Wednesday, June 06, 2012

Big Boxes, Little Bookstores and Taxpayers

June 6, 2012, 3:15 p.m.

This blog entry became the source research and links for an op ed column ("Maybe Taxpayers Should Buy Wal-Mart a Gift Shop") published by the Iowa City Press-Citizen, June 11, 2012, and embedded in "E-Commerce Challenges Businesses, Governments, Taxpayers," June 11, 2012.

We'll Leave the Prairie Lights on For You

Internal Links:
First, the basics: Capitalism, Socialism and Fascism.
Next, Today's Corporatism Stories.
A TIF Gone Bad: Last Resort.
Bookies for Bookstores.
City Council's Opposition to Citizen Participation.
The Ever-Changing Traditional and Electronic Markets.
Where Will It Stop?

There's so much transfer of taxpayers' money going to for-profit businesses in this morning's [June 6] news that I'd say I'm speechless -- but for the fact those who know me wouldn't believe it. And they'd be right, as you're about to see.

First, the basics: Capitalism, Socialism and Fascism.

(1) Capitalism. An economic, for-profit venture or institution owned by one individual, or a group of shareholders, is an illustration of capitalism. Such money as it may need to get started comes from the owner, investors, bank loans, venture capitalists, family members and friends -- not taxpayers. If the business plan works as intended, those with a stake can become rich, and sometimes very rich. If it doesn't they can lose their investment, and sometimes a very large investment.

(2) Socialism. Facilities and programs traditionally created and operated by government can be characterized as "socialist." Examples include police and fire protection, public schools, libraries, parks, roads and bridges. In Iowa City it also includes the provision of drinking water, collection of trash, and maintenance of the smouldering landfill.

(3) Fascism, or corporatism. When Italy's Benito Mussolini did it during World War II, the intertwining of for-profit enterprises with government was called fascism. Today it is more commonly referred to as corporatism. It can take the form of government grants, low-interest loans, subsidies, earmarks, tax breaks -- including, locally, the grant of TIFs by the City Councils of Iowa City and Coralville.

Corporatism is what we have today, without any of us ever having voted for it, whether the government is in Washington, Des Moines, or Iowa City.

As an aside, given these definitions a healthcare delivery system funded by insurance premiums paid to for-profit insurance companies, and largely administered by those companies, delivering medical services with well-compensated private doctors -- a system pilloried by opponents as "Obama-care" -- is scarcely the socialism opponents allege it to be. You may or may not think it a good plan, but it isn't "socialism." Depending on the details, the preference of the rest of the industrialized world, "universal, single-payer, healthcare," often could be fairly characterized as a socialist system.

Next, today's corporatism stories.

There are two disturbing aspects to them.

(1) They embody all the risks (for taxpayers) and unfairness (for the recipients' unfunded competitors) of corporatism. Officials use the money of non-consenting taxpayers to enrich the profits of for-profit owners. ("You can keep all the profits; my taxpayers will cover your losses.")

(2) We are now beginning to witness a new phenomenon: public officials' overt, candid antagonism toward some efforts to democratize this process.

A TIF Gone Bad: Last Resort.

An all-too-common story of another TIF gone bad is spread across the front page of this morning's Gazette. Orlan Love, "Last Resort: Sheriff’s sale closes book on failed Clayton County resort; Project near McGregor ending in financial loss for some in area," The Gazette, June 6, 2012, p. A1:
A June 19 sheriff’s sale will likely end the costly and contentious River Buff Resorts economic development saga.

The $138 million planned resort complex . . . was to have been an upscale tourist attraction consisting of a hotel, water park, golf course and condominium and single family housing. . . .

The prospect of taxpayer-funded incentives — initially through a state Vision Iowa grant and later through a county tax increment financing district — encouraged developers to undertake the project.

