May 4, 2008, 9:30 a.m.
Letting Business Pay for (and Profit from)
Economic Growth
Believe it or not, I'm always looking for and celebrating what is, by my standards, good news from the world of business.
My critiques go primarily to business' requests for, and government's willing compliance in providing, taxpayer subsidies of various kinds to for-profit enterprises. See, e.g., Nicholas Johnson, "Golden Rules & Revolutions: A Series - VIII," April 19, 2008 (with links to the prior seven).
I think "the marketplace," "free private enterprise," and "competition" is what business does best -- not joint enterprises with government. I also think government can do best what governments have traditionally done, governments in this country and elsewhere: roads, schools, parks and other public lands, libraries, police and fire protection, and so forth. It's only the combination I find self-defeating and problematical -- especially for the taxpayers who end up picking up the bill. See, e.g., Nicholas Johnson, "Time to Learn From What Works," Iowa City Press-Citizen, January 20, 2006; Nicholas Johnson, "Growing Iowa's Economy the Right Way," April 27, 2008.
But because some people characterize anyone who criticizes TIFs and other subsidies for business as "anti-business" I try to make a point of noting with praise those business successes that do not involve "corporate welfare."
About half-way through Nicholas Johnson, "Subsidizing the Sheraton" in "Bush and Giveaways to Sheraton," April 25, 2008, I note: "For example, although I haven't yet investigated the program and its payback rates, I'm intrigued by another story in this morning's paper, Kathryn Fiegen, "City Loans Help businesses Get Started; Number of Applications for program Has Almost Tripled," Iowa City Press-Citizen, April 25, 2008, p. A1.
Even more self-reliant, Jay Honeck, owner of the Alexis Park Inn, posted a comment on the Press-Citizen's Web site explaining how he and his wife have built their business in Iowa City in the face of government subsidies for his competitors but not for him. Needless to say, he's not enthusiastic about the prospect of the City of Iowa City transferring taxpayers' money to the Sheriton -- as the title of his piece suggests: "Please, not again!" Here are some excerpts:
In 2002 my wife and I bought the old Alexis Park Inn next to Iowa City's airport. It was in bad shape, with a checkered reputation, but we knew a diamond in the rough when we saw it.
Since then we have spent these last six years remodeling and refining our service, until we now have the top-rated hotel in Iowa City. We have seen double-digit increases in both revenue and occupancy throughout that period -- a result few would have predicted.
The lesson? Offer a great lodging experience at a fair price, and you will prosper.
During those six years we never applied for nor accepted government assistance. We did not incur any debt, choosing to fund the renovations with the cash flow from the business. This is MUCH harder to do, and takes much longer -- but, in the end, it's the only way to assure success in a business with razor-thin margins.
Posted by: jjhoneck on Wed Apr 23, 2008 6:23 pm and reproduced in Nicholas Johnson, "Call the Cops, Robbery in Progress," April 24, 2008.
And so it is this morning that I note another story of business success without government subsidy: The Gazette's report of what a couple of venture capitalists have done: George C. Ford, "$4 million for Iowa City business; Venture capitalists invest in soybean products firm," The Gazette, May 3, 2008, p. B12.
"Venture capital" and "venture capitalists," as the names imply, involve the provision of "capital" (money) for "ventures" (new business ideas) by investors who are in the business of taking risks -- risks beyond those that banks are willing to take -- knowing they'll lose on many, but more than make up for those losses with the enormous returns that sometimes come their way from the winners. Venture capitalists were much of the driving force behind the 1990s' "dot com boom" in the Silicon Valley of California, where many are still located. (If you'd like a quick overview of more information, "Venture Capital," Wickipedia.org, is fairly good.)
The Gazette's story begins,
Two venture capital firms are making a $4 million investment in a 4-year-old Eastern Iowa agribusiness.
Asoyia of Iowa City grows and processes 1 percent ultra low linolenic soybeans to produce specialty trans-fat-free oils.
St. Louis-based Prolog Ventures, the lead investor, was joined by Life Science Partners of Boston.
Now let me make clear at the outset that all I know about this business transaction is literally "what I read in the papers." There could already, or also, be tax breaks and government subsidies involved that the story doesn't mention. The venture capitalists could be taking a disproportionately and unfairly large share of the ownership in exchange for their investment. Without knowing more I'm not prepared to be giving this deal any awards.
I just cite it as an example of venture capital.
And why?
