When I saw that James Carville and Stan Greenberg had just published It's the Middle Class, Stupid! (Blue Rider Press), I knew that I would want to read it. I had always liked Carville's We're Right, They're Wrong and wanted to know his take on approaching the declining fortunes of the middle class.
While this book includes some diagnosis of the problems and has a very detailed and very good set of policy proposals, primarily it is a work on political strategy. Based on polling and focus groups the authors have conducted over the last several years (as well as their long experience running campaigns and polling), Carville and Greenberg analyze what they consider some of the political failures of the Obama Administration, particularly with regards to messaging.
For example, they argue that Americans are not persuaded by Team Obama's continuing emphasis on the fact that the President inherited a mess from the Bush Administration (Chapter 11). Although voters place much of the blame for the Great Recession on President Bush, Greenberg reports that his focus groups reacted very negatively to President Obama's car-in-the-ditch metaphor ("I'm still in the ditch!" many told Greenberg) and the participants expressed strong opinions that we needed to look forward, not backward.
As one said, "[Obama] is trying to say things are turning around, but the numbers are still bad." The premature declaration of victory by the Administration described here has been strongly criticized by Paul Krugman, among others. Economically effective policy is the best talking point. Carville and Greenberg also give a compelling litany of sophisticated responses to even "good" job creation news on pp. 103-7.
The second big, non-obvious, point is that Americans really are concerned about the deficit and debt (Chapter 8). Again, even though they recognize the role of the Bush tax cuts and unfunded wars in creating that debt, they are still leery about the possibility of spending our way to more economic growth, though not by huge majorities. Too many of them are convinced of the false analogy between households and governments, although Paul Krugman is doing his best to convince them with his new book, End This Depression Now! The framing the authors found most persuasive to middle class voters was an emphasis on "investments that will get our country back on track." Tellingly, as Carville and Greenberg note, their respondents did not see the debt as a reason to cut Social Security or Medicare.
Third, but more obvious, middle class voters don't see government as the solution because they consider it to be captured by elite interests. The focus groups showed that this view led to some tendency to paralysis and disengagement from politics. It is from this point that Carville and Greenberg pivot to their most important policy recommendation: Amend the Constitution or obtain a Supreme Court that will overturn Citizens United and end corporate personhood. In addition, they call for public financing of elections, disclosure of campaign contributions, requiring broadcasters to cut the price of political ads, and ending the revolving door of office holders and lobbyists. All this is in support of a politics that makes rebuilding the middle class Job 1 for government, and for a consistent framing of all issues (including foreign policy) in terms of their impact on the middle class.
Not everything in the book is persuasive. At one point Greenberg says the popularity of raising taxes on the rich "is as close to an absolute truth you can have in polling" (p. 144). I have two problems with this. First, you could say the same thing for other industrialized democracies. Sven Steinmo, writing in the mid-1990s, has cited polling results for the U.S., U.K., and Sweden, all of which showed publics that thought the rich should pay more taxes, yet in none of these cases has that been the direction of policy over the last 30 years. To me, this suggests there is an international dimension that helped make government capture possible, but the book does not address globalization very much at all.
Second, the book devotes relatively little attention to another issue that also is overwhelmingly supported in poll after poll: raising the minimum wage. Yes, making work pay is an important theme in the book and the authors acknowledge that increasing the minimum wage is part of that, but they say nothing about how putting the issue on many state ballots helped increase Democratic turnout in 2006. In Missouri, for example, the minimum wage Proposition B passed by a 76-24 margin, helping Claire McCaskill squeak out a U.S. Senate win with less than 50% of the vote.
The other weakness of the book is that the authors are too close to President Clinton to give a completely objective view of his Presidency. While they make a single parenthetical reference about how NAFTA may not have been such a great idea for the middle class after all, they say nothing about how "ending welfare as we know it" was bad for the middle class. This can best be seen by thinking about income determination as a massive bargaining situation. Anything that takes away one side's options reduces its bargaining power, and the 1996 welfare reform did just that. In addition, they seem blind to the fact that income inequality (top 1% vs. the 20th-80th percentiles) took off during the Clinton Administration far in excess of what had been seen under President Reagan, as a glance at their chart on p. 52 shows.