After Vision Iowa announced its intention to issue a $3.5 million grant to the project, [Tim] Mason and his colleagues — local farmers Harlan Dettman, Greg Koether and Shawn Kleinow — researched the backgrounds of the developers, Conrad Seymour, then of La Crosse, Wis., and James Daughtry, then of La Quinta, Calif., . . .. Their research uncovered widespread dissatisfaction with their refurbishing of a downtown building in La Crosse and their development of a golfcourse/residential project in Necedah, Wis. . . .

The developers then persuaded the Clayton County supervisors to establish a tax increment financing district that was to have provided the source of payments for a $20 million tax-exempt urban renewal revenue bond to be issued to Daughtry. . . .

Kevin Lambert, who runs an appraisal business in Portage, Wis., said he wrote off “a five-figure loss” several years ago for unpaid work he did on the [Necedah] project.

“Everyone was gung ho for water parks” at the time. “They believed people would come if you built it, but that was not necessarily so,” said Lambert, who analyzed a feasibility study commissioned by the developers. . . .

Necedah Village Administrator Roger Herried said the tax value of the projects in the TIF district — a golf course, assisted living units and residential lots — is about a third of the $12 million needed to cash flow.

Herried said the underperforming TIF district has strained village finances, forcing it to refinance its debt under a state law passed specifically to aid communities like Necedah.
Clayton County, Necedah, and their taxpayers were not the only ones to bear the losses. In addition to the county and community, losses from this venture were sustained by the State of Iowa ("Vision Iowa"), the Iowa Department of Natural Resources, banks, contractors, suppliers, consultants, and others.

Thus, the transfer of taxpayers' money to these "developers" is a classic case study of a number of the categories of reasons why TIFs are not a good idea: the lack of ability and incentive of public officials to evaluate for-profit ventures (since none of their personal money is involved), the inability of anyone to predict with accuracy either the genuine need for the money or the prospects for a project's success, the fact that they so often simply don't work, the cascading losses that can fall on others than just the taxpayers of the granting agency, and the unfairness for the recipient's capitalist competitors deprived of public funding. For more, see "Sampling of Prior TIF Op Ed Columns and Blog Entries" and especially the listing of those categories in "The True Price of TIFs," October 1, 2012.

Bookies for Bookstores.

Meanwhile, "we got trouble, right here in River City, with a capital T and that stands for taxes" (with apologies to Meredith Wilson's "Music Man").

The Iowa City City Council -- or at least three members, leapfrogging over their colleagues -- have ruled the City (or more precisely and worse, its City Manager) can take your money and mine and go into the local, independent bookstore business -- gambling like bookies for bookstores with other peoples' money. Although it's not even a bookstore venture really. It's more like a cafe and a gift shop. Mitchell Schmidt, "City recommends $27,500 in funds to Prairie Lights; Aid for renovations also mentions possible loan for the bookstore," Iowa City Press-Citizen, June 4, 2012, p. A3 ("City officials recommended offering the bookstore $27,500 from the fund with the option of a low-interest 1 percent loan of up to $15,000 . . .. The request for funds [includes] . . . an expansion and addition to menu items including a small catering component at the store’s The Times Club cafe and modifying the building’s display areas to include gifts and toys similar to museum quality."). [Photo credit: Christina Janiczek.]

Lee Hermiston, "City to give Prairie Lights $27,500 development grant; Portion of money will let bookstore create eBook kiosk," Iowa City Press-Citizen, June 6, 2012, p. A3:
Iowa City Council members Matt Hayek, Michelle Payne and Susan Mims unanimously approved a $27,500 grant to Prairie Lights at a meeting of the Economic Development Committee on Tuesday morning.

However, rather than taking the recommendation to the full council, the committee took advantage of a recent rule change allowing City Manager Tom Markus to exercise his discretionary authority and bypass the council. . . .

The three councilors said they were in favor of approving the grant, expressing an interest in educating the public about the intricacies of eCommerce and how local businesses can be involved.

“I’m comfortable with you using your discretion,” Mims told Markus during the meeting. “It will speed things up a little bit.”
There are at least three reasons why those three felt they probably could keep this under the radar.