Because some of those who advocate intertwining government and business with tax breaks, subsidies, TIFs, earmarks and other deals make the argument that unless "we" bribe the company in question ("we" meaning the taxpayers of Iowa, or Johnson County, or Iowa City) no businesses will ever come here; they'll just take some other place's bribe and go elsewhere. "Everybody else is doing it, so we have to do it, too." The free private enterprise system will collapse without corporate welfare from government.
Well, I don't believe it, and from this story it would appear that Prolog Ventures and Life Science Partners don't believe it either.
There are lots of other ways than corporate welfare to get a business economy up and running: The entrepreneurs. Investment from their family and friends. Shareholders. Bank and other loans.
And, if even all of those sources are not enough there are always the venture capitalists, looking for an opportunity to invest in "the next big thing" -- in this case, a $4 million investment in "ultra low linolenic soybeans to produce specialty trans-fat-free oils."
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April 24, 2008, 7:15 a.m.
The Iowa City Mayor, Regenia Bailey, writes:
"As many of you know, the new owners of the Sheraton have approached the economic development committee to talk about support for their efforts to revitalize the property. I have heard from many of you already and I know that many are simply philosophically opposed to city’s providing financial support to corporations.
"I’d be interested in hearing from you about how we should approach our dropping market share in visitors in downtown Iowa City, which I would contend is linked to the poor condition of the hotel. As you may have read in the downtown market study, visitors are significant to the retail businesses in our downtown. I see a City interest here in capturing more of the conference and visitor market. I know from my work on the Iowa City/Coralville Convention and Visitors Bureau board that we are bringing fewer conferences to downtown Iowa City. I am interested in your thoughts about how we should approach this challenge."
Regenia Bailey, "Economic Development and the Sheraton downtown," Update From Regenia Bailey (e-mail list), April 23, 2008.
How insulting! "[M]any are simply philosophically opposed to city’s providing financial support to corporations," indeed! How dismissive! How presumptuous that the only possible position of right-thinking citizens and officials is to assume that there is, of course, "a City interest here in capturing more of the conference and visitor market" -- or any other market. A "city" interest, yes; but a "City" (i.e., a governmental) interest? No.
Having made her assumptions, she moves immediately to "how we should approach this challenge" -- that is, what would be the best way for City government to get involved, the most effective way to turn taxpayers' money over to for-profit businesses.
Since she says she is "interested in your thoughts," here are mine:
I don't see the "challenge" as one of how we can get more taxpayer money transferred to for-profit enterprises, or how the City can best go about improving their "markets." No, the "challenge," in my view, is how we can get elected officials to concentrate on doing well those things that are within the appropriate role of government -- when it is so much more fun and prestigious for them to be able to play "business" with our money and their corporate playmates.
You want to know how best to expand "markets"? Leave the "challenge" to the free market -- individual local businesses, the Downtown Merchants Association, the Chamber of Commerce, the Iowa City/Coralville Convention and Visitors Bureau (on whose board you've served).
As for the philosophical opposition, it is you, Madam Mayor, who ought to be philosophically opposed, not I. The philosophical opposition, the ideological opposition, ought to come from those who champion the virtues of business, competition, and the free private enterprise system; those who want to "cut taxes" for the rich and then the programs for the poor; those who want to "privatize" everything from schools to prisons. Those are the folks who ought to rise up in righteous ideological indignation and philosophical opposition at the first whisper of "corporate welfare."
My objections are far more practical than philosophical.
In my open letter to the Iowa City City Council the last time a whiff of a TIF was in the air, I listed 11 categories of reasons (each of which could contain many examples) why corporate welfare in general, and TIFs in particular, simply don't make practical, good business, sense -- both anywhere at any time, and especially in Iowa City, Iowa. Nicholas Johnson, "Courage, Councilors," Iowa City Press-Citizen, October 3, 2007, p. A12.
Those categories included such things as opportunity costs, numerous past failures of various kinds, inability to verify "need," lack of transparency, officials' poor business judgment, better alternatives -- read the column if you're interested in more.
Ironically -- because I never anticipated a proposal as totally bonkers and corrupt as the Sheraton proposal to come along so quickly -- I've just concluded an 8-part series about the role of money and lobbyists in politics and government generally (which, if you're interested in this stuff, you might also enjoy taking a look at). See Nicholas Johnson, "Golden Rules & Revolutions: A Series - VIII," April 19, 2008 (the last in the series, but with links to the prior seven).
Looks like I'm going to have to get back into the subject, for this scandalous Sheraton proposal is only one of many current corporate welfare disasters -- as recent reports are documenting.
But for today, as a concession to the limits on the time you have to read and I have to write, I'm going to let a local business person speak for me.
