country (in this example, the UK). Post-tax profit increased by the change in sales price ($400) times the difference in the tax rate (20%).

Of course, it is not like tax authorities don't know that shenanigans like this can arise. But it can be hard to detect it even if you're looking for it. Richard Caves' Multinational Enterprise and Economic Analysis provides a good overview of many research studies, which have found that it easier to get away with abusive transfer pricing when there is no real arm's length market for the good. For example, there is obviously a large market for spark plugs, so it's relatively easy to see if the price a company assigns for their sale between subsidiaries makes sense. On the other hand, there is frequently no market for a company's patents, because it often does not want to license them to other firms because they are a source of competitive advantage. That explains why Microsoft put patents in an Irish subsidiary where the royalties are untaxed: there is no good way to determine if the prices charged to other subsidiaries for their use is a reasonable one or not.

We see, then, that by a relatively simple mechanism a company can make its profits show up in lower tax jurisdictions. As previous columns discussed, most multinationals have a substantial network of subsidiaries in tax havens to reduce the taxes they pay in the U.S. and other developed countries. Their reduction, of course, means higher taxes for us, higher deficits, program cuts, or some combination of the three.

My next post will deal with how to combat tax havens.

How Profitable Fortune 500 Companies Save $70 Billion a Year in Taxes

2011-11-07T00:09:00.000-05:00

A new report by Citizens for Tax Justice and its sister organization, the Institute for Taxation and Economic Policy (h/t Dirt Diggers Digest), documents the extent to which the Fortune 500 is able to skate around the tax system and pay far less than its fair share. The study covers 280 firms in the F500 that had pre-tax profits in the U.S. every year from 2008 to 2010, excluding companies that reported "ridiculous" geographic allocations of their pre-tax profits

Between subsidies, stock options, indefinite deferral of taxes on income earned abroad, apparently abusive transfer pricing, skillful use of tax havens, and aggressive tax shelters (which can only be identified after the fact), these companies reduced the amount of their global income that was taxable in the United States, and slashed the amount paid on their U.S. taxable income by over $70 billion per year. That is, the difference between what these companies would have paid at the 35% corporate income tax on their $1.4 trillion in U.S. profits over those three years, and what they actually paid, came to $222.7 billion.

This only scratches the surface. Note that this is only the companies' U.S. income--which has already been reduced by transfer pricing, making profits show up in low-tax foreign jurisdictions. The report singles out Google and Microsoft because "almost all or even more than all of their pretax profits were reported as foreign, even though most of their revenues and assets were in the United States." In Microsoft's case, as I report in my latest book, one of its subsidiaries in Ireland had $16 billion in patent assets but almost no employees, draining royalties from the U.S. to Ireland for booking purposes. U.S. companies do not pay taxes on their foreign earnings until they are brought back to the United States. As the CTJ/ITEP report points out, if the U.S. stopped taxing foreign earnings, as for example, Herman Cain and Rick Perry advocate, this would create even bigger incentives to declare profits overseas rather than in this country.

Considering U.S. taxes only, the report shows that 30 companies paid negative tax rates on their 2008-10 domestic income, with General Electric having negative taxes in all three years, receiving $4.7 billion in tax refunds despite $10.5 billion in U.S. pre-tax income.

As I have emphasized repeatedly, what one group does not pay in taxes means higher taxes on others, greater deficits, or budget cuts. One way or the other, those of us who do pay our taxes are harmed by those who do not. This report does a great job spotlighting the worst offenders. In posts in the near future, I will discuss how transfer pricing works, and ways to tackle tax havens.

Poll Results: Anti Counterfeiting Trade Agreement

2011-11-01T23:43:00.000-04:00

The poll is now closed.

Had you heard of the Anti Counterfeiting Trade Agreement (ACTA) before today?

Yes: 1
No: 9

No surprise here; the agreement is not well known. But as I argued in the related post, this treaty, if it withstands constitutional challenge, will increase the cost of medications in many countries by taking away the ability of government health agencies to negotiate with drug companies for lower prices.

Tax Havens Cost the Middle Class Untold Billions

2011-11-01T02:57:00.000-04:00

As I argued yesterday, when taxes are reduced for one group, government must raise taxes on someone else, run bigger deficits, or cut programs. Tax havens, jurisdictions with strong secrecy provisions and low or zero tax rates, are one way that rich individuals and corporations reduce their tax payments, both legally and illegally. A recent book by Ronen Palan, Richard Murphy, and Christian Chavagneux summarizes the latest work on tax havens and contends that they form a central part of the global economy. Tax Havens: How Globalization Really Works presents data that 30% of multinational corporations' foreign direct investment passes through tax havens like Bermuda, Ireland, or Luxembourg, overwhelmingly for tax purposes. Tax havens, then, are far more central to the global economy than we generally suppose.

How much does this cost average taxpayers? In a separate report, Murphy calculated that wealthy individuals have roughly $11.5 trillion in tax havens, which at a 7.5% rate of return would generate $860 billion in income each year. If, on average, these people faced a 30% marginal tax, that would come to $255 billion annually that the rich avoid in taxes. Needless to say, this is a best guess, since the value of these assets is not disclosed publicly. See his report for more details on how he generated those figures.

That's just individuals. The situation with corporations is murkier still. While corporations set up subsidiaries in tax havens for the obvious purpose of reducing their tax, Palan et al. say there is no solid estimate of the overall cost of these activities. The Government Accountability Office reported in 2008 that of the largest 100 U.S. companies, 86 had subsidiaries abroad, and 83 of these had subsidiaries in tax havens. Bank of America had 115 subsidiaries in tax havens, including 59 in the Cayman Islands. Citigroup had a whopping 427 tax haven subsidiaries, including 91 in Luxembourg and 90 in the Cayman Islands. Goldman Sachs only had 29, 15 in the Cayman Islands.

I mention the Cayman Islands because President Obama has long been a critic of tax havens, saying during the 2008 campaign of Ugland House in the Cayman Islands, "Either this is the largest building in the world or the largest tax scam in the world. And I think the American people know which it is." Palan et al. report that the Caymans are the sixth largest financial center in the world, with $1.9 trillion in assets in December 2007. However, since taking office, the President has not succeeded in passing a version of the Stop Tax Haven Abuse Act, which in its original form he co-sponsored with Carl Levin, Norm Coleman, Ken Salazar and Sheldon Whitehouse.

Tax havens could not exist without the financial services industry, which provides the tax lawyers, accountants, and other professionals who make it possible for the rich and corporations to reduce their taxes. Collectively, they and their clients are the 1%. Occupy Wall Street has highlighted the abuses benefiting them, and tax havens are most definitely part of their pattern of abuse. Tax havens have proved amazingly resilient, however, and it will take sustained political pressure to shut them down.

How to Read a Republican Tax Proposal

2011-10-30T18:56:00.001-04:00

We've been hearing about Herman Cain's 9-9-9 Plan for a few weeks and now Governor Rick Perry has released his tax proposal, supposedly a 20% flat tax. We will undoubtedly hear more as the Presidential campaign kicks into higher gear. As a public service, I am providing a simple way to understand the impact of these tax plans.

Step 1: Assume revenue neutrality.

Don't laugh; Cain's “9-9-9 Scoring Report” claims to be revenue neutral and Perry says he will keep federal revenue at 18% of gross domestic product.

Step 2: Look at what income is no longer taxed.

For example, the 9-9-9 Plan “features zero tax on capital gains and repatriated profits,” eliminates the estate tax, and cuts the corporate income tax from 35% to 9%, while Rick Perry's tax plan eliminates taxes on capital gains, dividends, Social Security, estates, repatriated profits, and cuts the corporate income tax from 35% to 20%.

Step 3: Determine how much of that income you have.

If you're not rich, you've got very little of it, except Social Security in the Perry plan. If you're not retired, you'll get virtually no reductions under either plan.

Step 4: Ask what taxes have to be raised to get to revenue neutrality.

Step 5: Look in the mirror to see who pays them.

Comments: As I argued in Competing for Capital, if you cut one group's tax burden, one of three things has to happen to offset the reduction: someone else's tax burden increases, government runs higher deficits, or programs must be cut. If you maintain revenue neutrality, the first of these options is the only one possible, as flat tax pioneers Robert Hall and Alvin Rabushka admitted as far back as 1983: “It is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people” (h/t James Carville, We're Right, They're Wrong).

But in fact, Perry's proposal clearly is not revenue neutral. How could it be, when people have the option of filing under the current tax system or his new system? People who would pay more under the new plan would pay under the old plan and people who would save money under the new plan would pay under the new plan: this necessarily means less revenue. Rich people would save quite a bit of money, as Seth Hanlon at Think Progress has shown. Using published tax returns of famous people and the tax form on the Perry website, he shows that Warren Buffett's tax rate would fall from 11% to 0.2%, former Vice-President Cheney's rate would drop from 19.1% to 6.4%, President Obama would get a $60,000 tax cut, and Governor Perry's rate would fall from 18.6% to 15.8%.

Similarly, Cain's 9-9-9 Plan would raise far less than current taxes do, even as it increases taxes on the middle class and the poor. Michael Linden at Think Progress estimates that it would only bring in 14% of gross domestic product, well below the current low revenue that's giving us a $1 trillion deficit. In addition, many analysts think his corporate income tax is actually a value-added tax in disguise (h/t Michael Linden).

