Alabama's Airbus Subsidy Eerily Reminiscent of Auto "Transplants"

The July 2 announcement that Airbus would begin assembly of its A-320 airliner in Mobile, Alabama, may be good for Alabama, but whether it's good for the country as a whole is dubious. Indeed, it most reminds me of the subsidized arrival of foreign auto "transplants" that helped undermine Detroit's Big 3 as well as the unionization of the auto industry.


The new $600 million facility is projected to create 1000 jobs. Initial reports put subsidies to the company as $158.5 million from the state and various local governments (thanks to @varnergreg for pointing out this article). Remember, though, that initial reports are more likely to underestimate subsidies than overestimate them, as in the case of Electrolux in Memphis. However, if this is remotely near accurate, Alabama got a much better deal for Airbus than did Washington state for the Boeing 787 Dreamliner, which was 220% of the investment and $1.65 million per job (according to my calculations for Investment Incentives and the Global Competition for Capital), more than 10 times the per job cost in Alabama.

Unfortunately, this development could repeat the example of the subsidization of foreign automakers that hastened the decline of Detroit's Big Three. According to economic geographer James Rubenstein (1992, Table 1.1), from 1979 to 1991 there was a 1 to 1 correspondence in the opening and closing of new automobile and truck assembly plants in the U.S. and Canada: 20 new ones were built, 20 old ones were closed. Every one of the new facilities received subsidies from state and local (or federal and provincial, in Canada) governments. Given that the automobile industry was in a position of overcapacity for much of that period, it is no surprise that new production simply displaced older production.

Will the same thing now happen in the aircraft industry? Globally, Airbus has been putting market share above profits since the early 2000s. With its current move to Alabama, CEO Fabrice Brégier said the company hoped to grow its U.S. market share for single-aisle planes (the A-320 competes mainly with the Boeing 737) from 17% to 50% over the next 20 years. If Airbus is successful, it would be bad for the 80,000+ employees in Boeing's Commercial Airplanes group.

Of course, there is growing global demand for airliners, especially in Asia. But China has already developed its own competitor in the single-aisle market and Airbus is building A-320s in Tianjin, China, making it unclear how much of the global growth can translate into increased U.S. employment.

As was the case with foreign automakers, this is a case where a market-seeking investment was clearly coming to the United States, but the competition for the facility allowed Airbus to extract rents through the site selection process. By repeating this process for projects large and small, state and local governments deprive themselves of as much as $70 billion per year in revenue, enough to hire all state and local employees laid off since the recession began in December 2007. At the same time, over the long haul, the process in the auto industry replaced well-paid unionized workers with less well-paid, non-union workers.  The prospect that this evolution could be repeated in the aircraft industry is a pretty depressing one, when all is said and done.

Cross-posted at Angry Bear.

What is Mitt Romney Hiding? UPDATED

Mitt Romney has so far released only one year of tax returns (2010), plus an estimate for 2011. This stands in stark contrast to his father, Michigan Governor George Romney, who released 12 years of tax returns when he began running for President in 1967. As his father said at the time, "One year could be a fluke." So the questions remain about what is in Romney's older returns.

Two stories this week and last have ratcheted up the pressure. One is a recent web exclusive for "The Last Word with Laurence O'Donnell" where David Cay Johnston has five questions for Romney that can only be answered with his tax returns. The other is a blockbuster story by Nicholas Shaxson (h/t TPM) in the new Vanity Fair on the shadowy world of Romney's tax havens. Together, they put a laser-like focus on the finances of the man who could become our 45th President.

Johnston is a well-known former New York Times reporter, Pulitzer Prize winner, and the author of the major books Perfectly Legal and Free Lunch. If you don't have time to watch his 3:45 video, here are the five questions:

"1. Did you buy any illegal or gray area tax shelters?
"2. Did an IRS audit ever uncover serious problems with any of your tax returns?
"3. Did you make use of offshore vehicles to defer, or avoid paying, federal income taxes?
"4. Did you take advantage of any tax strategies that the IRS did not uncover in audits?
"5. Did you fully tithe to the Church of Jesus Christ of Latter Day Saints every year and take a deduction on your tax return that shows that?"

These are important questions. We know that Governor Romney has had a Swiss bank account, as well as money in other tax havens like the Cayman Islands, Luxembourg, Bermuda, and Ireland. Romney's answer to any question about his taxes has basically been, "Trust me." But the guy's running for President, for Pete's sake. He owes us more than that.

