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Saturday, February 22, 2020

PBS "Frontline" episode analyzes Amazon, including HQ2

The PBS series "Frontline" on February 18 broadcast a nearly two-hour investigation of Amazon, "Amazon Empire: The Rise and Reign of Jeff Bezos." There were many important points to the story.

Naturally, there was coverage of the HQ2 auction, with an interview of Good Jobs First executive director Greg LeRoy, who also spoke on Amazon's early benefit of avoiding sales tax, something brick and mortar stores can't do. In fact, Amazon did not collect sales tax nationwide until 2017.

Labor relations were another important focus of the show. Amazon is infamously anti-union, one of the issues that came up after the company announced it would put half of HQ2 in New York City. Blowback on that score was one reason Amazon pulled out of that investment. Speedup and related safety issues (i.e., that it was difficult to "make quota" in the warehouse without cutting safety corners) are one more source of contention the story focused on. The company also chose to use a delivery truck that was too small for Department of Transportation regulations to apply to it, despite having thousands of drivers and their traffic accidents. The thing is, while we can easily find out how many vehicle accidents drivers for FedEx and UPS have, there is no comparable source of information for Amazon due to its avoidance of regulation.

Needless to say, Amazon has used tax haven subsidiaries to avoid paying taxes. According to Think Progress in 2012, all of these subsidiaries were in Luxembourg. Its report said the company's tax arrangements under so-called "check-the-box" provisions of the U.S. tax code saved it $700 million in U.S. taxes up to that point. The European Union pursued tax agreements between Amazon and Luxembourg as an illegal state aid, ordering the company to repay €250 million ($294 million) to Luxembourg in 2017.

Finally, "Frontline" covers the question of whether Facebook is a monopoly or has market power. Hilariously -- and tellingly -- company executives never use the phrase "market share," only coming as close as "market segment share." But the show interviewed numerous people who recounted what happened when Amazon suddenly stopped carrying their products, and many people were afraid to come on the show because of fear of retribution from Amazon. I recommend it highly.

Thursday, February 20, 2020

Wow! Boeing asks for end of Washington State subsidies UPDATED X 2

The New York Times is reporting that Boeing Corporation has requested that the state of Washington stop providing it with tax breaks that the World Trade Organization (WTO) has on multiple occasions ruled to be an illegal subsidy under the Agreement on Subsidies and Countervailing Measures. On February 19, State Senator Marko Liias and co-sponsors introduced a bill at the company's request to end these subsidies.

Of course, Boeing's move did not come from the goodness of the company's heart. It represents part of its maneuvering in its WTO war with Airbus. 16 years ago, the United States challenged Airbus' EU subsidies at the WTO and the European Union fired right back with a complaint against Boeing's subsidies from the state and federal government. Both won as plaintiffs and lost as defendants. (The same was true for Canada and Brazil, which alleged illegal export subsidies to Embraer and Bombardier regional jets.) As I noted over six years ago, while the federal government had eliminated its subsidies to Boeing through NASA and the Department of Defense, the state and local subsidies were continuing merrily along. Indeed, the WTO Appellate Body affirmed this again last year (h/t NYT), with the state subsidies valued at $100 million per year.

As a result, the company wants to clean its slate in order to help the United States press its case against Airbus and the unresolved issues there with EU subsidies. (Note that in the WTO, only countries have standing to file complaints; companies cannot do so.) Airbus received billions of dollars worth of subsidized loans in so-called "launch aid." This is quite an amazing dispute: Not only has it lasted ever since the World Trade Organization came into being in 1995, but a settlement to the dispute was supposed to be part of the agreements creating the WTO.

The bill is expected to pass in the current legislative session, which ends March 12. Thus, thanks to the European Union and the World Trade Organization, Washington taxpayers will save $100 million a year going forward.

Update: CNBC reports that the tax break saved Boeing $200 million in 2018, double the amount mentioned above.

