Amazon moves closer to breaking the bank with "HQ2"

Yesterday (Jan. 18), Amazon announced the 20 finalists for its "HQ2" project, that will supposedly create a second headquarters (why?) for the company somewhere in North America, most likely in the United States. With an alleged 50,000 jobs and $5 billion in investment, this development attracted 238 bids from cities and counties in the United States, Canada, and Mexico.

The finalists: Atlanta, Austin, Boston, Chicago, Columbus, Dallas, Denver, Indianapolis, Los Angeles, Miami, Montgomery County (MD), Nashville, New York, Newark, northern Virginia, Philadelphia, Pittsburgh, Raleigh, Toronto, and Washington.

The finalists will now be subject to months of unremitting pressure to give up as much as possible. It will not be pretty. Information asymmetry, capital mobility, and rent-seeking are the hallmarks of the site selection process. In the European Union a set of rules on subsidies limits this competition, whereas in the United States, it's the Wild West. This leads to much higher investment incentives being given in the United States than are given by EU Member States for similar projects even by the same company (AMD/Global Foundries, for example).

Interestingly enough, both the highest-known bid ($7 billion in Newark) and the lowest (0 in Toronto) are still under consideration. (Unfortunately, the other known 0 bid, by San Jose, was rejected.) I can think of scenarios where either might be chosen, but I can't get inside the mind of Jeff Bezos and other Amazon decision-makers. This is the heart of information asymmetry. So again, we have to wait and see what Amazon does. Will the company subject a smaller group of cities to still more torture? Stay tuned!

New book on investment incentives will help shape policies debates for years to come

This past week I received my chapter author's copy of a new book from Columbia University Press, Rethinking Investment Incentives: Trends and Policy Options. Based initially on the November 2013 conference on investment incentives at Columbia Law School, the contributors were put through their paces to upgrade their conference presentations into proper papers. The result is what Theodore Moran of Georgetown University calls in the Foreword "a who's-who of experts across this broad span of topics." He predicts, and I concur, that the work presented in this book will help drive policy discussions around the globe.

The book is divided into four parts. The first discusses theoretical debates on definitions and the effect of these incentives on (especially) foreign direct investment. The second section provides a global overview of the use of incentive incentives, both in major economies and in developing countries. Part III includes practical tools for ensuring program effectiveness as well as value for money. This includes a chapter on cost-benefit analysis, a methodology of which I am highly skeptical. As I have written before, if you end this analysis at the state (or city!) border, you miss many of the indirect job losses inflicted at competing companies by the addition of new subsidized competition. Indeed, according to economist Tim Bartik, very few subsidy programs have positive *national* effects, even if they have positive local effects that will be the only thing considered in the cost-benefit analysis.

Finally, the fourth part of the book considers ways to reduce the competitive use of investment incentives to attract investment. My chapter falls in this section, considering the control of subnational incentives in Australia, Canada, and the United States. (Spoiler: Most of the record is not pretty; Australia was an exception but the policy expired in 2011.) A variety of supranational regulatory efforts, including most notably that of the European Union, are considered in a chapter by Lise Johnson.

Have I teased you enough yet? This book is a must-have if you are interested in investment incentives and economic development; co-editors Ana Teresa Tavares-Lehmann (University of Porto, Portugal), Perrine Toledano, Lise Johnson, and Lisa Sachs (all of the Columbia Center for Sustainable Investment) are to be congratulated for the fine product.

U.S. Trails at Least 15 OECD Countries in Median Wealth

Via @exiledonline, I learned today (July 18) that Canadians are richer than Americans. This is rather surprising, since GDP per capita is higher in the U.S than in Canada.: $48,100 vs. $40,300 (at purchasing power parity or PPP), according to the CIA World Factbook. But in fact things are much worse than that, as 15 OECD countries (plus Singapore and Taiwan) have higher median wealth than the U.S. does. There may even be more, as the Credit Suisse report I discuss below does not give median wealth data for several countries with higher mean wealth than the U.S.

Most reporting has been based on a story that was run in the June 30th Globe and Mail claiming that average (mean) Canadian household wealth had reached $363,202 vs. just under $320,000 in the U.S. This is not a particularly informative statistic, however, since wealth is even more unevenly distributed than income, and income in the U.S. is already highly unequally distributed. What we really need is median net worth, i.e. the level at the exact middle of the net worth distribution in a country. G&M commenter "TJMone" picks up that point, receiving an answer from "porkbarrel pundit": a Credit Suisse report from October 2011 (via LSM Insurance), shows that the median net worth per adult in Canada was $89,014, compared to just $52,752 in the U.S. (all figures in U.S. dollars).

