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Sunday, October 22, 2017

Now Amazon wants to break the bank

On Thursday (October 19), the first stage of the Amazon sweepstakes for a second headquarters, dubbed "HQ2," was completed as cities submitted their bids to the Internet giant. With a possible $5 billion investment and eventually 50,000 jobs at salaries over $100,000, this is one of the very best economic development projects to come along in a long time.

BUT IS IT?* I have a hard time understanding how this project even makes economic sense. Why does a company need two headquarters? Doesn't that defeat the whole idea of having a headquarters as a centralized coordination site? Dean Barber has gone so far to suggest that Amazon will "A/B test" the two headquarters: See which one does better, and close the other one (h/t Greg LeRoy). I can believe it, but as long-time readers know, this is an area where we're looking at the terrible information  asymmetry that bedevils governments in site selection bidding wars. In other words, we have no idea whether Amazon intends to close its existing headquarters in Seattle or close HQ2 if it doesn't work as well as the current headquarters. This is kind of an important point for assessing the impact of HQ2 on the United States as a whole. And then there's the effect that subsidizing Amazon will have on its competitors, which will reduce net job creation and net benefits for the country as a whole. On top of everything, unemployment is pretty low in most states, so why would they want to shell out billions of dollars for this project?

I'm not going to try to prognosticate the HQ2 location (I almost said "the winner," but there is a good chance of overbidding in a public auction with so many competitors), because there is no way to wave away the information asymmetry problem. I think we can be confident that it will be a place that is already a tech hub. CNN offers eight plausible contenders (Atlanta, Pittsburgh, Toronto, Dallas, Austin, Boston, San Jose, and Washington, DC), while the New York Times predicts Denver. Instead, I want to highlight some specific bids that caught my eye.

One of the good stories is Toronto. Both the city and the province of Ontario were quick off the mark to say that while they would certainly do things like facilitating land assembly, there would be no cash subsidies for Amazon. The city's application to the company emphasizes its abundance of tech talent. As a sign that this "no subsidies" talk is not empty, we can point to the announcement earlier this month that Ontario had secured a new investment from Thomson Reuters, adding 400 jobs over two years, scheduled to eventually grow to 1,500 jobs. This project received no financial support at all, only what provincial officials described as "concierge service" (h/t Carpentry of the Heart).

Another major city not getting involved in the bidding war is San Jose. Like Ontario officials, Mayor Sam Liccardo argues that talent availability is the key to attracting businesses. While this tells us nothing about incentives the state of California might provide, it is good to see two of the major potential sites taking an anti-subsidy position.

At the other end of the spectrum, New Jersey is offering $5 billion over 10 years, and Newark will provide another $2 billion over 20 years. This is crazy on a number of levels. First of all, it has a nominal aid intensity of 140%: New Jersey and Newark will pay all the costs of the project and give Amazon some more money on top of that. Second, this is 18 times bigger than the largest subsidy the state has given in the past ($390 million). (We saw the same situation with Nevada and Tesla, but that was only 13 times the state's formerly largest incentive package.) Whether the state is really capable of managing a deal of that size is doubtful; indeed, the $390 million American Dream retail/entertainment project has been under construction for more than 10 years. Third, while not all of the approximately 50 bids have yet been revealed, currently the second-highest bid is $500 million from Worcester, Massachusetts (state support is currently unknown), 1/14 the size of Newark's package. This is reminiscent of the disparity in bids between North Carolina and Virginia for a Dell manufacturing facility in 2004: $300 million (nominal) vs. $37 million! Fourth, and finally, this project requires the legislature to tear up the current geographic targeting of the state's Grow NJ subsidy fund, currently restricted to the four poorest cities in the state, Passaic, Paterson, Camden, and Trenton.

Now, we wait. Amazon does not plan to announce its decision until next year. There is plenty of time to announce a list of finalists and subject them to more pressure. I am going to guess that when all first-round bids are revealed, the number 2 bid will be over $1 billion; indeed, there may be several $1+ billion bids. This is going to get ugly before we're done.


*Bonus points if you recognize the literary allusion.

Friday, August 25, 2017

Reports of Obamacare's death are greatly exaggerated: All counties to be covered for 2018

Obamacare has now obtained an insurer for every county in the country, defying Republican claims that the program is collapsing. As reported by The Hill, "At one point or another over the past year, more than 80 counties have been at risk of having no ObamaCare insurer on the exchanges in 2018." On Thursday (Aug. 24), the last "bare" county, in Ohio, was covered by insurer CareSource. Insurance companies have until September 27 to sign contracts, so it is not yet guaranteed there will be no bare counties for 2018.

As you no doubt remember, Chicken Little Republicans have proclaimed the sky to be falling ever since the Patient Protection and Affordable Care Act was passed in 2010. We were subject to ridiculous predictions about "death panels," skyrocketing premiums, predictions of no fall in the uninsured, horror stories that weren't, and of course the ever-popular "job killing" meme.