Update 2: My colleague Kasia Tarczynska at Good Jobs First reminds me that Boeing also receives subsidies in Missouri and South Carolina. This led me back to the WTO's report on U.S. compliance as modified by the Appellate Body. While the dispute, for whatever reason, did not include Missouri subsidies, it also covered a variety of subsidies beyond Washington state, including Industrial Revenue Bonds (IRBs) from Wichita, Kansas, and 11 subsides that comprised the South Carolina package. If I have this correct, the Dispute Panel found that the United States had not removed the state and local subsidies in Washington, while the Appellate Body added that only some of the subsidies in South Carolina were in violation of the rules, and it was unclear if Wichita's IRBs constituted a "specific subsidy" that could be sanctioned. It is possible, therefore, that Boeing may have some more cleaning up to do to get to the blank slate it wants to have when it presses against Airbus subsidies.

Wednesday, February 12, 2020

The dictatorship is here

Under cover of the New Hampshire primary, on February 11, 2020, the illegitimate Trump regime's Attorney General, William Barr, put an exclamation point on the corruption of the Justice Department by throwing out the DOJ's sentencing recommendation for Roger Stone less than 24 hours after it had been filed. Meanwhile, Trump himself says out loud that there should be further retribution against Lt. Col. Alexander Vindman for testifying before the House impeachment inquiry and today claimed in a tweet that former Special Counsel Robert Mueller lied to Congress.

It was already clear this was happening when the Southern District of New York (the once "Sovereign District of New York") did not indict Rudy Giuliani despite all the evidence of his connections to the indicted Lev Parnas and Igor Fruman, and an endless stream of leaks and speculation that his indictment was days away. Now it's crystal clear: Trump associates will have their crimes minimized and eventually erased, and the DOJ will harass Trump's many perceived enemies.

It's hard for me to say something coherent about all this. Since the 2016 election, politics for me has been alternately paralyzingly depressing and rage-inducing. Yesterday, fear was added to that equation. When I graduated from college almost 42 years ago, I envisioned our country becoming a better place to live 40 years hence, fairer and more democratic than ever. Instead, as I say in my tagline, things have gotten worse for the middle class over the entire time period, and I certainly never expected that democracy would be collapsing in this and so many other countries around the world. Only the 2018 blue wave gives me any hope.

But make no mistake about it. The rule of law has ceased to exist in the United States, and we are by no means guaranteed that we will have free and fair elections in November. Trump has already been impeached for his efforts to cheat in the election, and those efforts continue because Republican politicians have sold their souls to the devil. Or Putin. Thus, we face a very concentrated 9-month fight.

In an oddly appropriate line from Harry Potter, Sir Cadogan tells the trio, "Be of stout heart, the worst is yet to come!" There is no doubt in my mind that this is true for us today. There is no time for paralysis in the next nine months. We have to remember, with Greta Thunberg, "No one is too small to make a difference." My voice alone is small, but I still have to raise it. Everyone else, with voices small and large, must raise theirs, too. We don't know the extent of the dirty tricks coming, but we will have to fight them. Democracy is a precondition to improving the lives of everyday people, and we've got to fight for it now.

Friday, August 2, 2019

First-ever binding end to a border war: Missouri-Kansas UPDATED

Kansas Governor Laura Kelly has just signed an executive order that prohibits state subsidies being used to move existing Missouri firms in four Missouri counties to three Kansas counties, which together make up the Kansas City metropolitan area. Unlike previous voluntary no-raiding deals, such as NY-NJ-CT, Council of Great Lakes Governors, and even Australia's Interstate Investment Cooperation Agreement, this is not a voluntary agreement, but one with the force of law, a first in the country's history.

The binding nature of the agreement comes from the fact that both states have legally bound themselves. In June (h/t New York Times), the Missouri legislature passed and the Governor signed into law restrictions on using state subsidy funds (such as Missouri Works) from being used to attract companies operating in three counties in Kansas in the Kansas City metro area. The law stipulated, however, that this would not go into effect unless Kansas passed similar binding regulations on its state subsidies (Promoting Employment Across Kansas, or PEAK) being used to attract firms on the Missouri side of the metro area. Today's action by Kansas' Kelly meets the stipulations of the Missouri law.