The bottom line is that if we cut taxes for the wealthy and corporations, it will impact the budget elsewhere, in some combination of tax increases on the middle class, program cuts, and deficit increases. Regardless of the spin surrounding these and other tax plans that may come down the pike, if a proposal reduces some taxes but doesn't reduce your taxes, you will lose out via these three methods of compensating for the lost revenue.

Great catch by Yglesias on U.S. intellectual property bullying

2011-10-29T13:47:00.001-04:00

In the middle of a fairy tale about how trade deals are a vehicle for overcoming special interest opposition to foreign competition, Matt Yglesias hits on what he sees as the exception, but is actually the rule:

But over the past 10-15 years, I think we’ve gotten saddled with a pretty fallen and perverse version of it. The trade deal was supposed to be a political vehicle for overcoming special interest politics, but it’s really just become another venue for interest group politics. Read, for example, this account of U.S. efforts to use trade agreements to coerce foreign governments into paying higher prices for pharmaceutical products.

Matt was in high school when the Uruguay Round trade agreement was signed in 1994, so it's understandable why he's overlooking how the U.S. pharmaceutical, entertainment, publishing, and software industries created the so-called Agreement on Trade-Related Aspects of Intellectual Property. Still, he really should read Susan Sell's Private Power, Public Law to see how industry placed such draconian laws into the TRIPS agreement that even free-trade icon Jagdish Bhagwati harshly criticized it in In Defense of Globalization as a terrible deal for developing countries. Agreeing to TRIPS, as noted by Sell, was what developing countries had to give up to get industrialized countries to end their hypocritical quotas on textile exports from developing countries, the Multi Fiber Agreement.

The new example in Matt's link of bullying by intellectual property industries concerns the Trans Pacific Partnership, which would ban government health services from negotiating prices with pharmaceutical companies. This follows on the Anti Counterfeiting Trade Agreement, which requires countries to institute criminal penalties for all kinds of counterfeiting, while nowhere mentioning "fair use." The U.S. Trade Representative is claiming the executive branch can enter into without Congressional action, something disputed by Senator Ron Wyden. NAFTA and the Uruguay Round agreement (which created the World Trade Organization) were both passed as legislation in the U.S., as opposed to being considered treaties requiring a 2/3 vote in the Senate. ACTA has not been considered by Congress at all, even though it is obviously an international agreement.

TRIPS lengthened patent terms around the world, including in the U.S. (from 17 to 20 years), something Congress had repeatedly voted down when considered on a stand-alone basis. But in the all-or-nothing "fast track" procedure used for the Uruguay Round legislation, Congress had no choice but to accept it if it wanted the other parts of the agreement. With the ACTA and now TPP negotiations, the pharmaceutical and other industries are trying to make it impossible to undo their gains from TRIPS.

Forbes 400 has collected plenty of subsidies

2011-10-25T03:47:00.000-04:00

Dirt Diggers Digest has a good post up about how various members of the Forbes 400 have received plenty of government subsidies. Echoing Elizabeth Warren, Phil Mattera writes:

Accumulating a great fortune requires, among other things, a legal system oriented to property rights, a tax system biased in favor of investment income, and government spending on infrastructure ranging from interstate highways to the internet.

He gives numerous examples of how the 1% have received subsidies on top of these general government provisions. Bill Gates' Microsoft received $32 million in Texas for a data center in Bexar County. Warren Buffett's General Re, an insurance company owned by Berkshire Hathaway, got $28.5 million in various subsidies simply to relocate from one place in Stamford, CT, to another, creating no new jobs. Michael Dell's self-named firm got $242 million (nominal value) from North Carolina for a computer manufacturing facility which closed less than five years later.

As I show in my report for the Global Subsidies Initiative, "Investment Incentives: Growing Use, Uncertain Benefits, Uneven Controls" (free download), Dell received millions more in the U.S. and Canada for call centers, most if not all of which are now closed. The company received millions more in Europe, including a controversial 54.5 million euro subsidy to relocate its computer manufacturing from Ireland to Poland in 2009. (Subsidized relocations are a rarity in the European Union, and I was shocked that the European Commission approved this; when I spoke to them in Brussels in January on my book Investment Incentives and the Global Competition for Capital, most of the Q&A was about my criticism of their decision.)

Mattera gives many more examples, even though he only gets down to #18 of the 400. His basic point is on the money: the richest Americans have exploited government subsidies both here and abroad to grow their fortunes, and the 99% are right to be upset about it. As I've emphasized before, we could more than pay for all government layoffs at the local and state level if we could find a way to end these giveaways.

The Selling of Trade Agreements from NAFTA to Today

2011-10-20T11:27:00.000-04:00

With last week's passage of three trade agreements (Colombia, Panama, and South Korea), and spurred by Suzy Khimm's article on the Korea trade deal, I was reminded of the storm of numbers proponents of NAFTA threw out there in the run-up to its approval.

Gary Hufbauer and Jeffrey Schott, described by the New York Times (2/22/93; no link but available on Lexis-Nexis) as "the two most influential academic experts on the North American Free Trade Agreement," wrote a book entitled NAFTA: An Assessment in 1992, with a second edition in 1993 (all references below are to this edition). They predicted that the U.S. would gain 170,000 jobs by 1995.

This work struck me as flawed for a number of reasons. In the first place, it was odd that two economists would write about the winners and losers from NAFTA without making any reference to the economic theory on the subject, such as the Stolper-Samuelson Theorem (see below). Second, the authors did computer simulations of the effect of the agreement that said in their long-run scenario (Table 2.1, p. 16) that we would gain low-skill jobs and lose high-skill jobs, pretty much the opposite of what you would expect based on economic theory. I questioned what assumptions would be necessary to get that result. Finally, the book assumed that the U.S. would have a merchandise trade surplus with Mexico, "$7 billion to $9 billion annually through the 1990s, and perhaps $9 billion to $12 billion annually in the following decade" (p. 15) They held this view even though the authors showed on on page 4 that the Mexican peso was overvalued. If the value of the peso were to fall, Mexican goods would become cheaper in the U.S., while American products would be more expensive in Mexico, completely upending the likelihood of a U.S. trade surplus. As we know, the peso fell sharply in the December 1994 "tequila crisis," and the U.S. has had a trade deficit with Mexico ever since. See the table for details.

U.S. Goods Trade Balance with Mexico ($billions)

Year                                  Amount

1985                                    -5.5
1986                                    -4.9
1987                                    -5.7
1988                                    -2.6
1989                                    -2.2
1990                                    -1.9
1991                                    +2.1
1992                                    +5.4
1993                                    +1.7
1994                                    +1.3
1995                                   -15.8
1996                                   -17.5
1997                                   -14.5
1998                                   -15.9
1999                                   -22.8
2000                                   -24.6
2001                                   -30.0
2002                                   -37.1
2003                                   -40.6
2004                                   -45.2
2005                                   -49.9
2006                                   -64.5
2007                                   -74.8
2008                                   -64.7
2009                                   -47.8
2010                                   -66.4
Jan-Aug 2011                     -44.8

Source: Census Bureau

So much for that prediction. According to the then-fashionable claim that $1 billion in net trade surpluses created 19,600 jobs, the fact that the trade deficit worsened from $1.9 billion in 1990 to $74.8 billion in 2007 ($72.9 billion deterioration) implies a loss of 1.4 million jobs at its worst point. This number should be taken with a grain of salt, but it is in one sense what we expect. Still, it's only about 1% of the labor force, though we could certainly use the jobs now. But the effect on labor may have been worse, because the expanded option for companies to relocate to Mexico made it possible for them to threaten their workers with job loss and thereby hold down their wages. Kate Bronfenbrenner of Cornell's Institute for Labor Relations found that shutdowns became much more frequent after NAFTA (15% vs. 5% in the late 1980s) during labor organizing and contract campaigns.

At the same time, a contradictory prediction also failed to hold up. Wolfgang Stolper and Paul Samuelson argued that the expansion of trade was good for a country's abundant factors of production (they are land, labor, and capital) because of added markets abroad, but bad for scarce factors of production because of competition from abroad. Here, "bad" means reduction in real (inflation-adjusted) income. The U.S., which is not densely populated by world standards, is thus labor scarce but abundant in land and capital. My expectation was that NAFTA would therefore lead to lower real income for labor. In fact, however, weekly earnings for nonsupervisory workers in the private sector, which fell from a peak of $341.83 (constant 1982-84 dollars) in 1972 to a low of $266.46 in 1992, have risen ever since, despite the NAFTA and WTO agreements, hitting $284.79 in 2000 and $297.31 in 2010, according to the Economic Report of the President 2011, Table B-47. Of course, we are still $44.52 1982-84 dollars below the peak, or about $95.25 per week in 2010 dollars.

While obviously we see plenty of economic misery today, I'm curious why the trend on this measure, which Bill Clinton brilliantly politicized with "It's the Economy, Stupid," has reversed course, and how it relates to other measures of labor income. Perhaps there is a better measure of wages out there, or perhaps inflation is currently underestimated (there was a huge campaign in the mid-1990s claiming it was overestimated; maybe the Bureau of Labor Statistics paid too much attention to critics), which would overstate real income. Let me know what you think in the comments.

As for the three new trade deals, they are being sold with squishy job projections, just like NAFTA was. While Khimm's interviewees are probably right that the deals' effect on labor will be small, I still think we should go with the Stolper-Samuelson expectation that the effect will be negative.