American reporting based on the study in the G&M did not start until 18 days later, when an article in U.S. News & World Report picked it up (Canadians are right: no one in the U.S. is paying attention to them). Moreover, no one picked up on the much better data in the Credit Suisse report until later in the day, when Dylan Matthews at Wonkblog wrote a great story on it (there are many high-quality comments, too). It turns out that lots of OECD countries, including economic basket cases Italy, Spain, and Ireland, have higher median wealth than we do. See the chart below:


Source: Dylan Matthews, based on data from Credit Suisse

It is mind boggling that median Australian net wealth per adult is four times that of the U.S., and Italy is three times as high. Ireland and Spain, meanwhile, are also higher despite having housing busts similar to that in the United States. What is going on here?

Part of the answer is more equal income distribution. According to the Credit Suisse report, mean wealth per adult is just shy of 5 times median wealth in the U.S., whereas in Canada it's a little less than a 3:1 ratio (see Table 7-1). Other countries with higher median but lower mean net worth per adult are Taiwan, Finland, Germany, Ireland, Israel, the Netherlands, New Zealand, and Spain. Australia has a higher mean net worth than the U.S., but its ratio of mean to median net worth per adult is less than 2:1.

Another part of the answer may be that in many other wealthy countries, households have less debt. If you remember Michael Moore's movie Sicko, in one scene he interviews an upper-middle class French family and asks them what debt they have. Their only significant debt is their mortgage, because they didn't have to take out loans to go to college. The Credit Suisse report finds this pattern (unfortunately, only mean debt, not median debt). Mean debt per adult (see Table 2-4) is $59,362 in 2011 for the United States, whereas for France it is $40,873, Germany $33,424, and Italy only $24,291. Of course, this isn't true of all countries: Ireland and Switzerland both have much higher mean debt per adult, but they also have about twice the median wealth per adult of the U.S.

This analysis is hardly exhaustive; I bet a good book could be written on the subject.

One final point: Matthews skewers the claim by Globe and Mail author Michael Adams (whose firm conducted the study discussed in his article) and later commenters on both sides of the border who accepted Adams' claim that this was a historical first. As he shows with U.S. and Canadian government data, Canada's median household net worth was significantly higher in 2004-5, before the crisis, than here in the U.S. Given the huge disparities between the United States and some of the other countries, it is likely that net worth per adult has been higher in a number of these countries for quite some time. These data reflect trends that have been developing for a long time, and are not purely driven by the economic crisis or by any single set of policies. But they make for sobering reading, and deserve more than the superficial analysis most of the U.S. press has given them so far. Bravo to Matthews for a great piece of analysis.

Cross-posted at Angry Bear.

Is Globalization Good for America's Middle Class? Part 1

In this blog, I have frequently documented economic trends that have been bad for the middle class: Declining real wages, steadily falling bang for the healthcare buck, stagnant educational attainment, the gigantic cost of tax havens, etc. With this post, I want to begin exploring one possible reason for the economic insecurity of the middle class, namely globalization. Today, we will look at who wins and who loses from international trade, one of the key elements of globalization.

In some circles, one is likely to see a variant of the claim that "everybody" is better off because of freer trade. Even according to the most mainstream economic theory, this is simply false. The workhorse theory for determining the distributional effects of trade (i.e., who wins and who loses) is called the Stolper-Samuelson Theorem, first enunciated in an article by Wolfgang Stolper and Paul Samuelson in 1941.

To understand this theory, you need to know that economists think about national economies in terms of the amount of land, labor, and capital they have compared to all other countries in the world. These "factors of production" can be in relatively high supply compared to the rest of the world, in which case they are referred to as "abundant," or in relatively low supply compared to the rest of the world, in which case we call them "scarce."

The theorem can be stated in quite simple terms, but its consequences are not at all simple: As trade expands, owners of abundant factors of production benefit, and owners of scarce factors of production are harmed. Here, "benefit" means their real income increases, while "harmed" means their real income decreases.

Remember, trade can expand for two main reasons. First technological innovations can reduce the cost of transportation, making it first possible, then cheaper, to send goods long distances. For example, political scientist Ronald Rogowski, in his great book Commerce and Coalitions shows how the introduction of the steamboat made it possible to export North American wheat to Western Europe, displacing wheat from Eastern Europe. Second, policy changes like the North American Free Trade Agreement (NAFTA) or the trade agreements embodying the World Trade Organization (WTO) reduce or eliminate costly barriers to trade and lead to its expansion.