(1) The lucky beneficiary of this largesse is Iowa City's beloved landmark, Prairie Lights. (The bookstore is beloved by no one more than by me. But this blog entry is not about the contribution of this institution to Iowa City and its university. It's about the propriety, and process, of handing over taxpayers' money to what is, after all, a for-profit business.)

(2) Iowa City has a pretension to progressivism, volunteerism, citizens community involvement, culture and intellectualism (as home to one of the nation's top research universities and its designation as a "City of Literature"). However, as we discovered yesterday [election day, June 5] not everyone is registered to vote, and among those who are 90 percent choose not to bother. So it's unlikely these three City Council members will ever have to pay a political price for their generosity. ("Turnout in Tuesday’s primary was slightly less than average in Johnson County. As of press time Tuesday, 9.5 percent of voters had cast their ballots, a total of 7,635 votes." Tara Bannow, "Weipert defeats Slockett; Slockett concedes after serving as county auditor for 35 years," Iowa City Press-Citizen, June 6, 2012, p. A1.)

(3) What with Queen Elizabeth's "Jubilee" in London, high school sports, and the local elections in Iowa City, there's plenty to divert the voters' attention, even if there was anyone who both cared and would have otherwise been paying attention.

So the three Council members may very well be right in their belief that their gift will be appreciated by Prairie Lights' owner, but unknown to those whose money it was.

City Council's Opposition to Citizen Participation.

Why did I say, above, that "We are now beginning to witness a new phenomenon: public officials' overt, candid antagonism toward some efforts to democratize this process"?

For this we must reflect back on the last City Council TIF brouhaha. See "TIF Towers," April 9, 2012.

Now there's a new development in that giveaway. Local citizens want to be involved in this process, and are circulating a petition to make that possible. Mitchell Schmidt, "Petition asks for public vote on TIF funds; Group spurred by city giving Moen $2.5M in TIF money for new tower," Iowa City Press-Citizen, June 2, 2012, p. A1.

So how has the City Council responded to this request from its constituents to participate in the decisions regarding the distribution of their money to local for-profit businesses? With an utter, total, rebuff -- indeed, one that will end up costing the city's taxpayers an additional $300,000! Read on.
The cost of the deal between the city and Moen is estimated to be closer to $3.7 million when interest is added. The city plans to sell what are known as general obligation bonds to cover the amount.

General obligation bonds are subject to a reverse referendum, which is the goal of the petition. Kevin O’Malley, Iowa City’s finance director, said Monday he has been instructed to look into financing the deal instead with TIF revenue bonds.

A petition is powerless against those bonds. But they have higher interest rates than general obligation bonds, and O’Malley said an initial estimate has it as being $300,000 more expensive. . . .

[First assistant city attorney Sarah] Holecek said that if the petition is successful, the council would have two choices: call an election on the matter or issue the other type of bonds. She said voiding the agreement was not an option because of the city was already contractual bound to the project.

Council member Susan Mims said her preference would be for changing the financing if the petition is successful.
Gregg Hennigan, "Petition Seeks Vote on $2.5 Million Deal for Downtown Iowa City Building," The Gazette, June 5, 2012, p. A2. And see, Mitchell Schmidt, "City may have few options for funding Moen tower; Uncertain whether contract obligates city to fund project in event of possible election," Iowa City Press-Citizen, June 8, 2012, p. A1.

In other words, the Council will tolerate citizen participation only so long as it is ineffective. We can circulate petitions only if we don't get enough signatures. However, if there's a risk citizens might be able to accomplish something the Council opposes, it will create an end-around to nullify citizen participation.

It's one thing to shut out direct democracy, such as petitioning for a right to vote. It may be better than a poke in the eye with a sharp stick, but not by much. But in the case of the gift to Prairie Lights the three Santas don't even like representative democracy -- they don't even want their fellow members of the City Council to be able to participate.

"The Ever-Changing Traditional and Electronic Markets."