Occupy Wall Street points in the right direction

2011-10-16T23:18:00.000-04:00

The Occupy Wall Street movement has gotten plenty of press and I've sometimes wondered what I can add to the conversation. But I've decided that it is worth echoing that they are pointing in the right direction regarding how we got into the economic mess we're in. To hear many conservatives tell it, the 2008 financial crisis was caused by the Community Reinvestment Act (CRA), Fannie Mae, Freddie Mac, and ACORN. There is a huge analytical problem with this narrative, though: the financial crisis was a change in outcome, and these supposed wrongdoers had all been around for decades. If the cause doesn't change, it can't be the cause of a changed outcome. We have to look somewhere else for what changed.

The CRA was passed in 1977. Fannie Mae was founded in 1938. Freddie Mac was founded in 1970. The ACORN Housing Corporation, now known as Affordable Housing Centers of America, was founded in 1986. Their existence cannot be what caused a financial crisis 22 years after the last of them (and 70 years after the first of them) was founded. Something had to change.

What changed, of course, was bank regulation and securitization. Laws keeping banks from taking on excessive risk, like the Glass-Steagall Act, were targeted by financial firms and eventually repealed. During the housing boom, private loan originators chopped up mortgages into mortgage-backed securities (MBS), and these mortgages had much greater delinquency and default rates than the ones Fannie and Freddie issued. (F&F did buy some of these securities, but they were not the main player even in that role.) As David Min shows (h/t Paul Krugman), even the riskiest of F&F loans had "serious delinquency" rates in the 2nd quarter of 2010 of under 10.5%, whereas subprime mortgages had a serious delinquency rate over 28%. Private actors got the rules changed in their favor, and dramatically increased their risk-taking to earn huge personal incomes, and the taxpayer bailed them out when it all went bust.

This brings us back to Occupy Wall Street. In the group's "Declaration of the Occupation of New York City," we see that OWS identifies the problem as corporations running government and subverting democracy. As Robert Creamer points out, for OWS politicians are only the problem insofar as corporations (especially on Wall Street) control them. The repeal of bank regulation came about through a decades-long campaign based on political contributions and influence by Wall Street firms. This process is what the Occupy Wall Street manifesto highlights. Occupy Wall Street puts the spotlight on private sector power and greed and demands a change. OWS's manifesto also points out the efforts of corporations to take away employee rights and to use outsourcing to reduce pay and benefits. In a future post, I will discuss the decline of real income in much more detail. It has led to a greater need for two-income families, and then an increase in family debt, in order to maintain a standard of living that was possible on one middle-class income in the 1970s.

I'll close for now with some words from one of my favorite books, Charles Lindblom's Politics and Markets (1977). They could easily have been in the Occupy Wall Street manifesto: "The large corporation fits oddly into democratic theory and vision. Indeed, it does not fit."

Almost all government layoffs are local, but could be paid for by cutting subsidies

2011-10-12T02:27:00.000-04:00

Sometimes I feel like a broken record, but it really can't be emphasized too often: state and local subsidies to business have noticeable negative effects on government finances,which are magnified in times of fiscal crisis like the present.

As Kash Mansori points out (h/t Mark Thoma), of the 532,000 government jobs lost from September 2009 to September 2011, fully 470,000 are at the local level.

Source: Kash Mansori, The Street Light

My research suggests that state and local governments give almost $50 billion per year in location incentives to business, and about $70 in total business subsidies. My best guess is that about half of it is at the local level, meaning $25-35 billion per year comes from local governments. It's easy to see that that much money could pay to rehire all those teachers, police, and other local government workers, and maybe have money left over. At the top end of the estimate, $35 billion could hire half a million workers earning $70,000 a year in salary and benefits, or 700,000 making $50,000 per year.

Make no mistake: we can't just wish state and local subsidies away. Companies leverage their mobility to extract tax breaks (and, increasingly, grants) from governments that need tax revenue and economic activity. But it's impossible to build a politics to oppose these giveaways unless we can document their extent and show what it really is we're giving up when governments award subsidies. Mansori says local budgets are being balanced on the backs of schoolchildren; it would be equally correct to say that local subsidies are paid for out of school budgets, on the backs of teachers and students alike.

Great reporting in Albany highlights growing trend towards use of cash grants by states

2011-10-10T16:04:00.000-04:00

The Times-Union in Albany, New York, has a great series up on the $1.1 billion (present value) incentive package given to Global Foundries (formerly Advanced Micro Devices) in Malta, New York, near Albany. Coming so soon after the Commercial Appeal series on Electrolux's move to Memphis, I am hopeful that we will continue to see more in-depth analyses of large incentive deals around the country.

This facility received the largest-ever cash grant given by a state or local government to attract an investment, as I determined in my research for Investment Incentives and the Global Competition for Capital. In terms of total value, it was second only to Boeing's $1.98 billion package from state and local governments in Washington. But AMD/Global Foundries highlights a new trend in the evolution of U.S. subsidy patterns. Historically, the vast majority of incentive packages in this country were made up of tax breaks, and cash was a negligible part of the equation. By contrast, in Europe, cash grants have long been the main form of subsidies for new investment, although tax incentives have frequently been used as well. As I explained in Competing for Capital: Europe and North America in a Global Era, this supported the European Commission's goal of having subsidies given as transparently as possible.

AMD/Global Foundries is the largest cash grant given, but it is safe to see that we are seeing a trend toward growing use of cash grants by state governments. Nucor's deal with Louisiana last year foresees up to $160 million in cash grants to the company if it meets all its expansion and job targets. Reporters in several states have told me they are seeing more cash grants. A shift from tax break to cash grant means that the true size of the incentive is growing, since the present value of cash is obviously higher than that of an equivalent nominal tax break spread over a number of years. When states are dealing with huge budget deficits, the last thing we need is for incentive packages to keep growing larger.

Based on my research, the Times Union also points out that New York state is paying a lot more per job than other states for similar fabrication facilities. By my calculation, AMD/Global Foundries received $927,000 per job for its facility there. By contrast, Samsung in Texas received only $190,000 per job and Hemlock Semiconductor in Michigan got $248,000 per job in 2007 (all calculations at present value, not nominal value). Moreover, New York paid 35% of the cost of the project, whereas Texas only paid 4% of Samsung's costs, and Michigan paid 12% of Hemlock Semiconductor's costs.

The case that New York is overpaying is strengthened when we compare what Germany has had to pay to get plants from the exact same company, AMD/Global Foundries. In 2004, the European Commission approved a subsidy worth 22.67% of the investment or $710,000 per job (at 1 euro=$1.35), significantly lower than New York but in the same order of magnitude. However, after rule changes that cut the maximum subsidy for large projects, the Commission only approved an 11.9% subsidy for AMD in 2009 and a 10.83% subsidy for Global Foundries earlier this year (no job data available in the decisions). You can search for all EU state aid cases here.

Again, kudos to the Times Union, and I hope more newspapers are willing to devote resources to documenting the large cost of subsidies such as these when state governments are suffering huge deficits.

UPDATE: $100 Million Incentives: US 25, EU 5

2011-10-05T12:38:00.000-04:00

Crowdsourcing works! In my last post on $100+ million incentive packages, I asked for your help in identifying any projects I had missed either in the US or European Union. Readers came up with several suggestions, which led to me discovering even more mega-incentives. I also checked the Good Jobs First blog Dirt Diggers Digest, where I found four projects listed, only one of which had been in my original 13 post-early-2008 packages. Then I went to the accumulated results of Google Alerts, where I found even more. In all, I found a total of 12 more projects in the US, bringing the score to US 25, EU 5. I have identified one possible additional case in the EU, but have yet to confirm it.

Here is my original list of $100 million incentives from September 29:

Company          State           Minimum nominal incentive package

AREVA             ID              $276.6 million present value
Nucor                LA             $373 million
Hemlock            MI             $358.4 million
Spirit Aero         NC            $250.9 million
Cerner/OnGoal KS             $230 million
Hemlock            TN            $200 million
Electrolux          TN             $188.3 million present value
Ford                  KY            $180 million
Boeing              SC              $900 million
Apple                NC            $320.7 million
Xtreme             MI              $100 million
Schott               NM            $130 million
Panasonic         NJ              $102 million

Here are the additions:

LG Chem              MI              $276 million (thanks to Dean Whittaker for this and the next one)
Johnson Controls       MI          $467.5 million
Motorola                  IL                $113.7 million (thanks to Dirt Diggers Digest for this and the next two)
American Greetings OH              $104.5 million
Diebold                   OH                 $96 million (DDD expects this to top $100 million when all is tallied)
Yahoo                     NY               $200 million (David Cay Johnston has reported on this and the next one)
Verizon                   NY               $614 million
Xanadu                   NJ                 $200 million
Gaylord Entertain.   CO                $300 million
A123 Systems        MI                 $100 million
Dow Kokam          MI                 $100 million
fortu PowerCell      MI                 $100 million

We now have five times as many $100+ million packages in the US than the EU in the last three years, seven of which exceed the largest package in the EU, at least in nominal value. This continues to underscore my contention that the EU state aid rules successfully reduce the size of incentives there and we need to adapt their rules to our political institutions.

I have heard rumors that there may still be mega-packages still to uncover. Let me know if you hear about them!

Job piracy in Canada, Australia, and the United States

2011-10-02T23:03:00.000-04:00

As I mentioned in August, my article "Regulating Investment Attraction: Canada's Code of Conduct in Comparative Perspective," has just appeared in the September issue of the journal Canadian Public Policy.

Job piracy (using subsidies to induce the relocation of an existing facility) is a big problem in the United States. New York City and Kansas City have been subject to repeated raids by neighboring states, and a Good Jobs First study this summer documented extensive job piracy in the Cincinnati and Cleveland metropolitan areas. Two voluntary anti-poaching agreements among groups of states were complete failures.