The grain example helps show why trade creates winners and losers. The Midwest U.S. and Canadian Prairie provinces are a gigantic breadbasket made possible by low population density, which implies abundant land and scarce labor. Expanding trade gave these farmers new markets and higher incomes. In much more densely populated Europe, the reverse is true: labor is abundant and land is scarce. As a result, expanding trade in grains meant more import competition and lower income for European farmers..

Fast forward to today and we can ask what U.S. factor endowments are currently. As a rich country internationally, the United States is necessarily a capital abundant country. As a comparatively low population density country, it is land abundant but labor scarce. The answer is to our initial question is then quite clear: expanding trade is harmful to U.S. workers because imports of labor-intensive products and services from abroad create competition for American workers, reducing their real wages. As I have discussed before, U.S. real wages have remained below their peak for 39 straight years, just as the Stolper-Samuelson Theorem would predict.

What about all the cheap goods we now buy at Wal-Mart? It doesn't change this story at all, because the lower price of imported goods is already reflected in the inflation rate we use to calculate real wages.

Rogowski's book also argues that we can expect certain pattens of political coalitions to form, with the winners from trade on one side and the losers on the other. NAFTA illustrated this well, with capital and agriculture generally in favor of the agreement (minus a few small specialty agricultural products like oranges), while labor was strongly opposed. And of course, this only helps us understand economic reasons for support or opposition to trade agreements; for non-economic reasons such as the environment, we have to look elsewhere. Although beyond the scope of this post, Rogowski's analysis of the entire world through phases of rising and falling trade (i.e., the Great Depression) lends strong credence to his claims. You should definitely read his book sometime.

Economists are divided over how big this effect is. In the 1990s, when I first started teaching, the most common view of economists was that technological change was the driver increasing the premium for high skilled labor while reducing wages for low-skilled labor. Adrian Wood's 1994 book, North-South Trade, Employment, and Inequality, argued that trade was in fact the main culprit, (a good, ungated analysis is  Richard Freeman's "Are Your Wages Set in Beijing?"). Although this met with a lot of resistance at the time, Wood's view has gained a lot of traction among economists based on developments over the last 15 or so years. Paul Krugman, a particularly noteworthy example due to his Nobel prize, has gone from being a fanatic adherent of free trade to someone who sees trade as a big problem, though even today he is not quite willing to pull the plug on free trade.

One important point Rogowski makes (and Stolper and Samuelson did before him) is that the theory of comparative advantage tells us that the winners from trade gain more than the losers lose, which makes it possible in principle to compensate the losers and have everyone be better off. But he also argued that those who benefit economically from trade will see their political power increase, something that has certainly been borne out in the United States in the more than 20 years since his book was published. This makes it less likely that such compensation will occur, and we certainly haven't seen any policy in the U.S. that comes close to making everyone better off as a result of trade.

One small bit of comfort comes from Paul Krugman's book The Conscience of a Liberal (pp. 262-3). He provides us some reason to think that the Stolper-Samuelson Theorem isn't necessarily destiny, as he shows that the United State and Canada, two countries with the same factor endowments as each other, have distinctive differences in political outcomes, particularly with regard to unionization rates.

Overall, unfortunately, it looks like the answer to today's question is clear: freer trade has harmed, and is harming, the American middle class. But globalization is more than trade, and I will continue to analyze other elements of globalization in my next few posts.

Romney to Replace Obamacare with...Essentially Nothing

Tommy Christopher (via @rcooley123) at Mediaite has a good catch on Mitt Romney's health care proposals, from an interview Romney gave to Mark Halperin of Time magazine. Asked what would happen to people with pre-existing conditions after he were to repeal Obamacare, Romney said:

If people have been continuously insured, and then they decide to change jobs or change locations, they should not be denied coverage if they go to a new place or have to get a new policy. So people continuously insured should be able to get new insurance.

As Christopher points out, people who have been continuously insured already have this right, and have since 1996, under Title 1 of HIPAA. As he puts it, Romney "is selling you something you already owned." And lest you think maybe Romney just misspoke, you can see the very same words in his platform: "Prevent discrimination against individuals with pre-existing conditions who maintain continuous coverage." So, on the critical question of pre-existing conditions, Romney is offering precisely nothing.