Shaxson, a researcher for the Tax Justice Network and author of the book Treasure Islands, asks us to consider the possibility that maybe not everything Romney has done tax-wise has been  legal. He opens with a story told by a former Bain employee about how Romney encouraged him to lie to get secret information on competitors. There is, of course, the fact that Romney has funds parked in numerous tax havens and the fact that his supposedly "blind" trust invested in a business started by Romney's son Tagg, and the fact that he has $102 million in his IRA despite a contribution limit of $2000 per year for the entire 15 years Romney ran Bain. Obviously nothing to see here...

The standard answer of the Romney campaign to all this is that he always followed the law. As Jon Stewart had to point out since the major media did not, Romney did plenty to affect the law he was supposedly "just following," including his defense of the "covered carried interest" tax loophole that let him treat his fees at Bain as if they were capital gains (15% tax) rather than wages (35% tax). All perfectly legal and as Johnston points out in his book by that name, that is the real scandal.

Further, Shaxson reveals that an early filing of the original Bain Capital fund in 1984 showed that many of its foreign investors were routed through tax havens and that at least one was a notorious financial criminal, Robert Maxwell. Thus, Bain helped foreigners take advantage of the fact that the United States has set itself up as a tax haven for non-citizens (see also Jason Sharman's paper on setting up anonymous companies in the U.S. and elsewhere; h/t Robert Kudrle). Shaxson quotes Rebecca Wilkins of Citizens for Tax Justice, “It is shocking that a presidential candidate should think that is O.K.” for Bain to service the likes of Robert Maxwell.

The bottom line is that there is a lot of unsettling information in what investigators have so far been able to piece together about Romney's finances. The easiest way for Governor Romney to put to rest what his campaign described to Shaxson as "unfounded allegations and insinuations" would be to release his tax returns. Yet he has not done so and shows no sign of changing his mind. Josh Marshall calls the questions "kryptonite" and thinks Romney will come under a lot of pressure to release more tax returns. Let's hope so. The guy's running for President, for Pete's sake.

Updated to correct "covered interest" to "carried interest." Thanks to m.jed at Angry Bear.

Update 2: Via Gotta Laff at The Political Carnival, here is a Wall Street Journal video covering the low-valued special class of shares that Romney and other Bain executives put into their IRAs, which tends to bolster Shaxson's contention that this is the source of the huge gains in Romney's IRA. (As opposed to the suggestion of some commenters that he rolled over other types of income into his IRA when he left Bain.) The key question from a tax law perspective is whether these shares were properly valued.

Health Insurance Rebates Show How Bad Insurers and State Regulators Can Be

Thursday's health care ruling was a surprising victory for the middle class. I went to bed Wednesday dreading waking up, only to be awakened by a phone call that the law had been upheld. Most of the story is well-known, and summarized in the President's speech: six million young adults under 26 who have gained  insurance, children now (and adults starting in 2014) can no longer be denied insurance due to pre-existing conditions, an end to terminating people's insurance when they get ill, closing the Medicare donut hole, etc. I want to focus on one provision the President mentioned in passing, the $1.1 billion in insurance rebates that 12.8 million Americans will be receiving August 1.

The rebates are due to the medical loss ratio or "80/20" rule that insurance companies cannot spend more than 20% of premium dollars on "administration, CEO pay, and profits," as Health Care for America Now (HCAN) summarizes it. The requirement is 85% spent on actual medical care for firms in the large group market, according to healthcare.gov.(via HCAN). Of the $1.1 billion in rebates, $393.9 million will be in the individual market, $386.4 million in the large group market, and $321.1 million in the small group market.

Although $1.1 billion in rebates is not a lot of money in the multi-trillion U.S. health care system, it is enough to provide noticeable rebates to millions of consumer before the November election. Consumers Union has a state-by-state breakdown of which insurance companies owe rebates in each state, and how much. Three patterns emerge from these data: First, some companies routinely failed to meet the 80/20 rule in state after state after state. Second, Blue Cross/Blue Shield companies, which were once largely non-profit but were converted to for-profit corporations mostly in the 1990s, are now frequent violators of the medical loss ratio rule. Third, some states, most notably Texas, have such lax insurance company regulations that violations of the rule are rampant. The data below come from the Consumers Union link above.

1) Multiple violations by individual companies: The poster child for gouging consumers and spending premium dollars on things other than health care is Golden Rule Insurance Company (since 2003 a subsidiary of UnitedHealthcare), which operates solely in the individual market, and not in either the small group or large group health care markets. According to the Consumers Union data, Golden Rule owes rebates in 23 states where it operates. Comparing the CU data with Golden Rule's website on where it operates, we find that in only nine states where it operates does it not owe rebates. We also learn that two Golden Rule subsidiaries also owe rebates, American Medical Security Life Insurance Company in Utah in the individual market, and Oxford Health Plans of New Jersey Inc. in the large employer market, bringing Golden Rule's total to fully 25 states where it owes rebates under the medical loss ratio rule. In a number of states (Alabama, Florida, Indiana, Kentucky, Maryland, Michigan, Mississippi, and West Virginia) , Golden Rule owes more money than any other insurer in the individual market.