In the early to mid-1990s, Canada was seeing large-scale job piracy as well. Crown Life Insurance moved 1200 jobs from Toronto to Regina, Saskatchewan, in 1991, receiving a C$250 million loan guarantee to do so. New Brunswick was handing out millions of dollars to call centers to relocate there, including C$11 million to get United Parcel Service to consolidate 870 jobs from three other provinces in Canada. With this background, British Columbia insisted that a ban on job piracy be placed in the 1994 Agreement on Internal Trade signed by the Canadian federal government, all 10 provinces, and the Yukon and Northwest Territories. Though there were other provisions in the Code of Conduct on Incentives, the piracy ban was the only one that was legally binding. But it turned out to be not binding enough.

The United Parcel Service subsidy was subject to a complaint by British Columbia against New Brunswick in 1995. But weak dispute resolution rules in the larger Agreement meant there was no true enforcement mechanism. New Brunswick suffered no consequences, although it eventually got out of the poaching game when Premier Frank McKenna retired. However, since 1995, there have been at least eight other instances where various provinces (Nova Scotia, Prince Edward Island, Quebec, and Ontario) all gave subsidies to companies to move existing operations. One of them, Clarke, Inc., has been featured for years on the website of Nova Scotia Business, Inc., even though it is a prima facie violation of the Code of Conduct. But without a complaint from Ontario, nothing can happen -- and Ontario tried to raid Nova Scotia unsuccessfully to obtain the headquarters of grocery chain Sobeys.

The Code of Conduct does not appear to have had much success. The best that can be said about it is that the relocations subsidized were much smaller than those of the 1990s. Clarke, at 95 jobs, was the largest; the others were significantly smaller than that. In the meantime, the Agreement on Internal Trade has strengthened its dispute resolution process to make violators subject to fines up to C$5 million. It seems possible that a large-scale subsidized relocation would provoke a complaint under the Code.

An interesting contrast is Australia, which has a voluntary anti-piracy agreement that includes five of the country's six states (Queensland is the non-participant). Besides banning job piracy, the Interstate Investment Cooperation Agreement also encourages states to consult with each other when a company tries to play them off against each other. Whereas the National Governors Association says U.S. states have the right to do this, in Australia the states really do consult with each other to reduce what I describe as an information asymmetry in bargaining between governments and companies. Even though there is no enforcement mechanism at all, there have only been a couple of violations since the Agreement was first adopted in 2003. The reason for its relative success seems to be that the five states' politicians genuinely believe that job piracy is bad policy, a view that has been promoted by a federal government research body, the Productivity Commission, for at least 15 years.

The lesson for the United States is that we should try to ban job piracy because it obviously has no benefit for the country as a whole. In the U.S., of course, we have a stronger dispute resolution process than Canada's Code of Conduct does: If Congress passed a law against interstate job piracy, it could be enforced in federal court. The problem is that too many state politicians don't agree that poaching is a bad policy; they need to be educated or replaced.

$100 million Incentive Packages: US 13, EU 5. Have I Missed Any?

2011-09-29T02:51:00.000-04:00

I am reworking my list of the top 25 subsidy packages in the U.S. for a new article I'm working on. In my book, Investment Incentives and the Global Competition for Capital, I used the top 25 projects from 1999 to early 2008. For the article, the table will cover 2001 to the present. In addition, I am interested in uncovering all incentive packages of $100 million or more since early 2008. In the European Union, there are only five $100+ million incentive packages in the last three years. (Source: European Commission, search for cases with decision date after 1/1/2008 and Primary Objective of Regional Development.)

In the United States, by contrast, state and local governments have given at least 13 packages with a nominal subsidy value of $100 million or more since early 2008. (As with the book, I will be calculating their present value, because that is what the European Union does; this allows for better comparability of subsidies and, besides, present value is the more meaningful figure.) Before I send this article off, I want to make sure I haven't missed any, which is why I am asking for your help. Please let me know if there are any projects I've missed. I will, naturally, acknowledge you in the article.

First, here is a corrected version of the table that appeared in the book. In the course of writing a report, not yet published, for the North Carolina Budget and Tax Center, I discovered that our estimate of Google's subsidy in North Carolina was too low. It is corrected here.

Company	Year	City	State	Present Value

Boeing	2003	Everett	WA	$1,984,400,000
Advanced Micro Devices	2006	Malta	NY	$1,118,000,000
ThyssenKrupp	2007	Mount Vernon	AL	$734,304,000
Scripps Research Institute	2003	Palm Beach County	FL	$566,500,000
IBM	2000	East Fishkill	NY	$533,083,333
Volkswagen	2008	Chattanooga	TN	$450,139,048
Kia	2006	West Point	GA	$353,083,333
Toyota	2006	Blue Springs	MS	$291,634,000
Nissan	2000	Canton	MS	$289,666,667
Sematech	2007	Albany	NY	$269,444,444
Hyundai	2002	Montgomery	AL	$233,936,363
Ford	2006	Detroit	MI	$219,780,000
Toyota	2003	San Antonio	TX	$218,100,000
International Sematech	2002	Albany	NY	$175,636,364
Dell	2004	Winston-Salem	NC	$174,230,401
Goodyear	2004	Akron	OH	$173,099,088
Samsung Austin Semiconductor	2006	Austin	TX	$171,244,444
Eli Lilly	1999	Indianapolis	IN	$150,916,667
Marathon Oil	2007	Detroit	MI	$148,800,000
Honda	1999	Lincoln	AL	$144,221,818
Google	2007	Lenoir	NC	$140,592,593
General Motors	2000	Lansing	MI	$138,844,542
Alenia/Vought	2004	Charleston	SC	$133,133,333
Dell	1999	Nashville	TN	$132,373,334
Hemlock Semiconductor	2007	Hemlock	MI	$124,226,666

Source: Investment Incentives and the Global Competition for Capital and author's calculations

While researching this new article, it occurred to me that Kansas City, MO, has given several tax increment financing (TIF) subsidies that exceed the lowest value in this table. In fact, four Kansas City TIFs should have appeared in the table: KC Live, H&R Block, Pershing Road, and Three Trails (source). KC Live, the smallest of these, had a nominal subsidy of $167.9 million. To the best of my knowledge, the EU does not approve subsidies for retail, and I know for a fact that it does not approve them in the steel industry (ThyssenKrupp in the table above, Nucor in the table below).

The following list was begun by identifying the "top projects of the year" for 2008-10 according to Site Selection magazine. Pursuing news stories to determine the incentive package details led to the discovery of several other projects of at least $100 million in nominal subsidy value.

Company          State           Minimum nominal incentive package

AREVA             ID              $276.6 million present value
Nucor                LA             $373 million
Hemlock            MI             $358.4 million
Spirit Aero         NC            $250.9 million
Cerner/OnGoal KS             $230 million
Hemlock            TN            $200 million
Electrolux          TN             $188.3 million present value
Ford                  KY            $180 million
Boeing              SC              $900 million
Apple                NC            $320.7 million
Xtreme             MI              $100 million
Schott               NM            $130 million
Panasonic         NJ              $102 million

Thus, in the last three years, there have been at least 13 deals for $100 million or more in the U.S. (though the last three may fall below $100 million in present value) compared to just five in the European Union. The deals in the U.S. are larger, too: the largest deal in the EU is for Global Foundries (formerly Advanced Micro Devices) in Dresden, Germany, where EU state aid rules allowed it to receive 211.0 million euros, about $284.9 million. Not only is this dwarfed by what South Carolina gave Boeing, Global Foundries is asking New York State for $1 billion for a new wafer fabrication plant there. As I will argue in the article, new evidence continues to demonstrate that the EU is successful in reducing the investment incentives granted to mobile investors there, compared to what they get for similar projects in the U.S.

Again, these results are preliminary, but striking. Because of the EU's centralized register of cases, it is more likely that I may have missed 9-figure subsidies in the U.S. than in the EU. Of course, please let me know if I've missed any in either place. Thanks!

What's Up with Political Math?

2011-09-28T06:40:00.000-04:00

Matthias Shapiro at Political Math made a big splash on August 16 with a post purporting to show that Texas had had the best employment record since the official start of the recession in December 2007. How big a splash? Well, Ross Douthat endorsed it in his New York Times column and Zach Pandl at Goldman Sachs (no link, but thanks to Pandl for sending more detail on the analysis) used the raw jobs numbers as the dependent variable for explaining why some states had better employment outcomes than others (energy industry, low exposure to housing bubble, and high tech employment, he concluded).

Shapiro was deluged with responses, including 452 comments on his blog post and no telling how many emails, including a couple from me. Shapiro had made a serious error in what he called "My Personal Favorite Chart," which was that he looked at labor force data and acted like it was population data. Since December 2007, "739,000 people fled into Texas," he said. In fact, he had no data on interstate migration at all, and was misinterpreting the change in the size of the labor force to be the same thing as interstate migration. One commenter, "delaustin," pointed him to a link for interstate migration data (http://www.census.gov/hhes/migration/), where we see, for example, that net interstate (including DC and PR) immigration into Texas in 2009 was 130,234. This, of course, was all migrants, not just members of the labor force, and less than half of Texas' total population is employed. As a result, his "Personal Favorite Chart" was GIGO.