That is hardly the end of Romney's useless ideas on health care. His platform says we should return control over health insurance to the states. In principle, this could be workable; after all, in Canada each province has its own health insurance plan. States are big enough entities to do this: if Prince Edward Island can have its own plan, so could Rhode Island. And there is diversity in the provincial plans: Quebec's covers prescription medicine, while Ontario's does not. But this only works because the federal government has strong conditions on what level of coverage the provinces can provide. Romney, on the other hand, says we should "Limit federal standards and requirements on both private insurance and Medicaid coverage." This is a sure recipe for bad health insurance regulation at the state level.

Another plank in his health care platform is to "Empower individuals and small businesses to form purchasing pools." This will not enable individuals or small businesses to have anywhere near as much bargaining power as the state insurance exchanges in the Affordable Care Act.

Romney also says we should turn Medicaid into a block grant, giving states more flexibility. As Aaron Carroll points out, states acquired a great deal of flexibility with Medicaid during the GW Bush Administration, but have not introduced any great innovations. Why Romney thinks that would change is anyone's guess.

And of course, what would a Republican health care proposal be without the usual references to tort reform, "innovation grants to explore non-litigation alternatives to dispute resolution" (tort reform again), allowing insurance to be sold against state lines (which would weaken state's ability to regulate; isn't that where Romney said authority should be?) and getting rid of the tax deduction for employer-provided health care?

So, instead of the Affordable Care Act, Romney promises to give us what we already have on pre-existing conditions, plus junk to give insurance companies even more control over the health care market than ever.

Job Flight from Canada Highlights U.S. Inequality and Low Wages

The fact that middle class living standards have been falling for decades is no secret. One way to put this in sharp relief, however, is through international comparisons. Alexander Eichler at the Huffington Post reports today that Caterpillar Inc. is demanding that its locomotive manufacturing workers in Canada take a 50% pay cut to bring them more in line with what its workers in Illinois make.

How is it that the Canadian Caterpillar workers get more than twice as much in wages and benefits as their Illinois counterparts when income per capita is lower in Canada than in the U.S.? According to the 2009 UN Human Development Report (Table M, p. 195), gross domestic product per capita in the U.S. in 2007 was $45,592 but only $40,329* in Canada. The first part of the answer is inequality. The same table shows that the U.S. has a Gini coefficient (an inequality measure in which 0 equals complete equality, and 100 when one person has all the income) of 40.8, compared with Canada's 32.6. The richest 10% of Americans make 15.9 times as much as the poorest 10%, while the figure in Canada is only 9.4 times as much.

The second part of the answer is unionization and union strength. As I noted in September, the U.S. has the fifth-lowest unionization rate of the 34 industrialized democracies in the Organization for Economic Cooperation and Development. Only 11.4% of the American workforce is organized, compared with 27.5% in Canada.

As Eichler points out, a third reason wages are often higher in Canada is that its unemployment rate is lower than the U.S. rate, 7.5% vs. 8.5%. Higher unemployment means lower bargaining power for workers.

Caterpillar is not an isolated example. As I discussed in September, Electrolux actually moved from the Montreal suburbs to Memphis, saving over $4 per hour by ditching its unionized workforce for right-to-work Tennessee, and getting a free factory in the bargain.

This comparison with Canada helps us see, from another angle, just how much pressure the middle class is under in this country. The fact that Canada is very similar to the U.S. economically suggests that it is not impossible to strengthen the union movement and hence, the middle class, here.


* Technical note: The comparison of GDP per capita is not adjusted for purchasing power parity. Companies have to pay their workers in actual U.S. dollars or Canadian dollars, so the adjustment is not appropriate for this comparison.

Job piracy in Canada, Australia, and the United States

As I mentioned in August, my article "Regulating Investment Attraction: Canada's Code of Conduct in Comparative Perspective," has just appeared in the September issue of the journal Canadian Public Policy.

Job piracy (using subsidies to induce the relocation of an existing facility) is a big problem in the United States. New York City and Kansas City have been subject to repeated raids by neighboring states, and a Good Jobs First study this summer documented extensive job piracy in the Cincinnati and Cleveland metropolitan areas. Two voluntary anti-poaching agreements among groups of states were complete failures.

In the early to mid-1990s, Canada was seeing large-scale job piracy as well. Crown Life Insurance moved 1200 jobs from Toronto to Regina, Saskatchewan, in 1991, receiving a C$250 million loan guarantee to do so. New Brunswick was handing out millions of dollars to call centers to relocate there, including C$11 million to get United Parcel Service to consolidate 870 jobs from three other provinces in Canada. With this background, British Columbia insisted that a ban on job piracy be placed in the 1994 Agreement on Internal Trade signed by the Canadian federal government, all 10 provinces, and the Yukon and Northwest Territories. Though there were other provisions in the Code of Conduct on Incentives, the piracy ban was the only one that was legally binding. But it turned out to be not binding enough.