Furthermore, UnitedHealthcare subsidiaries carrying the UHC name owe rebates in 28 states in the small business market, large business market, or both.

I don't mean to single out UnitedHealthcare for overcharging: depending on the state and the market, Aetna, Connecticut General, and Time Insurance Company, among others, owe substantial rebates to their customers as well. But Golden Rule and UnitedHealthcare failed to meet their 80/20 tests in so many states that they really stand out.

2) In many states in which Golden Rule does not owe the highest rebates in the individual market, Blue Cross/Blue Shield does. This includes states like Arizona, Missouri, Oklahoma, South Carolina, Tennessee, and most notably, Texas. This represents a complete repudiation of the historical BC/BS ethos, which included non-profit incorporation and community rating (i.e., not penalizing people for getting sick). But that's what happens when you turn non-profits into for-profits in health care.

3) This brings us to lax insurance regulation, as in Texas. Blue Cross/Blue Shield of Texas owes $89.9 million in refunds, all of it in the individual market, which by itself exceeds all the refunds in the much bigger California economy, where total refunds only amount to $73.9 million. Total rebates in Texas will total $167.0 million. The only other state with rebates exceeding $100 million this year is Florida, at $123.6 million. However, a number of states have higher average rebates, led by Vermont at $807. I believe both the total and average rebates should be examined for evidence of weak insurance regulation.

To summarize, the Supreme Court's decision was a great one for the middle class. On top of all the provisions that expand coverage and economic security, 12.8 million consumers will see refunds from their insurers to pay back for their price gouging.

This is not to say that we don't have a long way to go to complete health reform. As Aaron Carroll points out, there is a great deal more that needs to be done to our $2.7 trillion health system, including making coverage universal and getting cost increase under control. But upholding the Affordable Care Act is a step in the right direction.

Lost Output Over $3 Trillion And Rising

Still traveling, so just a quick post, but this really can't be emphasized enough. Andrew Fieldhouse at the Economic Policy Institute reports that the Congressional Budget Office now has cumulatively reduced its estimate of 2017 gross domestic product by 6.6% since the beginning of the recession in December 2007. As Fieldhouse points out, that doesn't sound like much, but when it's 6.6% of a $15 trillion economy, we are looking at about $1 trillion (with a "T") of lost income in 2017. To put it another way, that is well over $3000 of income per person that year. That is on top of $3 trillion in potential GDP already lost since the recession began, according to Fieldhouse.

The culprit, of course, is the lack of further stimulus to the economy. After the totally inadequate $800 billion stimulus package in 2009, we have had essentially nothing. At the end of 2011, Republicans had to be shamed into approving a payroll tax cut they previously favored. Indeed, as Thomas Mann of the Brookings Institute and the Norman Ornstein of the American Enterprise Institute have pointed out, it is not the case that both parties are getting more partisan. As they put it, "Let's just say it. The Republicans are the problem." It is the Republicans in Congress who are blocking further stimulus measures. Electing a new Congress that will not pass a stimulus bill will cost Americans thousands of dollars out of their pockets.

We are a long way away from George Wallace's famous claim that there was not "a dimes' worth of difference" between the two parties.

Why Not Infrastructure Spending?

Why are we not doing infrastructure spending today? Here's what the federal government started in the midst of the Great Depression:

Photo credits: Personal photos, June 21, 2012

Hoover Dam was commemorated in 1935 and completed in 1936. The dam presently provides electricity to 1.3 million people in Arizona, Nevada, and California (via Wikipedia). There is no shortage of infrastructure needs today and plenty of unemployed workers. The problem, of course, is political, not economic.

P.S. Limited blogging for the next ten days.

Why the World Should Care About America's Middle Class

Tim Worstall, in his Forbes blog, attacks my series (here and here) on whether globalization is good for America's middle class. Not on the basis that he disagrees with my conclusion (though he does), but because, he argues, there are much more important facts about globalization than a decline in the economic well-being of the middle class in America and Europe. In particular, he points to the great decline in poverty among developing nations that have embraced globalization:

This growth in incomes, in wealth, has been uneven, this is true. Largely speaking those places which have been taking part in globalisation, Indonesia, China, India, have been getting richer. Those that have not been, Somalia perhaps as an example, have not been.