Instead, three years of the ACA (Q4 2013 to Q4 2016) brought the uninsured rate for adults 18-64 down from 20.8% to 13.1% (but an increase to 14.2% in Q2 2017) while unemployment fell from 6.7% in December 2013 to 4.7% in December 2016 (and 4.3% in July 2017). In addition, personal bankruptcies fell from 1.5 million in 2010 to just 771,000 in 2016, according to Consumer Reports.

As the recent increase in the uninsured rate shows, the ACA is still vulnerable to sabotage by the Republicans. Given that the increase occurred disproportionately among younger adults, Gallup speculates that uncertainty about the consequences for disregarding the individual mandate may explain a large amount of the change. There remain several routes for sabotage to take place. At the same time, there is a bipartisan effort in the Senate to stabilize the individual marketplace, potentially with explicit funding for individual subsidies.

Constant vigilance!

h/t David Ayon

Thursday, August 10, 2017

Why subsidize protectionism motivated foreign investors?

The already infamous case of Foxconn in Wisconsin illustrates a dynamic we are likely to witness more before we are rid of the illegitimate Trump regime. One of the regime's hallmarks has been a set of unpredictable trade policies with a definite protectionist tilt. The United States was withdrawn from the Trans Pacific Partnership agreement on January 23. On May 19, the regime officially announced it would renegotiate the North American Free Trade Agreement (NAFTA).

If you're a company dependent on exports to the United States, these are worrisome developments. Given that the country had $2.7 trillion in imports and an overall trade deficit of $502.3 billion in 2016, there are quite a few companies dependent on exporting to the United States. Therefore, the environment is threatening for them at present.

The classic response, as I wrote before, is to protect access to the U.S. market by making your product in the United States. This is what foreign automakers did in the 1980s, in the face of so-called "voluntary export restraints" on Japanese cars. Being committed to a particular site means that a company's bargaining power with the host government is sharply reduced. However, thanks to U.S. federalism, all is not lost for a company that really needs to locate in the United States.

Since each state has access to large revenues and budgets, and because the U.S. Constitution has not been interpreted to mean that location incentives violate the Commerce Clause (read: Cuno v. Daimler-Chrysler), state and local governments are able to reward companies for doing something they would have done anyway: Come to the United States. Even in the Foxconn case, where the firm obviously wanted to be in House Speaker Paul Ryan's district, it created the illusion that it might go elsewhere, which was all it had to do to get Wisconsin to cough up an obscene $3+ billion subsidy. (We won't know how much in total until we find out the cost for local tax increment financing.)

How can this happen? Probably the two biggest reasons are that the company is mobile, especially when it hasn't committed any money yet, and that there is a tremendous information asymmetry working against governments. Lots more information is available on governments and their officials than is available about a company and its true preferences. Even when a corporation is strongly telegraphing its preferred site, you never can be 100% sure that site will be the winner, or that it will be the winner even if it gives no investment incentives. Corporations make up competing sites even when there aren't any (a site location consultant tells me he always recommends that; see Competing for Capital). They exploit their information advantage well. As a result, governments give them investment attraction subsidies and the average taxpayer pays for it.

How do we know that Foxconn is coming to the United States because it is worried about protectionism? Because it made no economic sense for Foxconn to build here otherwise. There are good reasons Foxconn makes all iPhones in China: land, labor, and just about everything else are way less expensive than in the United States, *and* provincial and municipal governments will give them generous location incentives to favor one over the other. You can't beat that with a stick. But you can beat it if market access is in question.

As long as U.S. protectionism remains ascendant, a growing number of foreign companies will follow Foxconn and hedge their bets to guarantee access to the U.S. market. Due to fiscal federalism, however, the potential advantages from foreign investment (which may not be that great, depending on job losses at existing competitors' facilities) will be diluted or even overwhelmed by the amount of subsidies the newcomers receive. State and local governments need to resist temptation -- to be more precise, we need to find a way politically to make them resist temptation.

H/t to Greg LeRoy for suggesting this article.

Cross-posted at Angry Bear.

Sunday, July 30, 2017

Foxconn cashes in for $3 billion plus - analysis

Foxconn hit the jackpot with Wisconsin on Wednesday, when CEO Terry Gou and Governor Scott Walker signed a memorandum of understanding for the company to invest $10 billion in southeastern Wisconsin in return for $3 billion in state subsidies and an undetermined amount of local incentives in the form of tax increment(al) financing (TIF).*

The basic outline of the deal, sent to me by John Haynes of the Milwaukee Journal-Sentinel, is pretty simple: Foxconn is required to invest $10 billion and employ 13,000 workers within six years at an average pay rate of $53,875 a year plus benefits. In return, the state will give Foxconn $1.5 billion in tax credits for the 13,000 new jobs, $1.35 in tax credits for the $10 billion investment, and $150 million in sales tax breaks on construction materials for the plant. The tax credits are refundable, so Foxconn will receive a check if it doesn't owe much or anything in state income tax in any given year. The state credits will total $200-$250 million a year for up to 15 years, or until Foxconn has received the entire $3 billion. All this must be approved by the state legislature by September 30. According to the state, if Foxconn does not create all the jobs or make the entire investment, it does not get the full subsidy.