Finally, the book has no index, which is very annoying when you have 296 pages of text and 25 pages of endnotes.
Those caveats aside, this is a very good book that deserves a careful reading by progressive activists. I certainly learned something from it, and I'm sure you will, too.
Cross-posted at Angry Bear.
Tuesday, July 31, 2012
Tuesday, July 24, 2012
New Estimate of Offshore Wealth Shows Big Increase Since 2004
A new report by the Tax Justice Network, "The Price of Offshore Revisited," shows that the amount of wealth held in tax havens has increased enormously since 2004, and confirms what I previously wrote about the huge cost to tax coffers of money hidden offshore.
The report was authored by the former Chief Economist of McKinsey and Company, James Henry. Its findings advance our understanding of tax havens and demonstrate that typical estimates of wealth inequality are significantly understated.
The major finding is that offshore financial holdings now come to some $21-32 trillion, compared with the estimate in TJN's 2005 report of $9.5 trillion (this excludes non-financial wealth, such as real estate). James makes a very conservative estimate of how much governments lose in taxes of $189 billion a year, based on earning just 3% on this $21 trillion, taxed at 30%. How conservative? This is actually less than the $255 billion annually estimated in the first TJN report, but that is based on earning 7.5% annually on offshore wealth. We can get an idea of how conservative this estimate of lost taxes by seeing how sensitive it is to changing the rate of return and wealth estimate used:
Rate of Return Wealth Estimate Lost Taxes
3% $21 Trillion $189 billion (Henry's actual estimate)
4% $21 Trillion $252 billion
5% $21 Trillion $315 billion
6% $21 Trillion $378 billion
3% $32 Trillion $288 billion
4% $32 Trillion $384 billion
5% $32 Trillion $480 billion
6% $32 Trillion $576 billion
Note that none of these hypothetical estimates use an earnings rate for offshore wealth as high as the original TJN report's 7.5%.
Since these assets are hidden, we of course have no way of knowing how much the money is earning. I think it is fair to say that Henry's estimate is more likely low than high.
On the inequality of financial wealth, Henry says:
Despite Felix Salmon's characterization of the report as "long on hyperbole," I find no reason to disagree with its conclusion that tax havens are a "black hole," one which costs the middle class (through uncollected taxes on the super-rich) untold billions of dollars and increases inequality around the world.
The report was authored by the former Chief Economist of McKinsey and Company, James Henry. Its findings advance our understanding of tax havens and demonstrate that typical estimates of wealth inequality are significantly understated.
The major finding is that offshore financial holdings now come to some $21-32 trillion, compared with the estimate in TJN's 2005 report of $9.5 trillion (this excludes non-financial wealth, such as real estate). James makes a very conservative estimate of how much governments lose in taxes of $189 billion a year, based on earning just 3% on this $21 trillion, taxed at 30%. How conservative? This is actually less than the $255 billion annually estimated in the first TJN report, but that is based on earning 7.5% annually on offshore wealth. We can get an idea of how conservative this estimate of lost taxes by seeing how sensitive it is to changing the rate of return and wealth estimate used:
Rate of Return Wealth Estimate Lost Taxes
3% $21 Trillion $189 billion (Henry's actual estimate)
4% $21 Trillion $252 billion
5% $21 Trillion $315 billion
6% $21 Trillion $378 billion
3% $32 Trillion $288 billion
4% $32 Trillion $384 billion
5% $32 Trillion $480 billion
6% $32 Trillion $576 billion
Note that none of these hypothetical estimates use an earnings rate for offshore wealth as high as the original TJN report's 7.5%.
Since these assets are hidden, we of course have no way of knowing how much the money is earning. I think it is fair to say that Henry's estimate is more likely low than high.
On the inequality of financial wealth, Henry says:
By our estimates, at least a third of all private financial wealth, and nearly half of all offshore wealth, is now owned by world's richest 91,000 people - just 0.001% of the world's population. The next 51 percent of all wealth is owned by the next 8.4 million, another trivial 0.14% of the world's population.In the companion report on inequality by Nicholas Shaxson et al., the authors asked a number of well-known experts on inequality if they thought these data showed inequality has been underestimated. The answer from Thomas Piketty (of Piketty and Saez, the most widely quoted set of papers on inequality that I know of) was blunt: "Yes, definitely."