The United Parcel Service subsidy was subject to a complaint by British Columbia against New Brunswick in 1995. But weak dispute resolution rules in the larger Agreement meant there was no true enforcement mechanism. New Brunswick suffered no consequences, although it eventually got out of the poaching game when Premier Frank McKenna retired. However, since 1995, there have been at least eight other instances where various provinces (Nova Scotia, Prince Edward Island, Quebec, and Ontario) all gave subsidies to companies to move existing operations. One of them, Clarke, Inc., has been featured for years on the website of Nova Scotia Business, Inc., even though it is a prima facie violation of the Code of Conduct. But without a complaint from Ontario, nothing can happen -- and Ontario tried to raid Nova Scotia unsuccessfully to obtain the headquarters of grocery chain Sobeys.

The Code of Conduct does not appear to have had much success. The best that can be said about it is that the relocations subsidized were much smaller than those of the 1990s. Clarke, at 95 jobs, was the largest; the others were significantly smaller than that. In the meantime, the Agreement on Internal Trade has strengthened its dispute resolution process to make violators subject to fines up to C$5 million. It seems possible that a large-scale subsidized relocation would provoke a complaint under the Code.

An interesting contrast is Australia, which has a voluntary anti-piracy agreement that includes five of the country's six states (Queensland is the non-participant). Besides banning job piracy, the Interstate Investment Cooperation Agreement also encourages states to consult with each other when a company tries to play them off against each other. Whereas the National Governors Association says U.S. states have the right to do this, in Australia the states really do consult with each other to reduce what I describe as an information asymmetry in bargaining between governments and companies. Even though there is no enforcement mechanism at all, there have only been a couple of violations since the Agreement was first adopted in 2003. The reason for its relative success seems to be that the five states' politicians genuinely believe that job piracy is bad policy, a view that has been promoted by a federal government research body, the Productivity Commission, for at least 15 years.

The lesson for the United States is that we should try to ban job piracy because it obviously has no benefit for the country as a whole. In the U.S., of course, we have a stronger dispute resolution process than Canada's Code of Conduct does: If Congress passed a law against interstate job piracy, it could be enforced in federal court. The problem is that too many state politicians don't agree that poaching is a bad policy; they need to be educated or replaced.

Coming Attraction: The Battle Against Job Piracy in Canada

I just got word that my article, “Regulating Investment Attraction: Canada's Code of Conduct on Incentives in a Comparative Context,” will appear next month in the journal Canadian Public Policy.

I will post a complete analysis then, but let me leave you with a teaser for now. In the US, we often see subsidies used to move existing jobs from one state to another, or even one city to another. Good Jobs First recently did an analysis of this problem in the Cleveland and Cincinnati metropolitan areas. I have also mentioned how both New York City and Kansas City have been targeted by neighboring states raiding successful companies there. This kind of poaching has no benefit for the country as a whole, yet states and cities continue to give up parts of their tax bases simply to rearrange the deck chairs.

In 1994, Canada's provincial and federal governments signed the Agreement on Internal Trade, creating freer trade among the provinces. The Commerce Clause of the US Constitution serves a similar function in this country. One provision of the Agreement, not explicitly in the Commerce Clause (though the case Cuno v. Daimler-Chrysler argued for such an interpretation), legally bans the provinces from giving subsidies to companies that are moving in from another province. The point of my article, which I researched as a Fulbright Scholar at Carleton University in Ottawa, was simply to determine whether this ban has worked in practice.

The short answer is no: I document at least eight subsidized relocations from one province to another since 1996, and one case where Nova Scotia had to pay a retention subsidy because Ontario was trying to poach the headquarters of the grocery chain Sobey's. The longer answer is “a little bit”: all the relocations were under 100 jobs, far smaller than the 1990s poaching incidents that had motivated the ban in the first place. The lesson for the United States is that if similar rules were in place and enforceable in US courts, they would work better than they do in Canada, where the enforcement mechanism is very weak.

In the course of my research, I also learned why some Canadians call Manitoba's capital, Winnipeg, “Winterpeg;” saw Paul Krugman give a speech to economic development officials in Edmonton; and went to West Edmonton Mall, the largest mall in North America, where I saw a casino, striking casino workers picketing inside the mall, and heard a word I won't let you use in the comments section broadcast on the mall's music system (in Green Day's “American Idiot”).