An even more serious problem is that the concept of "employment performance" is extremely sensitive to the way it is measured. Shapiro asserted without argument that population growth is, at worst, "a good problem to have." Of course, since what he was actually measuring was labor force growth, I argued earlier that there was no clear reason to think that adding two unemployed people to the labor force for every new employed person was "a good problem to have."

Shapiro did argue that unemployment rates were not the best measure of employment performance because interstate migration meant that states were rewarded for having their labor force fall in size. Thus, his preferred measure was the ratio of employed persons in June 2011 to that of December 2007, i.e. raw job numbers. By this measure, it turns out from Pandl's study of every state that Texas came in fourth, after North Dakota, Alaska, and DC. (Shapiro says Texas did better than North Dakota; I can't account for their different findings without seeing more of Pandl's methodology.)

If we do use unemployment rates, however, we find that Texas' unemployment rate has deteriorated relative to the national average, rising from 88% of the national average in January 2008 to 92.3% of the national average in July 2008 (and it rose again in August). I showed that by an alternate measure of employment performance, ratio of unemployment rate in July 2011 to that of December 2007, Texas was slightly below the median, with the July 2011 unemployment rate 187% of the December 2007 rate. By this measure, North Dakota and Alaska held the top two spots, just as they did with raw employment numbers. DC, however, is right below the median, at 177%.

As I wrote a couple of weeks ago, the employment/population ratio is often used in place of the unemployment rate to measure employment performance. Since population is a component, it would seem that Shapiro would have less to object to with this metric. Felix Salmon showed that by this measure, Texas has performed worse than the U.S. average during the Perry administration.

Source: Felix Salmon

Two caveats are necessary here. First, Salmon uses a non-standard definition of the population denominator, including all persons regardless of age or institutionalized status. Second, even with this measure, we can see that since the recession began, Texas has performed better than the national average (compare the slopes of the two lines after 2007).

To find out much better, I used the standard Bureau of Labor Statistics definition of the employment population ratio, where population is the civilian, non-institutionalized population aged 16 and older, and took the ratio of that ratio for August 2011 (P for preliminary) to December 2007 (R for revised). As we can see, no state has gotten back to its December 2007 employment/population ratio, but North Dakota has gotten the closest.

Employment/Population Ratios by State (%)

State	August 2011 P	Dec 2007 R	Ratio of ratios

North Dakota	69.8	71.4	97.8
Vermont	66.1	67.8	97.5
Mississippi	54.2	55.8	97.1
Minnesota	66.8	68.9	97.0
Kentucky	56.1	58.1	96.6
Alaska	64	66.6	96.1
New Hampshire	65.6	68.6	95.6
Virginia	64.1	67.1	95.5
Nebraska	68.1	71.3	95.5
Maine	60.1	63	95.4
Texas	59.8	62.7	95.4
Kansas	64.4	67.6	95.3
South Dakota	67.3	71	94.8
Iowa	66	69.7	94.7
Tennessee	56.8	60.1	94.5
Massachusetts	60.2	63.8	94.4
Oregon	58.7	62.3	94.2
Oklahoma	57.6	61.4	93.8
Connecticut	61	65.1	93.7
New York	56.3	60.1	93.7
Ohio	59.1	63.1	93.7
Hawaii	59.5	63.6	93.6
Pennsylvania	57.6	61.7	93.4
Wisconsin	63	67.6	93.2
New Jersey	59.5	63.9	93.1
Missouri	59	63.7	92.6
Arizona	56.2	60.9	92.3
Arkansas	55.1	59.8	92.1
Montana	59.5	64.6	92.1
Louisiana	54.5	59.2	92.1
Wyoming	64.7	70.3	92.0
South Carolina	54	58.9	91.7
Rhode Island	59.1	64.5	91.6
New Mexico	55.8	61	91.5
Illinois	59.4	65	91.4
Florida	55.2	60.5	91.2
Maryland	61.4	67.3	91.2
Washington	59.1	65	90.9
Alabama	53.1	58.7	90.5
Idaho	58.7	65.1	90.2
West Virginia	48.5	53.9	90.0
Indiana	57.1	63.6	89.8
Michigan	53.5	59.9	89.3
California	55.3	62.1	89.0
North Carolina	55.3	62.4	88.6
Delaware	55.7	63.1	88.3
Georgia	56.5	64.1	88.1
Colorado	61.7	70.2	87.9
Nevada	56.2	64	87.8
DC	58	66.2	87.6
Utah	60.8	69.5	87.5

Source: http://www.bls.gov/lau/ststdsadata.txt

Here we find that Texas comes in 11th place. As noted, North Dakota retains the top spot; Alaska is 6th by this measure and does well on all three measures. DC, however, comes in 50th by this measure, rather than third or 27th. This underscores the difficulty in measuring "employment performance." Clearly, more analysis is needed.

Meanwhile, Shapiro promised on August 23 "to try to do a follow-up in the coming week that addresses more of the data." Since then, he managed to publish a long, multi-chart post on an unrelated topic on August 31, but has not delivered any follow-up. Here we are, more than a month later, and it is unclear if any will be forthcoming. I'm sure I'm not the only person curious as to what points Shapiro thinks still hold up.

Poll Results on Electrolux in Memphis

2011-09-22T12:14:00.000-04:00

Thanks to everyone who took part in the poll: How likely is it that Electrolux will be in Memphis in 15 years? Here are the results.

0-25%:     11 votes, 65%
26-50%: 5 votes, 29%
51-75%:     1 vote, 6%
76-100%:   0 votes, 0%

Personally, I don't think the likelihood of Electrolux sticking around is very high. Obviously, Memphis is a great distribution hub -- think FedEx -- but this is first and foremost a manufacturing operation. Electrolux has shown it disavows any responsibility to stand by its workers, even in Sweden, even in the CEO's home town. Therefore, my vote would have been 0-25%, and I think the chances are pretty close to 0.

Yes, $11 million per job is possible, and a record

2011-09-21T21:23:00.002-04:00

I posted on August 29 that it appeared that Sempra Energy had received $55 million in federal tax credits and Nevada incentives for a solar generation facility in Boulder City, Nevada, to just create five jobs. I wondered if this were even possible.

In the course of working to update a table of the largest incentives in the U.S. for an academic article, my research assistant found a website of Department of Energy loan and loan guarantee programs that shows how many jobs each recipient was expected to create. It turns out that solar generator Fotowatio Renewable Ventures, Inc., which received a $45.6 million loan guarantee, will create just four jobs. Granite Reliable's wind generation facility, which received a $135.8 million loan guarantee, will create just six jobs. Note that a loan guarantee does not have a subsidy value equal to its face value, but much less: essentially it is equivalent to what it would cost to obtain such a guarantee on the open market, but that is difficult to determine. I will not attempt this calculation here.

But these figures show that Sempra could indeed just create just five jobs for its Copper Mountain solar generation project, especially since it was adjacent to an existing facility. Thus, it appears that Sempra's subsidy package really does come to $11 million per job. To the best of my knowledge, this is the first time a project has cracked $10 million per job. Obviously, energy is the point of this subsidy, not jobs, but it is still an amazing number. Using a different measure called aid intensity, we find that the subsidy equaled 39% of the $141 million cost of the facility. That is a high intensity, but hardly off the charts. A comparison with aid intensities in the European Union would be useful, and I hope to be able to do that soon.

Update: Sempra Energy, the recipient of this subsidy, has one campaign contribution show up on the Open Secrets website for the 2008, 2010, or 2012 election cycles: $2500 to the San Diego County Republican Central Committee . Nevada Governor Sandoval was there for the ribbon cutting, since Nevada state and local governments contributed $12 million in subsidies for this project.

Historical Notes on Class Warfare

2011-09-21T14:17:00.000-04:00

"This is not class warfare. It's math," President Obama said on Monday. There is an important element of truth to this but, as Paul Krugman points out, there has been an "actual class war that has taken place over the past 30 years — namely class warfare for the rich against the middle class." He points to four major elements to this: tax cuts for the rich; a decline in the inflation-adjusted minimum wage (which peaked in 1968 at $10.04 in 2010 dollars); union-busting; and the deregulation of financial markets.

In fact, the war on the middle class goes back even further than that, before President Reagan's crushing of the air traffic controllers' strike, even before he came into office. Douglas Fraser, President of the United Auto Workers, identified a "one-sided class war" in 1978, when he resigned from the "Labor-Management Group" that unofficially advised President Carter. I want to quote at length from this letter, because many of the issues he pointed to then are still with us today.

I believe leaders of the business community, with few exceptions, have chosen to wage a one-sided class war today in this country—a war against working people, the unemployed, the poor, the minorities, the very young and the very old, and even many in the middle class of our society. The leaders of industry, commerce and finance in the United States have broken and discarded the fragile, unwritten compact previously existing during a past period of growth and progress....

The latest breakdown in our relationship is also perhaps the most serious. The fight waged by the business community against that Labor Law Reform bill stands as the most vicious, unfair attack upon the labor movement in more than 30 years. Corporate leaders knew it was not the "power grab by Big Labor" that they portrayed it to be. Instead, it became an extremely moderate, fair piece of legislation that only corporate outlaws would have had need to fear. Labor law reform itself would not have organized a single worker. Rather, it would have begun to limit the ability of certain rogue employers to keep workers from choosing democratically to be represented by unions through employer delay and outright violation of existing labor law....

This is, of course, a good description of the state of labor relations today. At the time, one major example Fraser had in mind was J.P. Stevens, a textile maker and serial National Labor Relations Act violator. The movie "Norma Rae," for which Sallie Field won "Best Actress" in 1979, depicts the struggle against Stevens.

