Monday, September 15, 2008

Taxpayer Rescue

September 15, 2008, 5:15 a.m.
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The Way Free Private Enterprise is Supposed to Work:
Thinking and Acting Globally and Locally

Looks like the taxpayers aren't going to be picking up the losses for the 158-year-old Lehman Brothers, now on its way to bankruptcy. It's not like the Bush Administration (and many Democratic senators and members of Congress) wouldn't like to send us the bill. After all, they had no qualms about having us pay for the JP Morgan Chase takeover of Bear Stearns in March, thanks to the Federal Reserve, and the $200 million or more they asked our grandchildren pay off in order to keep Fannie Mae and Freddie Mac struggling along, since all they otherwise would have had was ownership of half the homes in America, worth over $5 trillion.

Much was made this past week of the government's refusal to have us taxpayers pick up the cost of the U.S. auto industry management's persistent errors of economic and market judgment. The companies wanted some $25 billion from us. But then I read somewhere that the Administration had already given them $25 billion; this was just an additional request for the same amount. (Also in the financial news: the Bank of America has purchased Merrill Lynch (also in trouble and worth $100 billion last year) for $50 billion; and AIG is looking around for someone with $40 billion in spare pocket change to help them out.)

Corporate operations have become a "heads we win, tails you lose" proposition of "socialism for the rich and free private enterprise for the poor" in this country. When a company makes a profit it gets to keep it -- indeed, more and more of it, as tax rates for corporations and the rich have been slashed from what they once were. On the other hand, if it has losses that are big enough, the shareholders can just ask the taxpayers to cover those losses. It's a sweet deal.

So now there seems to be at least one example the Bush Administration can point to when this standard practice was not followed: Lehman Brothers, after reporting a half-billion of income has conceded a $2.8 billion loss one quarter followed by a $3.9 billion loss the next, and without a taxpayer bailout is headed for bankruptcy.

Why the switch? Who knows? Maybe someone in Washington has looked at the books and discovered we're $53 trillion in the hole (debt, plus unfunded future obligations) and decided we just couldn't afford it. Maybe there's a Republican fear of the remote possibility that the electorate will be treated to some discussion of issues other than lipstick on animals before they go to vote -- say, the economy -- in which case it would be handy for the Republican team to be able to cite at least one example of a time when the free private enterprisers didn't send the taxpayers the bill for their losses.

Anyhow, it's lucky Hong Kong's Hang Seng and Tokyo's Nikkei are closed today for national holidays. London's FTSE and Frankfurt's DAX are going to end their trading days down at least 2-3% and it would have been worse if the Asian markets were open. (India's SENSEX index was down over 5%.) Based on the Dow Jones and S&P 500 futures this morning, it looks like the U.S. markets will be down about 3% today.

Meanwhile, a comparable if short-lived burst of sanity has occurred right here in River City, and been memorialized in a Press-Citizen editorial. Editorial, "Center to Open Without Public Assistance," Iowa City Press-Citizen, September 15, 2008, p. A9.

Of course, in a way it's kind of sad. It's like the headline, "Man Bites Dog." The extent to which our public officials let for-profit businesses stiff the taxpayers for start-up costs on the front end and their losses on the back end is so endemic to government these days that "Taxpayers Spared Cost of Starting New For-Profit Business" is news.

But the fact that it's rare doesn't mean it shouldn't be celebrated, and editorialized about.

I have often written of "why business subsidies don’t make sense for any city [and are] especially inappropriate for Iowa City." In one Press-Citizen op ed column I itemized some 11 categories of reasons why this was so. Nicholas Johnson, "Courage, Councilors," October 3, 2007.

Of course there are examples of for-profit companies that, with the generous assistance of taxpayers, have not later gone belly up, or left town, leaving the taxpayers holding the bag. But such examples do not come close to constituting a persuasive case why taxpayers should move their money to the bottom line of for-profit companies. To the best of my knowledge, no one has to this day ever taken on that column's itemization of categories and documented why all of them are wrong.

One of those categories was:

“Need” is impossible to know. Many projects will go ahead without subsidy. If tax breaks are available, of course entrepreneurs will say they won’t act without them. But how can we know when that’s just blackmail?
Today's Press-Citizen editorial involves a case study illustrating this very category:

We're glad that Mercy Hospital and a group of local surgeons have managed to find enough funding to build a new ambulatory surgical center in Iowa City's Northgate Plaza . . ..

But we're even more happy that the Iowa City Council didn't offer any tax incremental financing to help the development of the project. After all, the first question of determining whether a project deserves a TIF should be, "Can it succeed without public financing?" Since the answer in this case was clearly, "Yes," the city was right to deny the request eventually -- although it could have done so much earlier in the process.

Last year, investors for the surgeons' group and Mercy came to the city requesting a $600,000 TIF to help build their proposed 24,000-square-foot facility.
The point is not that we couldn't have known whether the doctors really needed the $600,000 or not. The point is, as I wrote last year, "If tax breaks are available, of course entrepreneurs will say they won’t act without them."

The point is that while I would contend that we can always know that taxpayer funding of for-profit businesses is inappropriate for all the reasons I've itemized, one of those reasons is that we can virtually never know whether more appropriate funding sources could and would be found if taxpayer money was not available.

The paper's editorial doesn't go that far. The editorial board expressly says, "As an editorial board, we've never viewed TIFs as the automatic four-letter word of economic development."

But it's entitled to this blog's "Hat's Off" journalism award anyway for the rest of its conclusion:

[T]the decision on whether to grant a TIF needs to be based on much more than a bottomline explanation on how it offers a win-win arrangement for both the city and the business. Otherwise the city risks granting businesses massive tax breaks for doing simply what their corporate officers and the current market would have them do anyway. . . .

We don't want the city to be hostile to new businesses or expansions . . .. But neither do we want the city to fork over cash every time someone shows there's a little profit to be made.
On behalf of my grandchildren and great grandchildren, I thank you Press-Citizen editorial board -- and, oh yes, you too Federal Reserve Board.

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