Kansas and Missouri have thus joined the European Union as the only areas with legally binding no-raiding rules, anywhere in the world. Of course, the EU's provisions, based in the Guidelines for Regional Aid, cover the entire territory, whereas the Kansas-Missouri ban only applies in the Kansas City metropolitan area. However, since that's where almost all the job piracy between the two states takes place, the two states' action is truly historic.

The two states made a previous attempt at a binding agreement in 2014-16: Missouri passed a similar law to this year's in 2014, but Kansas' last-minute law just before a 2016 deadline in the Missouri law precipitated a stalemate, and no new deal was made until this year.

It should be remembered that an agreement of this type has been advocated for by a number of companies in the region, notably Hallmark and the Hall Family Foundation. Their work uncovered the hundreds of millions of dollars that had gone into the border war and led to pressure being put on both state governments to end the madness.

Monday, June 24, 2019

New article in Shelterforce highlights EU state aid rules

Greg LeRoy and I have written an article at Shelterforce explaining the basics of the European Union's rules governing subsidies, or "state aid" in EU-speak. As the article is ungated, and regular readers will remember much of the detail, I will not quote it here. Suffice it to say that the continuing reverberations of Amazon's HQ2 project have opened space to shine a brighter light on economic development subsidies.

In addition, Tim Bartik of the Upjohn Institute has a series of thoughtful tweets commenting on our article. His one reservation with the EU approach appears to be that even with the scaling down of the maximum subsidy allowed for large projects, the amount allowable might still be too high. If I'm not reading too much into his comments, it seems he would favor an absolute dollar cap on subsidies for the largest projects. He also admits in his counterfactual analysis of Foxconn in Wisconsin that the Racine/Kenosha area wouldn't be eligible for the highest level of incentives under the EU rules, so his scenario of a $1.7 billion subsidy being possible isn't fully accurate. In fact, it looks to me that Kenosha and Racine counties are just slightly below the national average for income per capita, and certainly not less than 75% of the average, the key figure that would make an EU region able to have even a 25% regional aid maximum.* The next highest aid maximum allowed in the European Union is 15%, and 34% of that (the scaling factor for investment over 100 million euros) is just 5.1%. Thus, a $10 billion Foxconn project would be eligible at most for a tad over $510 million in subsidies, not $1.7 billion.

I'd love to hear your take on our article.

* More technically, a per capita GDP below 75% of the EU average is required for designation as a "107(3)(a) area," named for the treaty paragraph it is listed in. See Regional Aid Guidelines for 2014-2020, paragraph 150. 25% is the lowest aid maximum in a 107(3)(a) area, while 15% is the highest aid maximum in a 107(3)(c) area, available to regions between 75% and 100% of the EU average, plus a few exceptional situations such as very low population density.

Friday, February 15, 2019

Amazon defeated in New York UPDATED

In the biggest ever defeat for a subsidized project in history, Amazon announced February 14th that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine's Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale. Not only did Amazon conduct an exploitative public auction for the supposedly single HQ2 facility, it furthered the impression that it was engaging in rent-seeking by its refusal to discuss alternatives with New York officials, by its absolute insistence on opposing a union for its workers, and by its sudden though not unexpected cancellation announcement. Activists scorched the firm, too, for the fact that for the second year running, Amazon will pay 0 in federal income tax despite earning $11.2 billion in profits in 2018 and $5.6 billion in 2017.

This is not to be confused with Foxconn, which is looking more and more like an economic development failure. There, it appears that the company will not be able to provide the investment and benefits it promised in Wisconsin. With Amazon, what we have is a case of the company being unwilling to continue the political battle to obtain its $3+ billion in incentives. While Amazon is by far the largest project ever defeated, such defeats are not unprecedented. I participated in two successful campaigns in the late 1990s and early 2000s against abusive tax increment financing (TIF) projects in the St. Louis suburbs of Olivette and O'Fallon, but these were on the order of $40 or $50 million, not $3 billion. Alas, I was also on the losing side of an exceptionally bitter battle against a TIF-funded mall in Hazelwood, Missouri, which still hurts to think about. The residents lost their homes to eminent domain, the city administration was high-handed and manipulative, and the new mall contributed substantially to the death of at least two nearby malls, part of the $2 billion retail subsidy merry-go-round during 1990-2007 documented by the East-West Gateway Council of Governments.