We are presently locked in battle with corporate interests on the Humphrey-Hawkins full employment bill. We were at odds on improvements in the minimum wage, on Social Security financing, and virtually every other piece of legislation presented to the Congress recently....Even the very foundations of America's democratic process are threatened by the new approach of the business elite. No democratic country in the world has lower rates of voter participation than the U.S., except Botswana. Moreover, our voting participation is class-skewed—about 50 percent more of the affluent vote than workers and 90 percent to 300 percent more of the rich vote than the poor, the black, the young and the Hispanic. Yet business groups regularly finance politicians, referenda and legislative battles to continue barriers to citizen participation in elections. In Ohio, for example, many corporations in the Fortune 500 furnished the money to repeal fair and democratic voter registration.

Examples of the latter today are too numerous to mention them all. But we obviously have the Koch brothers financing conservatives all over the country, with restrictions on the right to vote proposed or passed in states like South Carolina, North Carolina, Maine, Wisconsin, and others. Class war from the right is alive and well, but now it challenges science and math as well as labor and the middle class.

Wooing of Electrolux by Memphis Highlights Flaws of Economic Development Subsidies

2011-09-18T04:12:00.000-04:00

The Commercial Appeal in Memphis has just published a great series on the subsidized relocation of Electrolux from a suburb of Montreal to Memphis. Electrolux is closing a 1,300-worker facility in L'Assomption, Quebec, and has pledged to create 1,240 jobs in Memphis, receiving a subsidy package worth at least $188.3 million for the $190 million plant there. Electrolux is getting almost $200 million to destroy 60 jobs in North America. Even if we only think about Memphis, we are looking at an "aid intensity" of 99% of the investment or $152,000 per job.

This is a bad deal on its face, even if Electrolux were not cutting 1,300 unionized jobs elsewhere. One way to see this is to understand that $152,000 per job is within the range that automobile assembly plants typically receive in incentives. It is unlikely that this oven plant has nearly the possibility of spurring co-location from suppliers that an auto plant does. Moreover, auto plants pay more, and they do not receive subsidies equal to 99% of the investment, but more like 33%. Plants is Mississippi, Alabama, Texas, and Georgia all fell in this range since 1999; only Tennessee paid more (46% of the investment, about $225,000 per job), for Volkswagen in Chattanooga. These numbers were calculated along with data I presented in my book, Investment Incentives and the Global Competition for Capital.

It gets worse. As the paper relates, this subsidy package was negotiated in secret, and the full amount of the incentives were not disclosed to the public; even now, the newspaper has been unable to obtain all the details that likely will add to the cost.

In addition, the state agreed to a clause in the deal that prevents it from getting its money back if Electrolux fails to deliver on the 1,240 jobs or closes. More and more states are using such "clawback" provisions in incentive deals; even Tennessee has such a clause in its contract with Volkswagen. However, since that 2008 agreement, the state has not included clawbacks in deals with Hemlock Semiconductor and Wacker Chemie, according to the newspaper.

According to another story in the series, the workers in Quebec, who were represented by the International Association of Machinists union, earned the equivalent of $18.92 per hour, whereas the workers in Memphis will earn $14.65 per hour. So Electrolux was able to get rid of 60 workers, cut the wages of the jobs they kept by more than $4 per hour, get a more central distribution location, and a free factory courtesy of state and local governments in Tennessee. At a minimum.

To top it off, we have the requisite commissioned studies showing how well Memphis and Tennessee will do if the plant employs 1,240 people for 15 years. One of the reports did not even analyze the costs at all.

Let's review all the things wrong with this deal: Negotiated in secrecy, check. Bad cost-benefit analysis, check. Overpaid relative to what other states have paid for better projects, check. No money-back guarantee, check. Job piracy, check.

One booster of the deal complained that no one was writing about how great this deal could be if there were six or 17 suppliers in five years. But a worker losing his job in Quebec asked what Electrolux would do if Mexican officials offered a big incentive package along with a wage rate that is currently about $2.18 per hour.

What do you think? See the poll to the side.

Boeing in South Carolina: Huge Subsidies, and a Labor Dispute

2011-09-16T19:46:00.001-04:00

Boeing's decision to add an assembly line for its new Dreamliner aircraft in South Carolina has touched off a firestorm of controversy. The first facility, on Boeing's home of Washington state, received the country's largest-ever package of state and local incentives, totaling $160 million a year for 20 years, a nominal value of $3.2 billion that I calculated to have a present value of just shy of $2 billion. The World Trade Organization (WTO) ruled in January that this subsidy violated the terms of the 1994 Agreement on Subsidies and Countervailing Measures, but that decision is now under appeal.

Meanwhile, South Carolina has given Boeing a package thought to be worth over $900 million to open a new assembly line for the Dreamliner. The European Union will no doubt bring a complaint against this subsidy at the WTO and, in all likelihood, again will win.

The biggest battle over the South Carolina assembly line erupted when Boeing CEO Jim Albaugh said that the decision had been motivated by strikes at its facilities in Washington (http://motherjones.com/kevin-drum/2011/09/quote-day-boeing-vs-nlrb, h/t Matt Yglesias). This was a no-no: the National Labor Relations Act protects workers who exercise their rights to form a union or to strike from retaliation by the company. One obvious reading of Albaugh's statement is that he was admitting that the company broke the law. Therefore, it is not surprising that the National Labor Relations Board (NLRB) filed a complaint against Boeing.

Whether the NLRB will win its case is less certain. How is it “retaliation” if no workers in Washington lose their job and 5,000 more union workers there get jobs? As labor law professor Jeffrey Hirsch explains, it comes down to intent: the NLRB will use the statements of Albaugh and other Boeing officials against them, while Boeing will argue that the decision was not motivated by retaliation, but was purely an economic decision. The first hearing in the case is scheduled for later this month, and then we will see what an administrative law judge rules.

In the meantime, though, Congressional Republicans have been in an uproar, with the House passing a bill yesterday that would prohibit the NLRB from ordering the relocation of workers. While this bill is unlikely to go anywhere in the Senate, it is interesting that Boeing itself has “remained on the sidelines,” as The Hill put it yesterday.

Whatever the outcome of the labor dispute, it's clear that we have yet another example of a gigantic subsidy for a mobile company that can well afford to make the investment on its own. Regardless of whether the subsidies violate WTO rules (and I think they do), they take money from average taxpayers to give Boeing at a time when many states, including South Carolina, face severe deficits.

ACA Works for Young Adults as Planned; Percentage of Uninsured Hispanics also Falls

2011-09-14T03:18:00.000-04:00

On Tuesday, the Census Bureau released its annual report on income, poverty, and health insurance for the year 2010. Based on surveys at approximately 100,000 addresses conducted primarily in March 2011, the Current Population Survey Annual Social and Economic Supplement found that the number of uninsured in the U.S. rose by 919,000, from 49.0 to 49.9 million (see Table 8). (Note that this reflects a downward revision in the estimate for uninsured in 2009.) There were two bright spots in the data, however, for young adults and Hispanics.

On September 23, 2010, one of the most significant early provisions of the Affordable Care Act (ACA) went into effect, allowing young adults to stay on their parents' insurance until they turned 26 years old. The Census Bureau report shows that this provision was used by a substantial number of people. Since this provision affected 19-25 year olds, the report broke out the data separately for this age group: 393,000 fewer of them were uninsured in 2010 than in 2009, with the percentage uninsured falling from 31.4% to 29.7%; both of these changes were statistically significant. This shows that the Affordable Care Act worked precisely as planned for young adults.

In addition, the percentage of uninsured Hispanics fell by a statistically significant 0.9 percentage points, from 31.6% to 30.7%, between 2009 and 2010. While the fall in the number uninsured was small (110,000) and statistically not significant, when combined with an increase in the Hispanic population of over 1 million, the percentage change was substantial. The report does not speculate on the reason more Hispanics were insured. Indeed, despite the fact that the poverty rate increased among Hispanics by 1.3 percentage points (Table 4), the number of Hispanics insured under every category of insurance, private and public, increased between 2009 and 2010. For example, almost 900,000 more Hispanics had insurance through their employers, even as non-Hispanic whites had a drop of 1.9 million receiving insurance through their employers (Table C-2).

Despite this improvement, Hispanics were by far the ethnic group most likely to suffer being uninsured. Their rate of 30.7% uninsured compares unfavorably with blacks (20.8%), Asians (18.1%), and non-Hispanic whites (11.7%).

Given the fact that the uninsurance rate among 19-25 year olds is still almost 30%, there would seem to be a good possibility that we will see even more improvement here after this fall's annual enrollment periods, thanks to the ACA.

Employment to Population Ratio a Better Predictor of Uninsurance than Unemployment Rate

2011-09-13T16:51:00.000-04:00

Commenter David Littleboy at The Incidental Economist, where my unemployment/jobs post was linked, makes the good point that the employment to population ratio might be a better predictor of uninsurance than the unemployment rate. Over the period covered by the Gallup surveys I reference (2008-June 2011), the data bear him out. The employment/population ratio falls over the entire period, and the uninsured rate rises the whole period. Not only that, the employment/population ratio catches the big one-month rise in uninsurance between May and June found in Gallup's polling.

That said, he doesn't disagree that adding jobs is our best short-term method for insuring more people until the ACA's individual mandate comes into effect in 2014.

I've got no problems with finding the best possible measure for things we're interested in. And it gives me an idea for a better measure of states' employment performance since the recession began...