 Let's leave aside the fact that these successful countries are hardly poster children for the kinds of so-called "free-market" policies that Worstall espouses, a point made particularly well by Dani Rodrik. And in the spirit in which Worstall granted my claims for the sake of argument, let's grant his as well. (But if you want to get down into the weeds on the extent to which poverty reduction claims may be overstated, take a look at Robert Wade's work.)

Here is the crux of Worstall's argument:

So I would actually posit that whether the American, or European, or rich world, middle class benefits from globalisation is actually an incomplete question. Incomplete enough to be the wrong question. Almost to the point that the answer is “who cares?”.

The correct question is what is the distribution of all of the costs and all of the benefits of globalisation? To which my answer would be that a generation, perhaps even two generations, of stagnating lifestyles for the already rich, those middle classes, looks like a reasonable enough cost to pay for the other thing that is happening: the abolition of absolute human poverty in the rest of the world.

First, I think we should certainly care when hundreds of millions of people are suffering unnecessarily. Yes, unnecessarily, because contrary to Worstall's claim, we are not trading off reduced economic well-being for hundreds of millions of middle class people for the lessened poverty of billions of other people. Indeed, the two are happening simultaneously, but as Ronald Rogowki pointed out in Commerce and Coalitions, it is perfectly feasible to have rich country winners compensate rich-country losers and still have all of them be better off from trade. Politically, it is a hard row to how, as Rogowki pointed out: the winners from expanding trade increase their political power as a result of their increased income, making compensatory policies less likely. But ending globalization's harm to the middle class in rich nations does not require us to take anything away from poorer people, not if you accept the theory of comparative advantage and the Stolper-Samuelson Theorem. It does require us to figure out a political solution to the problems faced by the losers, which as we can see in the United States is made more difficult by the decline of unions and by the Citizens United Supreme Court decision.

And second, we should care about the U.S. middle class (and Europe's, for that matter) because how they react to their situation politically will have enormous consequences for the world economy and world politics. If the U.S. comes up with a "Smoot-Hawley" response to its economic problems, that would undo a lot of the gains Worstall sees as flowing from globalization, a point made recently by Dani Rodrik (via Mark Thoma). Even more ominously, in both the U.S. and Europe, we see increasing political polarization and the rise of nationalist political parties and movements, as noted by Paul Krugman. Economic decline is a scary thing, and people's reactions to it can get downright ugly, to put it mildly.

For both of these reasons, then, what happens to the middle class in the U.S. and Europe will have repercussions far beyond those acknowledged by Worstall.

Is Globalization Good for America's Middle Class? Part 2

In Part 1, I examined what economic theory has to say about the winners and losers from trade. The main conclusion is based on the Stolper-Samuelson Theorem: Because the United States is labor scarce in a global perspective, an expansion of trade will reduce the real wages of labor. As we have seen, this theoretical prediction has been borne out as real wages remain below their peak level for the 39th year running.

In this post, I analyze what I consider to be the other main element of globalization, the expansion of the mobility of capital. Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).

Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing's establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.

Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.

More generally, who should win and who should lose from the growth of capital mobility? One possibility is that it would simply speed up the effects of trade. If Mexico had needed to wait for the growth of domestic entrepreneurs, it could not have expanded its exports to the U.S. nearly as rapidly as in the actual situation where U.S. companies could provide the money. In that case, we would simply expect the effect of heightened capital mobility to be the same as the Stolper-Samuelson Theorem.

But this would not explain why European labor appears as opposed to globalization as U.S. unions. Western Europe is labor abundant, so we would expect western European worker to benefit from the expansion of trade. Yet one does not have to look hard at all to see that European unions are not in love with globalization. The right answer now might be that those who are mobile win in the global economy, while those who are immobile lose. While capital is mobile geographically, governments are bound to their location. Workers, even where they have significant legal opportunities to move, as in the European Union, are still restricted in their mobility by their language abilities or lack thereof, and by the common desire to live near their families (another way in which corporations are not people, by the way). And it is not as if European capital can only be invested in the EU.

This is consistent with studies of the effect on home country labor of foreign investment (see Richard Caves' Multinational Enterprise and Economic Analysis): reduced employment because exports are replaced with foreign production, some possible increased employment due to supplying goods and services to foreign subsidiaries, but at best the result is a wash and more likely the net effect is negative.

If this is right, U.S. workers may have the worst of both worlds: they are harmed by expanding trade, and they are harmed by being less mobile than capital. While this does not explain the political changes that have happened in the U.S. since 1970 (though it is certainly relevant), it gives us a pretty good handle on the economic market pressures that the middle class needs to address politically. I will have more to say about these issues in future posts.