In addition, as Richard Florida reports at Citylab and Good Job First points out at length, the victory has also energized reformers around the country searching for a solution to the problem of corporate bidding wars. I myself have received inquiries from multiple elected officials' offices about the European Union's systematic control of investment incentives, and I know of other efforts to make the shocking subsidy and perhaps even more shocking victory against it into a national teachable moment. For the first time in the over 20 years I have been fighting wasteful corporate subsidies, which is to say the vast majority of them, this is the first time it feels like it's possible that we could really see reform take place -- though not without a political battle royal. Buckle up!

Monday, February 11, 2019

Electrolux closing Memphis plant; Economic development malpractice leaves Tennesse holding the bag

On January 31, Electrolux announced (h/t Alan Freeman, that it would be closing its new (2012) factory in Memphis, Tennessee, by the end of 2020. This facility, you may recall, was a subsidized relocation from L'Assomption, Quebec (a Montreal suburb) that had an aid intensity of at least 99%! Yes, Tennessee state and local governments gave Electrolux a free factory ($188.3 million at present value in subsidies) while allowing it to get rid of its union, cut 60 jobs, and save over $4 per hour in wages on the jobs they kept.

As if all that weren't bad enough, the state of Tennessee agreed not to put clawback provisions into the contract with Electrolux, although the state was already requiring such clauses in contracts with major companies like Volkswagen in Chattanooga. That piece of economic development malpractice has now come back to bite the governments involved where it hurts. Not only does the contract specifically prevent the state from getting its money back, state and local governments guaranteed loans connected with the project, the payments for which will last until 2036. According to the Commercial Appeal's article, state government is on the hook for $48.5 million in loans, while Memphis and Shelby County governments must pay off a further $28.0 million.

While Electrolux committed to employing 1,240 people in order to receive the subsidies, its peak employment appears to have been the 1,100 who were employed in 2017. Now, just two years later, the company employs only 530 in Memphis, a figure that has been stable for about a year, supplemented only by overtime and temporary workers, both of which have now disappeared.

The fate of the Memphis facility is to be consolidated into another Electrolux plant in Springfield, Tennessee, in a transformation that will add no jobs in Springfield because of increased automation. According to a story in the Canadian Press (paywalled behind the Nexis database), Electrolux plans to invest $250 million to centralize all its U.S. cooking production at the Springfield facility.

A final twist in the Memphis story is that in 2016 Electrolux workers formed a local union of the International Brotherhood of Electrical Workers. Union business manager Paul Shaffer says he was "assured" by the company that the closure was not related to the decision to unionize. Color me skeptical, but thanks to our old friend information asymmetry, we'll probably never know. But the timeline is: 2016, unionization; 2017, 1,100 workers; 2018, 530 workers; 2019, closure announcement. Yes, I'm still skeptical.

I've been telling people for years that we need to explicitly include corporate rent-seeking into models of site-location decisions. Both Investment Incentives: Growing Use, Uncertain Benefits, Uneven Controls (2007: download here from the first link) and Investment Incentives and the Global Competition for Capital (Palgrave, 2011) make this case strongly. How else can we interpret Electrolux's behavior, squeezing every last dollar out of desperate governments near the height of the Great Recession, and demanding no clawbacks, except as a manifestation of rent-seeking? It's time to revise site-location theory to reflect this.

And in my standard EU comparison, let me point out that an aid intensity (=subsidy/investment) of 99% is not allowable anywhere in the European Union, where the maximum aid intensity allowable is only 50%, and that only in the poorest regions of the Union, such as Bulgaria (and that only on the first €50 million of investment; with a maximum of only 25% on the next €50 million of investment, and a maximum of 17% on any investment increment over €100 million). People were saying it was a bad deal when it was announced in 2011, as pointed out in these pages and in the great series the Commercial Appeal produced at that time. We were right, far more than we wished.

Cross-posted at Angry Bear.