Increase in Uninsured Rate Shows Need for Action on Jobs

2011-09-11T15:31:00.000-04:00

“Gallup: Uninsured Have Increased Under Obama and Since Obamacare Was Enacted,” blares the headline at CNSnews and a number of other conservative sites that picked up the story (thanks to a non-blogger friend for pointing me to this). The implication is that Obama and the Affordable Care Act have failed, though the article is careful to point out that the mandate does not come into effect until 2014. Indeed, the article makes no claims to explaining why this happened.

As two Gallup surveys show, 14.8% of adults were uninsured in 2008, 16.2% in 2009, 16.4% in 2010, and 16.8% in the first half of 2011. In fact, the results in June had to have been dreadful, because Gallup's January-May polling only gave a 2011 figure of 16.6%, and June results pushed the figure to 16.8%.

Similar, but less quickly reported, numbers come from the Census Bureau. As reported by the Kaiser Family Foundation in September 2010, the uninsured rate for all Americans was 15.4% in 2008 and 16.7% in 2009. Since the percentage of children uninsured in both years was about 10%, this implies even higher uninsured rates for adults than Gallup found.

What were the causes of this increase? Using the Gallup data since it is more recent, fully 70% of the increase (1.4 of 2.0 points) came from 2008 to 2009, when the full-year unemployment rate rose from 5.8% to 9.3%, as mentioned in the Kaiser article. Yet unemployment peaked at 10.1% in October 2009 and is down to 9.1% in August 2011, so it isn't simply unemployment since the uninsured rate has continued to rise. The other main cause would appear to be reduced employer provision of health care, whether through plan suspension, unaffordability, or of course job loss. According to Gallup's data, the percentage of adults with employer-provided insurance declined from 49.2% in 2008 to 45.0% in January-May 2011. The figure in 2010 was 45.8%, meaning that employer-based insurance fell even though there was no increase in unemployment.

Reversing this trend requires the full implementation of the Affordable Care Act, of course, but in the short run, these data underline the importance of job creation, since that is still by far the most common source of health insurance. Whether President Obama's jobs plan will pass is hard to gauge (though I think it's improbable), but without it, we are likely to see continuing increases in the number of uninsured. In addition, we should pay attention to Medicaid, which may cover fewer people due to state budget crises.

Labor Day: Of Nine OECD Members with a Higher Minimum Wage than U.S., Seven Have Lower Unemployment Rates

2011-09-08T23:08:00.000-04:00

When Michele Bachmann says she would “consider” lowering the minimum wage, she tapped into the long-standing theme of conservative economists that the minimum wage is a job-killer. The only problem is, careful statistical research has shown that this simply isn't true. In the 1990s, economists David Card and Alan Krueger demolished the methodologies of prior statistical studies showing a negative impact as well as conducting original research comparing low-wage employment within a two-state metropolitan area when one state raised its minimum wage, finding no negative impact. (A useful summary of Card and Krueger's long-run influence on the debate can be found in a post by Arindrajit Dube at Rortybomb [h/t Mark Thoma].)

But another way of showing the lack of a negative effect, following my “Labor Day” theme of international comparisons, is to look at the minimum wage and unemployment rates among the industrialized democracies of the Organization for Economic Cooperation and Development (OECD). Only 21 of the OECD's 34 members have economy-wide minimum wage rates, as shown in the table below. This shows the “real” (inflation-adjusted) hourly minimum wage for each of the 21 countries, expressed in 2005 U.S. dollars and adjusted for each country's price level in a measure called “purchasing power parity” or PPP. (Under straight exchange rates, Belgium, France, Ireland, Luxembourg, and the Netherlands all have minimum wages above $10 per hour in 2005 dollars.) The data are for 2008, the most recent year available. Unemployment data are for June 2011, the most recent month available for most of the countries (exceptions are noted in the table).

In this list, the United States comes in with only the 10^th highest minimum wage of the 21 countries. This is true even after the increase to $7.25 in 2009, which comes to $6.26 in 2005 dollars. In addition to the five countries mentioned above, Australia, Canada, New Zealand, and the United Kingdom have a higher minimum wage than the U.S. If the story told by Michele Bachmann and conservative economists were true, we would expect that they would all have higher unemployment rates than the U.S. In fact, however, only France (9.8%) and Ireland (14.3%) are higher, while the other seven have lower unemployment rates, ranging from 1.4 points lower (UK) to 5.1 points lower (Netherlands). We should remember from my last two posts in this series that all of these countries have stronger employment protections than does the United States, and that only France has lower union density.

Real hourly minimum wages

Data extracted on 09 Sep 2011 00:21 UTC (GMT) from OECD.Stat

Frequency		Annual
Series		In US$PPP
Time		2008
Time
Country
Australia		8.59 4.9%
Belgium		8.23 7.4%
Canada		6.43 7.4%
Czech Republic		2.99 6.5%
France		8.79 9.8%
Greece		4.86 15.0% (March 2011)
Hungary		2.61 9.9%
Ireland		7.55 14.3%
Japan		5.22 4.6%
Korea		4.36 3.3%
Luxembourg		8.95 4.3%
Mexico		0.79 5.8%
Netherlands		8.22 4.1%
New Zealand		6.99 6.5% (Q2 2011)
Poland		3.21 9.5%
Portugal		3.31 12.5%
Slovak Republic		.. 13.4%
Spain		4.07 21.0%
Turkey		2.96 9.3% (May 2011)
United Kingdom		8.06 7.8% (May 2011)
United States		5.59 9.2%

Notes: Unemployment rate is for June 2011 unless otherwise noted. U.S. minimum wage rose to $6.26 in 2005 dollars with the 2009 increase to $7.25 in nominal dollars. The Slovak Republic's minimum wage was $1.36 in 2006, the most recent year available.

Source: http://stats.oecd.org/Index.aspx

For 2008 real minimum wage in US$ purchasing power parity, click on “Labour,” then “Earnings,” then “Real hourly minimum wages,” then adjust the “Series” to “In US$PPP.”

For June 2011 unemployment rates, click on “Labour,” then “Labour Force Statistics,” then “Labour Statistics (MEI),” then “Labour Force Statistics (MEI),” then “Harmonized Unemployment Rates and Levels (HURs),” then adjust the “Subject” to “Harmonized Unemployment Rate (HUR).”

Raising the minimum wage would add to the purchasing power of many people who will spend their money at a time when the economy sorely needs demand, as economist Heidi Shierholz of the Economic Policy Institute points out. Meanwhile, the best research shows that a higher minimum wage does not destroy jobs as economists generally thought before Card and Krueger's work. The data presented here shows that American workers at the bottom of the wage scale earn less than their counterparts in a number of other countries, and overall those countries do not see more unemployment as a result. We should, therefore, resist any calls to lower our minimum wage.

Labor Day: U.S. Has Fifth Lowest Union Density in the OECD

2011-09-07T01:57:00.000-04:00

As was reaffirmed by Vice-President Biden on Labor Day, the American middle class was originally built by the labor movement. That unions have been declining in this country for decades is not exactly news. But where does the U.S. stand relative to the other industrialized democracies of the Organization for Economic Cooperation (OECD)? The obvious measure of the strength of the labor movement is the proportion of the workforce that is unionized, usually referred to as union density (although it is well known that the French labor movement is far stronger than its low union density would suggest).

The short answer is that the U.S. ranks 30^th of the 34-member OECD. U.S. union density stood at only 11.4% in 2010, significantly below the OECD average of 18.1% last year. The only OECD countries with a lower proportion of labor organized are Estonia (8.0%), France (7.6% in 2008), South Korea (10.0% in 2009), and Turkey (5.9% in 2009).

Examining some of the data, we see that the U.S. is not alone in seeing a decline in union density:

Country Density 1999 Density 2010

G-7

Canada 28.1% 27.5%

France 8.1% 7.6% (2008)

Germany 25.3% 18.6%

Italy 35.4% 35.1%

Japan 22.2% 18.4%

United Kingdom 30.1% 26.5%

United States 13.4% 11.4%

Other Countries

Australia 24.9% 18.0%

Finland 76.3% 70.0% (highest density in 2010)

Ireland 39.0% 30.7% (2009)

Sweden 80.6% 68.4% (highest density in 1999)

OECD Average 21.0% 18.1%

Source: http://stats.oecd.org/Index.aspx, then click on “Labour,” “Trade Union,” and “Trade Union Density.”

The reasons for this general trend are in dispute, though globalization is one likely culprit. I'll have to leave that debate for another time.

For now, I simply want to emphasize how low the American unionization rate is, and how that bodes ill for the middle class. We are, of course, currently seeing an attack on public sector unions in many states, which threatens tens of thousands of middle class jobs and reduced pay and benefits for hundreds of thousands of workers.

To end on a more positive note, it's interesting that Canada, a country like the U.S. in many ways (in particular, economists would describe as both relatively “labor-scarce” by global standards, an issue I will discuss in more detail in future posts), has not seen the same sort of deterioration in union density that the U.S. has. Paul Krugman, in The Conscience of a Liberal, makes a great deal of this comparison to argue that union decline in the U.S. was not inevitable and could be reversed. I hope he's right.