Although the Prairie Lights proposal appears to involve a rather traditional cafe and gift shop, "Wendy Ford, economic development coordinator, said the request stems from Prairie Lights officials’ attempt to adapt to the ever-changing traditional and electronic book market. 'The book market is changing,' Ford said. . . ." Mitchell Schmidt, "City recommends $27,500 in funds to Prairie Lights; Aid for renovations also mentions possible loan for the bookstore," Iowa City Press-Citizen, June 4, 2012, p. A3.

This is apparently a reference to "a special sales counter to devote a staff member to assist customers in e-book sales." Ibid.

There are a number of things wrong with this.

(1) For starters, from the looks of Prairie Lights' Web site, it would appear the store is already in the e-books business. Prairie Lights Books. Thus, the grant is not start-up money for a new electronic venture. It is simply a gift. Especially is this so given the owner's acknowledgement that "there’s no overhead” for this part of the business. Lee Hermiston, "City to give Prairie Lights $27,500 development grant; Portion of money will let bookstore create eBook kiosk," Iowa City Press-Citizen, June 6, 2012, p. A3.

(2) These are the kinds of expenses, or investments, that most business owners would assume to be their responsibility, rather than something to be paid for by local taxpayers. They would assume the business judgments behind them are theirs to make as well -- not the judgments of City officials.

(3) Thirty years ago, when sent by our State Department, and others, to foreign countries to provide advice on adapting electronics in general, and media in particular, to the coming 21st Century, I came upon an insight. The respect accorded one's ideas and opinions is in direct relation to the square of the distance one is from home. Thus, I was well regarded in Kazakhstan -- exactly half way around the Planet from Iowa City. And yet when I offered to provide comparable counsel for free to the local Chamber of Commerce members on how best to prepare for their coming online competition there was no interest whatsoever.

So, from that perspective, I'm pleased to see both City Council members and Prairie Lights owners addressing the implications for local business of cyberspace commerce.

(4) One of the greatest challenges facing any business person is watching out for the competitive innovation that will put them out of business -- and then preparing and responding to it before it arrives. Horse-drawn carriages had to respond to the "horse-less carriages," Swiss watch makers to digital watches, slide rule manufacturers to pocket calculators, mainframe computers to desktops, cell phones to smart phones -- the examples are endless.

Bookstores are now in that position. How quickly, creatively and effectively they respond is the measure of how and whether they will survive as anything similar to 20th Century bookstores. That's a part of what it means to be "in business." That's a part of the risk involved in any business. In a capitalist economy, these risks fall upon the owners of for-profit businesses -- just as the profits, and sometimes very large profits, are theirs to enjoy. In the corporatist economy favored by the City Council these risks becomes something for taxpayers to bear, while the profits remain with the owners.

(5) Authors, literary agents, publishers, distributors, and bookstores -- especially independent local bookstores -- have been hard hit by the arrival of online sales of both conventional (hardback and paperback) and digital "books," not to mention the ease of no-cost, online, self-publishing (plus distribution and sales) of conventional books.

(6) Wal-Mart, and other alternatives to traditional "bookstores," have dealt bookstores another blow. ("The growing clout of Wal-Mart and the other big discount chains -- they now often account for more than 50 percent of the sales of a best-selling album, more than 40 percent for a best-selling book, and more than 60 percent for a best-selling DVD -- has bent American popular culture toward the tastes of their relatively traditionalist customers." David D. Kirkpatrick, "Shaping Cultural Tastes at Big Retail Chains," New York Times, May 18, 2003.)

(7) Today much of the knowledge and entertainment the world offers is available, often for free and near-instantaneously, on one's laptop, netbook, iPad, smart phone, or other electronic device. (That's how that quote, and citation, immediately above were obtained.) A researcher may still end up in a library (school, public, or one's own) or bookstore before the research is done, but it is no longer always essential that they do so, let alone that they start there.