One of my categories of concern about corporate welfare in that Press-Citizen column, but that I did not itemize above, read as follows:
"Corporate welfare tilts the playing field. It’s fundamentally unfair to ask businesses to compete against a favored few funded by government. It upsets a smoothly working free market to no one’s benefit – except the lucky recipient."
It's always been a mystery to me why more members of the business community don't speak up about this -- especially when their own business is dealt a blow as a result of the corporate welfare that keeps dropping to their competitors' bottom line.
The Press-Citizen ran a story about this potential theft on Wednesday. Kathryn Fiegen, "Sheraton's case presented to city; Economic committee asks for more information on TIF," Iowa City Press-Citizen, April 23, 2008.
As of this morning [April 24] that story had 23 posted comments from readers -- virtually all very negative (regarding the proposal, not Ms. Fiegen's story).
State29, with his usual insight, has contributed a blog entry of his own to the dialog which you will want to read. State29, "Er, Then Why Did You Buy It?" April 23, 2008. It is that blog entry which brought the following comment to my attention.
Indeed, State29 raises an issue that deserves much more media attention. Why did the new corporation buy this property? Sadly, I can only see two possibilities.
(1) The principals are really dumb business people (unlikely, given their very successful multi-billion-dollar operation), who bought a property they knew would lose money without taxpayers' contributions, without getting an assurance from the City in advance that the money would be forthcoming -- in which case they have assumed potential liability in a shareholders' suit.
Or, (2) They did get prior assurances from the pro-TIF wing of the City Council that TIFs and other benefits could be delivered, before those applications had run through channels -- in which case Iowa City voters have equally serious complaints about their City Council.
Here, then, is the take of a real, honest-to-God, successful and unsubsidized business person on the subject of corporate welfare:
_______________
Please, not again!
Posted by: jjhoneck on Wed Apr 23, 2008 6:23 pm
In 2002 my wife and I bought the old Alexis Park Inn next to Iowa City's airport. It was in bad shape, with a checkered reputation, but we knew a diamond in the rough when we saw it.
Since then we have spent these last six years remodeling and refining our service, until we now have the top-rated hotel in Iowa City. We have seen double-digit increases in both revenue and occupancy throughout that period -- a result few would have predicted.
The lesson? Offer a great lodging experience at a fair price, and you will prosper.
During those six years we never applied for nor accepted government assistance. We did not incur any debt, choosing to fund the renovations with the cash flow from the business. This is MUCH harder to do, and takes much longer -- but, in the end, it's the only way to assure success in a business with razor-thin margins.
Also during those six years we have sat idly by as our own Gummint became our #1 competitor in the market. You probably don't know it, but since 2002 YOU, the taxpayer, have funded the addition of over 500 hotel rooms to this already saturated hotel market, including:
- The Marriott, built with $60+ million in taxpayer dollars
- The Riverside Casino, built by an unholy alliance of gummint and organized crime
- The Hotel Vetro, built with yet another TIF
Despite this, we have prospered, while the Sheraton has declined. Why?
The Sheraton is a bloated, top-heavy chain that provides little value for what it charges. Most of the rate they charge goes to national advertising campaigns, with little devoted to the local property.
And what IS spent locally is spent in the wrong ways. When the original Sheraton franchisee bought the property (which was then a ramshackle Holiday Inn) their main focus was on remodeling the lobby, gobbing marble and brass everywhere. The end result was that Sheraton guests paid $179/night for a tiny Holiday Inn room, and a really nice lobby. In addition, sleep was optional, because for that absurd rate they were forced to listen to the ped mall cacophony all night long.
In contrast, our smallest suite is bigger than their largest suite, costs just $70 bucks a night -- and includes a delivered breakfast in the morning.
There is no mystery behind their failure. If you don't provide good value for the dollar, you will fail. It's "Economics 101".
Now we're supposed to believe that the Sheraton's new owners need corporate welfare to survive? The purchase price has already been adjusted dramatically downward to take into account the diminished value of this property. There is NO WAY they (or any other private business, for that matter) should receive city aid.
I suggest that the Sheraton owners follow our example. Roll up their sleeves, get to work, one floor at a time, one room at a time, and fix up their OWN business. Who knows, in 5 or 6 years they might have a nice place down there.
Comment entered on Kathryn Fiegen, "Sheraton's case presented to city; Economic committee asks for more information on TIF," Iowa City Press-Citizen, April 23, 2008.
Watch this space -- there will, undoubtedly, be more to come on this story.
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