Labor Day; U.S. Has Weakest Employment Protections Among OECD and BRICS

2011-09-06T02:53:00.000-04:00

This is the first in a series of posts on the sorry state of American labor. International comparisons make this very clear. U.S. workers are more vulnerable than workers in any Organization for Economic Cooperation and Development (rich industrialized democracies) members or even the BRIC countries (Brazil, Russia, India, and China, with Estonia, Indonesia, and South Africa included as comparisons for good measure) to being fired unfairly, to not getting severance pay, to getting the least notice on mass layoffs or being fired, to being stuck on a mouse wheel of temporary positions, altogether a total of 21 measures that the OECD used to determine how well workers' rights at work are protected.

Not only is the United States in last place, it isn't even close. In the oldest version of the OECD's employment protection measure, for which data goes back to 1985, the U.S. score in 2008 was 0.21, unchanged since 1990. The next lowest were Canada and the United Kingdom at 0.75, while the other G-7 countries clock in with Japan (1.43), Germany (2.12), France (3.05), and Italy (1.89). Note that this measure uses only 14 elements; the full 21-element version begins only with 2008. The OECD considers the newer measure better, and the United States, while still last, does not lag quite so badly: U.S. (0.85), Canada (1.02), U.K. (1.09), Japan (1.73), Germany (2.63), France (3.00), and Italy (2.58). The unweighted OECD average on the new measure is 2.24 in 2008, while Brazil is 2.27, Russia 1.80, India 2.63, and China 2.80.

Employment Protection in 2008 in OECD and selected non-OECD countries*

Scale from 0 (least stringent) to 6 (most restrictive)

Source: OECD

The bottom line is that American workers enjoy the least protection out of all major economies in the world. Protections against individual firing, collective dismissals, and ability to get off temporary employment are as weak as they can be. Happy Labor Day!

Data notes: The basic methodology (with a link to the full methodology) is here.

The raw data for these measures is at OECD StatExtracts, then click on “Labour” in the left-hand menu to expand the category, then “Employment Protection,” and finally “Strictness of employment protection – overall.”

Inflation is Neither as Boring Nor as Simple as it Seems

2011-09-02T02:39:00.000-04:00

One nice thing about Dean Baker's new book, The End of Loser Liberalism, is that it puts the Federal Reserve Bank and inflation under the microscope. This is important and valuable, because too many people wrongly take it for granted that inflation is always a bad thing. To give an example, one graduate level textbook in international political economy that I use (Ravenhill, ed., Global Political Economy) has a chapter discussing theories of how different actors form their preferences about free trade (for or against), exchange rates (fixed or floating, high or low), etc. Notably missing is any discussion of why different people might favor higher or lower rates of inflation. The chapter author simply presumes that inflation is bad.

Yet once upon a time, average middle class people understood the significance of international monetary arrangements and inflation on their lives. These were the people to whom William Jennings Bryan's famous 1896 “Cross of Gold” speech was addressed. Farmers understood that the gold standard was harmful to their interests because it forced low inflation and even deflationary policies that made their debt burden worse. They wanted the dollar backed by both gold and silver (“bimetallism”) in order to have a larger money supply and higher inflation.

The first modern work of which I am aware that discusses who wins and who loses from inflation is William Greider's Secrets of the Temple. (For a fairly recent interview with Greider, see here.) The first level of the story is the easiest. It's hard to see how hyperinflation benefits anyone (though the historical memory of Germany's hyperinflation gave us the Bundesbank with its constitutional mandate to control inflation with no reference to unemployment and ultimately gave us a European Central Bank blindly following deflationary policies). Extremely rapid increases in the price level are so destructive that they outweigh the second factor, which holds in normal times: inflation benefits debtors, who get to pay their debts with cheaper dollars; and it conversely harms creditors, who receive those cheaper dollars.

But who are the debtors and creditors? In general, of course, lenders are wealthier than borrowers. Broadly speaking, older people lend to younger people. Thus, moderate levels of inflation transfer wealth from richer to poorer and older to younger. They make it easier for the middle class to build up assets like home ownership, and more generally for the economy to expand to full employment.

As Greider argued and Baker agrees, the decision to target a particular inflation rate is a highly political one with Fed decisions making it generally more difficult to reach full employment or the bargaining power full employment would give to workers. While the Federal Reserve Board officially has a dual mandate to promote both employment and price stability (in contrast with most central banks which, Baker points out, are responsible for price stability alone), in practice it has done little to promote employment even in the current jobs crisis, whereas it has frequently moved to raise interest rates when unemployment rates were quite high. Baker, as did Greider before him, argues that it is crucial to bring the Fed under more democratic control. Baker concedes that institutional reform of the Fed is a long way off, but argues that in the meantime progressives need to step up public pressure on the Fed to do something about unemployment, comparable in volume to the non-reality-based screams from the Right that what little the Fed was doing would set off massive inflation.

What was news to me, though, is that the Fed refunds to the U.S. Treasury the interest it earns on its assets (primarily “government bonds and mortgage-backed securities”), to the tune of $80 billion in fiscal year 2010. Baker suggests that if, instead of selling these assets off as planned over the next 10 years, the Fed holds on to them, the Treasury will save about $600 billion in interest payments over the period. This is almost equal to the revenue that will be gained by letting the Bush tax cuts for the wealthiest 2% of Americans expire.

Baker's main point is quite sound: progressives need to pay a lot more attention to the Fed than they have, and they have to amplify the voices of the few economists who have called for the Fed to announce that it wants a higher rate of inflation than 2%. The stakes are too high, and the general lack of knowledge means that there is quite a bit of room for organizing to make progress if the information gap is closed.

Link to liveblog and video of yesterday's talk in Raleigh

2011-09-01T15:26:00.000-04:00

One of the sponsors of my talk yesterday, NC Policy Watch, put up a liveblog and video from the event. The volume is a little low, so you will need to crank it up on your computer after the 30-second ad at the beginning. You can find the presentation here.

Thanks to NC Policy Watch and the NC Budget and Tax Center for organizing this lively event.

Speaking in Raleigh on Wednesday

2011-08-30T23:36:00.000-04:00

Wednesday I'll be speaking at noon in Raleigh, NC, as part of North Carolina Policy Watch's "Crucial Conversations" series. This talk will focus on my book, Investment Incentives and the Global Competition for Capital, and emphasizing policies needed to control subsidies for investment. I would say that there are three main ones:

Transparency: Taxpayers have to be able to see what governments are spending to attract investment. North Carolina right now is suffering from a problem with a proposed investment seeking incentives, but there is no disclosure of the company or the nature of the project.

Anti-piracy rules: States need to prevent cities, and the federal government needs to prevent states, from giving subsidies to move an existing facility from elsewhere. See earlier posts on "job piracy."

Restrictions on incentives by prosperous areas: Keeping deep pockets jurisdictions entirely out of the bidding for investment helps channel new investment to poorer areas and reduces what poorer areas have to pay. Very ambitious, but I think it is an important long-run goal.

I'll be back to regular posting by Thursday.

$11 million per job? Is that even possible?

2011-08-29T02:32:00.000-04:00

The Las Vegas Review Journal reports that Sempra Energy received $55 million in federal tax credits and state incentives to build its 48-megawatt Copper Mountain Solar Facility in Boulder City, Nevada. This is the largest facility of its kind in the country. While construction of the project required 350 people, both sources say that only 5 permanent jobs were created. That would mean each job cost taxpayers $11 million! I've never heard of a cost per job that high in all the time I've been writing about subsidies. A couple of million per job for data centers, I've heard of that. But over $10 million per job? I'm flabbergasted.

I wonder if that is even possible. How do you run a 48MW power plant with 5 people? I understand that it just sits there collecting the desert sun during the daytime. Doesn't it need 24-hour security? Doesn't it need maintenance from time to time? Couldn't some of the 775,000 solar panels suffer damage sometime? Even a few more jobs would quickly lower the per-job cost.

Consider this a plea for help. The energy industry is not my specialty. So, if anyone knows more about solar plants, or Nevada, or especially this project, please let me know what a reasonable level of employment would be, either in the comments of by email. Thanks in advance.

Is Rick Perry Trying to Make Himself Unelectable?

2011-08-28T15:50:00.001-04:00

A couple of great catches this weekend from Think Progress. Rick Perry is campaigning in Iowa calling Social Security a “Ponzi scheme” and saying he “'hasn't backed off' anything in his book,” which is, after all, out less than a year. It's refreshing to see a politician overrule his handlers, but Perry is making it completely clear how far out of the mainstream he is on Social Security.

The fact is, even if we do nothing, after the Social Security Trust Fund is exhausted in 2036, Social Security payroll taxes at their current level will provide about 75% of projected benefits through 2085, according to the 2011 Trustees Report. Getting rid of the income cap on Social Security taxes, currently $106,800, would eliminate the currently projected shortfall, according to the Congressional Research Service (see Table 2 in report). Either way, that's not a Ponzi scheme.

Perry's position makes him highly vulnerable in the 2012 election. If he makes it to the general election, even though the economy will still be doing poorly come November, President Obama will be able to truthfully tell middle-class voters, “Governor Perry wants to get rid of your Social Security.” Since, according to a Pew poll conducted in June, 60% of Americans say it is more important to maintain Social Security and Medicare benefits than to cut the deficit, this argument would be quite harmful to Perry.

What's more, Perry's position is likely to be a liability in the Republican primaries. The same poll showed that a plurality of Republicans, 47% to 44%, favors keeping benefits as they are rather than reducing the deficit. It will be interesting to see if any of the other Republican candidates challenge him on this issue.

Of course, there are lots of polls out there, but I think it's a pretty robust finding that the middle class realizes that it benefits from Social Security. The position of Social Security as a third rail of American politics remains consistent, and Rick Perry will find that out in either the primaries or the general election.