Despite Felix Salmon's characterization of the report as "long on hyperbole," I find no reason to disagree with its conclusion that tax havens are a "black hole," one which costs the middle class (through uncollected taxes on the super-rich) untold billions of dollars and increases inequality around the world.
Will Mitt Romney Release More Tax Returns?
Results are in for my reader's poll on whether Mitt Romney would release more tax returns. The overwhelming majority, 72%, said no, while 18% said yes, and the other 10% were unsure.
I'm in the 18% who said yes. I think that the President will keep up the pressure on Governor Romney over this issue, and it's easy to imagine him bringing it up in the debates in a forceful manner. "You're running for President of the United States and you think you don't have to release your tax returns like everyone else? Get serious!" But we'll know by November.
To update my last Romney post, his campaign is now denying that Governor Romney took part in the IRS amnesty program over unreported accounts in 2009, according to CNBC (via Talking Points Memo). We have their word on it...
I'm in the 18% who said yes. I think that the President will keep up the pressure on Governor Romney over this issue, and it's easy to imagine him bringing it up in the debates in a forceful manner. "You're running for President of the United States and you think you don't have to release your tax returns like everyone else? Get serious!" But we'll know by November.
To update my last Romney post, his campaign is now denying that Governor Romney took part in the IRS amnesty program over unreported accounts in 2009, according to CNBC (via Talking Points Memo). We have their word on it...
Thursday, July 19, 2012
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.
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.
Wednesday, July 18, 2012
Is the Noose Closing Around Romney's Tax Returns?
Problems on my blogging computer have kept me away from here for a week, and a lot sure has happened on the Mitt Romney tax story in that time. The Obama campaign has gone after Romney on his tax havens and tax returns is two separate television ads, including a new one yesterday. Calls have mounted from Republicans for Romney to release his tax returns, yet as of last night Romney was standing firm that he would not release any besides 2010 and (so-far estimated) 2011. The most interesting development to me is that speculation on what could possibly be so bad in the returns is narrowing down to one year, 2009.
Dan Shaviro (via TaxProf Blog) makes three points:
Matthew Yglesias also thinks the IRS amnesty program could be the answer:
In fact, we do know which bank held $3 million of Ann Romney's blind trust. It was UBS.
How do we know? Brad Malt, the Romneys' trustee, said so. Not only that, when Romney released his 2010 tax return in January of this year, he had to amend two previously filed disclosure forms, for 2007 and 2011. In 2007, he had not specified that the UBS account was in Switzerland, not the U.S., according to ABC News (UBS has branches in the U.S.).
Let's review the bidding: Ambiguous disclosure in 2007. UBS income on 2010 tax return. Retroactive revision of 2007 disclosure. IRS amnesty for undisclosed foreign accounts in 2009 powered by UBS prosecution. Refusal to release 2009 tax return. Yes, 2009 could be a big problem.
Also, as Linda Beale points out, it would be great to see 1999-2002 to help sort out the Bain claims and counter-claims.
The entire tax return saga is emblematic of a much larger issue: How there is one set of rules for the 1%, and a different one for the rest of us. If the consequences of releasing his returns would be so much worse than the sustained onslaught Romney is already absorbing, I have to question whether Romney can even finish the race.
Dan Shaviro (via TaxProf Blog) makes three points:
1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.So it is possible that Romney had a high income, but an even lower tax rate in 2009 than 2010--maybe even zero. The other possibility is that he got caught up in having an undeclared offshore account and took the IRS amnesty in 2009.
2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."
3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income. If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).
Matthew Yglesias also thinks the IRS amnesty program could be the answer:
Failing to apply for the amnesty and then getting charged by the IRS would have been both financially and politically disastrous. So amnesty it was. But even though the amnesty would eliminate any legal or financial liability for past acts, it would hardly eliminate political liabilityWouldn't it be great if we knew which Swiss bank Romney's money had been hidden in? As you may know, the IRS nailed Union Bank of Switzerland (UBS) for helping Americans commit tax evasion (the illegal kind, as opposed to legal tax avoidance). As a result, UBS coughed up the names of more than 4400 Americans (out of 52,000 originally sought by the IRS) who had accounts there. This was the backdrop to the IRS amnesty: for the first time, the U.S. had breached Swiss banking secrecy and Americans with Swiss bank accounts could no longer be sure that their secret was safe.