(8) There's less discretionary time available for reading, and reading must now compete for what there is not only with over-the-air television stations, cable and satellite channels, but with video game and Facebook time, the 50,000 radio stations available on smart phones, the world's newspapers, and other Web surfing.

(9) Clearly, bookstores have a challenge in their search for a business plan that works in the digital age. But adding cafes and gift shops is more of an alternative to the bookstore business than a business plan for staying in the 21st Century version of selling what books used to be and are today. It's like pharmacists -- a profession also challenged by online sales and Wal-Mart pharmacies -- deciding to start selling groceries as well as more conventional drugstore products. It may help their bottom line, but they're not filling any more prescriptions.

Want one example out of many of a little 21st Century creative thought for staying in the book business? Consider something that "can, potentially, give them [independent, local bookstores] a huge virtual inventory so they can have as many books as Amazon, all in a little bookstore . . . a new thing for the bookstore to do: not just sell books, but actually create books." Stacy A. Anderson, "The Antidote to e-Books," Associated Press, International Herald Tribune, June 12, 2012.

(10) Buying e-books online (from, say, Amazon) is not just a matter of a new format for books, and a cost saving. It's also the convenience of lying in bed at night and buying and installing on a Kindle, in less than a minute, a new novel you'd meant to read.

Since Prairie Lights is already selling e-books, does it really need that "special sales counter to devote a staff member to assist customers in e-book sales"? How many potential Prairie Lights' customers with the equipment, inclination, experience, and ability to read e-books need "assistance" in doing so? And for those who do, why are they going to travel all the way downtown, find a parking place, and walk to Prairie Lights, to get that advice? Isn't the advice just as likely to be available somewhere, somehow, on the Internet? And wasn't the convenience of doing all of this from home at least a part of the motivation for their interest in the e-books in the first place?

Where Will It Stop?

Every business, every retail outlet in the greater Iowa City-Coralville area, has been affected by, and must respond to, "the ever-changing traditional and electronic markets" -- the opportunities as well as the challenges they offer.

If the citizens of Iowa City aren't troubled by their City Council practicing corporatism (instead of insisting on capitalism and practicing socialism), which seems to be the case, and they want to address what local businesses can do about these changing markets, they're going to have their hands full.

It remains to be seen whether the Press-Citizen's new business plan (charging for online content) will turn out to be Gannett's salvation, or a mere handgun wound in the foot. One thing's sure, the paper's challenge can't be met with a tea room and gift shop. "Frequently Asked Questions, May 31, 2012.

Would the City Council be willing to make a gift to the Press-Citizen? Isn't a local newspaper at least as important to the community as an additional cafe and gift shop, even if they are in a bookstore?

Among the local businesses hardest hit by the changing markets are our so-called big box stores: Wal-Mart, Best Buy, Sears, and others. Miguel Bustillo, "Best Buy Forced to Rethink Big Box; As Shopper Habits Change in a Mobile World, Electronics Retailer Pares Stores, Tests Smaller Formats," Wall Street Journal, March 30, 2012, p. B1 ("Consumers armed with smartphones are changing the fundamental relationship between shopper and retailer. The new ease of mobile shopping and price comparison is accelerating the trend of 'showrooming'—where shoppers come in to stores to see an item but buy it elsewhere. . . . [E]lectronics are expensive enough to make price comparisons worthwhile, and because electronics are easy to order online."); "Walmart vs. Amazon: Can brick-and-mortar stores hang onto shoppers?; Not even the world's largest retailer is safe from Amazon, as more consumers turn to the web to buy everything from diapers to televisions," The Week, April 12, 2012.

If the City Council thinks it worthwhile to fund the creation of additional cafes and gift shops in support of the city's economy, isn't it at least ten times more important to provide taxpayer funding to such significant anchor stores in our metropolitan market area as Wal-Mart and Best Buy? Wouldn't losing them result in much greater economic and job loss than the lack of an additional coffee shop?

How about it City Council? Can I count on you to save my Big Boxes as well as my Little Bookstores -- or are you truly just picking favorites?

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