In addition, the legislature must also amend the state's TIF law by lifting the 12% cap on the ratio of TIF'd property value to a municipality's total property value, and extending the allowable life of TIF bonds. Together, these would make larger TIFs and greater municipal debt possible. It is unclear exactly how much more this will add to the subsidy package, since a final site hasn't been chosen in the Kenosha-Racine area. But Kansas City has certainly managed to give hundreds of millions of TIF dollars to companies in the past, so a large local component to the incentives package is certainly possible.

Is this a good deal for Wisconsin? As the state's press release points out, it's better than the deals Boeing has gotten in Washington state, including a much lower cost per job -- but that's a pretty low bar. As I discussed last time, Foxconn wanted desperately to locate in the United States due to its fear of U.S. protectionism, so the country as a whole was actually in a very strong bargaining position. However, the possibility of a bidding war between different states negated this, even though the individual states (Wisconsin at 3.1%) had very low unemployment rates and thus greater bargaining power than otherwise. Without EU-style rules to restrict bidding wars, there was a high probability of Foxconn hitting the jackpot.

With EU-type rules, it would be impossible to give a $3 billion investment incentive, since $9.9 billion of the $10 billion would only be eligible for 34% of any region's maximum aid intensity. The maximum conceivable subsidy would be a little over $1 billion.** We might say this consideration is the high bar, but it's worth knowing what is already achievable with a different set of rules.

On a strict cost basis, if the deal works out as claimed, you still have a cost per job of $231,000 and an aid intensity of 30%. These would be normal numbers for an automobile assembly plant, but Foxconn will only be paying a tiny bit over the Wisconsin average wage, certainly less than auto assembly pays. So these are basically just average jobs getting a lot of money. Many average jobs, certainly, but there is a good argument that you have diminishing returns. The more jobs there are, the more pressure that gets put on schools and infrastructure as people move to southeast Wisconsin, and the greater the number of jobs that will likely go to Illinois residents (indeed, Greg LeRoy of Good Jobs First says Illinois is the biggest winner of this deal after Foxconn itself). So you really shouldn't be spending 10 times the incentive dollars for 10 times the jobs.

What seems worst to me is that not only did Foxconn definitely need to be in the United States, but it probably wanted to locate in the Congressional District of House Speaker Paul Ryan all along. This was a very short bidding war. Wisconsin municipal officials were only notified about two months ago, and we have seen no stories about competing bids, nothing about other governors making a pilgrimage to Asia. This seems like it was never much of a competition. If that's true, Wisconsin got taken to the cleaners. Even if there was a genuine competition, the deal was way too rich.



* In Wisconsin and a few other states, the program is known as tax incremental financing, but in most of the country, it is simply tax increment financing.

** According to EU rules, the maximum aid intensity of 50% of investment is only allowable in regions with less than 45% of EU average per capita income. These areas are unlikely to be the site of an advanced manufacturing facility. The next highest maximum is 35% (down from 40%, such as Dresden, Germany, which has quite a bit of high-level manufacturing, such as microchip fabrication), and 34% of that is 11.9%. 11.9% of $10 billion is obviously $1.19 billion, which is why I say the maximum conceivable subsidy is just over $1 billion, and $3 billion is simply impossible under these rules.

Cross-posted at Angry Bear.

Thursday, July 20, 2017

Foxconn aims to break the bank

While the head of the illegitimate Trump regime makes multiple headlines telling the New York Times that he is above the law, we have to remember that there are plenty of other issues of concern to the middle class. One of the most striking is the latest huge bidding war for a gigantic Foxconn manufacturing plant (h/t David Haynes), slated to employ a massive 10,000 workers.

The linked article interviews an American consultant based in Beijing, Einar Tangen, who says that Foxconn's standard procedure is to get as much incentives out of state and local governments as possible; indeed, he says, "You can expect Foxconn to get as close to zero cost as they can. They can do it because they bring so many jobs." Yes -- and no.

Yes, 10,000 jobs is a lot of jobs for a single U.S. investment project. But Foxconn has strong motivations to invest in the United States, most importantly the fear of protectionist trade policies that will keep their iPhones and other electronics out of the country. This mirrors the mid-1980s, when exactly the same fear spurred most Japanese automakers to build at least one assembly plant in the United States. If the company has to have a presence in the U.S. market, especially as competitors were doing during the 1980s, the firm does not actually have that strong a bargaining position vis-à-vis the United States.