In fact, we do know which bank held $3 million of Ann Romney's blind trust. It was UBS.
How do we know? Brad Malt, the Romneys' trustee, said so. Not only that, when Romney released his 2010 tax return in January of this year, he had to amend two previously filed disclosure forms, for 2007 and 2011. In 2007, he had not specified that the UBS account was in Switzerland, not the U.S., according to ABC News (UBS has branches in the U.S.).
Let's review the bidding: Ambiguous disclosure in 2007. UBS income on 2010 tax return. Retroactive revision of 2007 disclosure. IRS amnesty for undisclosed foreign accounts in 2009 powered by UBS prosecution. Refusal to release 2009 tax return. Yes, 2009 could be a big problem.
Also, as Linda Beale points out, it would be great to see 1999-2002 to help sort out the Bain claims and counter-claims.
The entire tax return saga is emblematic of a much larger issue: How there is one set of rules for the 1%, and a different one for the rest of us. If the consequences of releasing his returns would be so much worse than the sustained onslaught Romney is already absorbing, I have to question whether Romney can even finish the race.
Wednesday, July 11, 2012
One Year Anniversary
Today marks the one-year anniversary of Middle Class Political Economist.
Depending on whether you believe Google Blogger or Google Analytics, I've had either 64,000 or 40,000 page views in this time. Either way, it's a pretty good start, and I want to thank all my readers and commenters for taking part in the conversation. A special thanks goes out to Tim Sinclair for his guest post on the S&P downgrade of U.S. debt.
I owe a great deal of gratitude to everyone who has helped promote this blog. Mark Thoma, who had picked up David Cay Johnston's review of Investment Incentives and the Global Competition for Capital last January, linked to my very first substantive post and has been generous with links ever since. Marty Pflugrath at BartCop Entertainment was the first to make me a regular. I've also gotten frequent and/or big boosts from Mark Ames, Brad DeLong, Markos Moulitsos, Pat Garofolo, and Dan Crawford, none of whom are responsible for my errors. Many of my posts now appear at Angry Bear, Business Insider, and Daily Kos. My wife, Mary Hildebrand, comes up with some of the ideas for my posts and is always there for me. There are many more out there who have helped me, and I thank all of you as well.
Going forward, I'd like to ask everyone: How can I make this a better blog? What topics would you like to see more of? What am I doing wrong?
Again, thanks for reading, and thanks in advance for your answers to my questions. Please feel free to post them as comments or email me at kpthomas55@hotmail.com
Depending on whether you believe Google Blogger or Google Analytics, I've had either 64,000 or 40,000 page views in this time. Either way, it's a pretty good start, and I want to thank all my readers and commenters for taking part in the conversation. A special thanks goes out to Tim Sinclair for his guest post on the S&P downgrade of U.S. debt.
I owe a great deal of gratitude to everyone who has helped promote this blog. Mark Thoma, who had picked up David Cay Johnston's review of Investment Incentives and the Global Competition for Capital last January, linked to my very first substantive post and has been generous with links ever since. Marty Pflugrath at BartCop Entertainment was the first to make me a regular. I've also gotten frequent and/or big boosts from Mark Ames, Brad DeLong, Markos Moulitsos, Pat Garofolo, and Dan Crawford, none of whom are responsible for my errors. Many of my posts now appear at Angry Bear, Business Insider, and Daily Kos. My wife, Mary Hildebrand, comes up with some of the ideas for my posts and is always there for me. There are many more out there who have helped me, and I thank all of you as well.
Going forward, I'd like to ask everyone: How can I make this a better blog? What topics would you like to see more of? What am I doing wrong?
Again, thanks for reading, and thanks in advance for your answers to my questions. Please feel free to post them as comments or email me at kpthomas55@hotmail.com
Monday, July 9, 2012
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.
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.
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