The problem, just as in the 1980s, is that as long as individual states do not coordinate their bidding (as happens in the European Union), the dynamic of bidding wars will induce them to offer outrageously high location subsidies, sometimes even in excess of 100% of the cost of the investment. Individual states do not take into effect what happens in other states when they do their cost-benefit analyses of economic development projects. The fact that the new investment will directly or indirectly destroy jobs at competing facilities is of no concern to policymakers in, say, Wisconsin, who will not adjust their cost-per-job estimates to reflect this dynamic.

While the United States has a strong bargaining position, individual states bidding against each other do not have a strong bargaining position. Foxconn believes it *has* to come to the United States, but it does not have to locate its new manufacturing plant in Wisconsin. Nor does it have to put it in Michigan, another state apparently in the hunt for this factory. But we can see that there will be a bidding war with at least two states pursuing the facility, and it will drive up the cost of location subsidies spectacularly. Perhaps we'll see a new all-time record.

Oddly enough, even the states have a factor increasing their bargaining power, a low unemployment rate. In May 2017, Wisconsin's unemployment was down to 3.1%, while Michigan's was 4.2%. For Michigan, this represents a decline of 10.7 percentage points (14.9% to 4.2%) since the peak in July 2009. All other things equal, both states should be less desperate to get these jobs than they would have been in 2009.

Call me cynical, but I'll believe it when I see it for the states to refrain from a bidding war.

Friday, July 7, 2017

Republicans help pass Illinois budget over Rauner's veto

For the second time in as many months, legislative Republicans have turned on their Republican governor for his refusal to back tax increases to help balance the budget. Last month, supermajority Kansas Republicans revolted against Sam Brownback's six-year tax-cutting experiment, which brought the state persistent budget problems and two credit downgrades.

Tonight (July 6) enough Republicans joined with the majority House Democrats to override Bruce Rauner's veto of the Illinois budget (the Senate overrode on July 4 with one Republican vote), ending a two-year battle. Like Kansas, Illinois will now have tax increases, in this case on both the personal and corporate income tax, which are expected to raise $5 billion a year.

The budget also contains 5% budget cuts for most state agencies and a 10% cut to college education, according to the Chicago Tribune. Democrats had fought Rauner for two years over cuts and, as the Tribune reports, Rauner had refused to sign an income tax increase unless there was a property tax freeze and/or cuts to workers' compensation. Amazingly, the budget battle led to state universities receiving no state funding since January; colleges and universities are refunded in the new budget.

Like so many Republicans, Rauner simplistically blames all of Illinois' budget problems on Democrats and unions. His extreme policy proposals have been presented as the only way to tackle the budget for his entire term of office, and he refused to negotiate. As a result, key members of his own party abandoned him on absolute opposition to tax increases. We'll have to wait and see whether this mini-trend will spread to more states.

Tuesday, June 27, 2017

Senate healthcare bill costs 15 million their health insurance next year, 22 million by 2026

One consequence of electing the popular vote loser is that the official winners act as if they have a mandate for the most extreme version of their policies. Thus, we have proposed legislation, the misleadingly titled Better Care Reconciliation Act, that will not only roll back Obamacare's expansion of Medicaid, but impose further large cuts on the program in addition. In total, the Medicaid cuts will come to $772 billion through 2026.

As a result primarily of ending the individual mandate, the Congressional Budget Office (CBO) estimates that 15 million fewer people will be insured in 2018 than would be the case with current law. As healthier people remove themselves from the individual market, this will cause increases in insurance premiums and the likelihood of further collapse of the market. As Tierney Sneed points out, there will be some premium reductions in the individual market, but this will be due to the plans being much less generous and having higher out-of-pocket costs. Tellingly, the CBO report judges that low-income people will not buy insurance under these circumstances. As a result, by 2026 there will be 22 million fewer people without insurance.

On the revenue side, of course, the Republican bill cuts taxes on the rich by $541 billion.

It's hard to know where to begin. The chutzpah of such a gigantic transfer from the poor to the rich staggers the imagination. As with everything surrounding Trump, this is completely surreal.

The good news is that it's not a done deal. Three Republican Senators (Collins, Paul, and Heller), one more than McConnell can afford to lose, are currently opposed to the bill in the Senate. Republican governors who have expanded Medicaid (Sandoval of Nevada and Kasich of Ohio), plus Baker of Massachusetts (which expanded Medicaid under former Governor Deval Patrick) have also come out against the bill.

It's no secret, then, what to do. Keep the pressure on your Republican Senators. If there is no vote this week, you'll have the opportunity to see them over the July 4th recess as well. The stakes have never been higher.

Cross-posted at Angry Bear.