Basics: Is that a good economic development deal? Using the Megadeals database

It's a familiar situation: business and government officials are promoting a new economic development deal which naturally includes subsidies for the investor. They may be touting a consultant's study touting massive ripple effects and fantastic taxpayer return on investment. Should you believe them?

Of course not. Consultants, whether they technically are working for the company or the government, don't get paid to say deals don't make sense. Or at least they don't if they want future contracts with the company or city/state/province/country paying them.

What's a taxpayer to do? First, you need to know that uncontrolled subsidy competition like we have here in the United States is going to systematically provide higher subsidies than will a rules-based system like that of the European Union. The EU's state aid rules guarantee transparency, restrict location subsidies to the poorest regions, and cap the amount of subsidy a project can receive based on two principles: 1) The richer the region, the lower the maximum subsidy allowed (with 0 as the maximum in many regions); and 2) For large projects, the maximum subsidy is reduced below the region's normal percentage cap (determined under the first principle) with a 50% cut in the cap for projects over 50 million euros and a 66% cut for the subsidy on the amount invested over 100 million euros. So you need to remind elected officials and economic developers of the need for transparency and real limits on subsidy use.

Realistically, though, we are a long way away politically from having rules like the EU's. Right now, we're making progress on transparency but not so much on substantive rules, not even anti-piracy agreements. What do we do to evaluate investment incentives now?

The goal in bargaining is to get the most benefits for the least cost. How do we know if the cost is high or low? This is where the Good Jobs First Megadeals database comes in. We can use it to compare the cost with similar deals made elsewhere in the United States. You can use Subsidy Tracker if you want to look at smaller deals, but for my purposes in this post I can't deal with a quarter of a million projects, so I am sticking with Megadeals.

Projects vary widely in size, so to compare different subsidies we need metrics, or standardized ways of measuring them. Knowing the gross cost  of a subsidy is not enough (and technically, using the present value of the subsidy rather than its gross cost would be better, but would not solve this problem). As I wrote in a report for the North Carolina Budget and Tax Center, $1 million would be a large subsidy for a call center, which needs little more than computers and phone lines. But $1 million would be miniscule for an automobile assembly plant, which can cost as much as $1 billion to build.

The good news is that we don't have to reinvent the wheel to obtain these metrics. Two good ones already exist, cost per job (subsidy divided by the number of jobs) and what the European Union call "aid intensity" (subsidy as a percentage of investment). The EU's rules set limits as discussed above in terms of aid intensity, but using both metrics together is even more illuminating.

Better news still is that the Megadeals database already contains the data needed to calculate both cost per job and aid intensity. Since you can download Megadeals in spreadsheet form at the link above, I did just that and then added two columns (cost per job and aid intensity) to create a spreadsheet with these metrics. Based on an informal conversation we had in March, Christopher Lau, a Senior Advisor in the Ontario Ministry of  Economic Development Trade and Employment, in an effort outside of his official capacity, added a chart grouping all the automotive investments together. This is on the larger of the two spreadsheets at the link below:

https://sites.google.com/site/middleclasspoliticaleconomist/megadeals-with-metrics

Christopher's chart (see below) lists all the projects from largest to smallest aid intensity, so it's a good place to begin to see the range for an auto plant. We can see from the list that the aid intensities are pretty tightly bunched from 15% to 41%, with no gap greater than 4 percentage points within that range. We can presume that anything above 41% is overpriced, especially the Gestamp project, since a stamping plant is one of parts facilities you would hope to have locate near an assembly plant, which means you would normally subsidize it less than an assembly plant.

Even  within the 15-41% range, we shouldn't conclude all are reasonably priced given the situation states and cities are currently caught in. We would want to factor in when the facility was built, focusing on the most recent experience when discussing a potential new project. We would want to know the location, the size of the project and the number of jobs created. And we need to remember with regard to jobs that if we build a new assembly plant, its output will reduce the sales and jobs at existing facilities, so the country's net job gain will be much less than the total employment at the new plant.

This post illustrates how we can use the Megadeals database to help evaluate the cost of a proposed subsidy deal. In my next post, I want to reiterate all the best practices that should be attached to any deal before we can say that it is a relatively good one under the United States' current Wild West subsidy system.



Source: Calculated from the Good Jobs First Megadeals spreadsheet.

 Note: Christopher Lau's analysis in this article is his own and does necessarily reflect the views and opinions of the Ministry in which he is employed.

Cross-posted at Angry Bear

April Tax-Cast Now Available

The Tax Justice Network's Tax-Cast has just been released, with stories on US states fighting against tax havens, an interview with TJN's John Christensen, and a discussion of a new paper by Paris School of Economics professor Gabriel Zucman's (yes, he's a student of Piketty's) estimating the amount of financial wealth held in tax havens ($5.9 trillion in 2008, on the low end of most estimates, but still quite substantial). You can hear it at the link above or just click here to go directly to YouTube.

Everything You Need to Know About Tax Freedom Day®

Today, April 21, is 2014 Tax Freedom Day®, according to the Tax Foundation. The Tax Foundation is not exactly known for unbiased research, and its promotion of Tax Freedom Day® is no exception.

The Foundation claims that Tax Freedom Day® is "a vivid, calendar-based illustration of the cost of government." In other words, instead of saying that its analysts expect total taxes in the United States (including social insurance) to reach 30.2% of net national income (NNI) in 2014, they say that Tax Freedom Day® arrives three days later than last year. Precise, huh?

Of course, the word "freedom" tips us off to the fact that the Tax Foundation is actually trying to create an emotional response. Something along the lines of, "Oh boy, after today I'm working for myself rather than the greedy government!" The implication further is that the later Tax Freedom Day® occurs, the worse it is for the country. The thing is, neither of these insinuations is true.

As the Center on Budget and Policy Priorities points out every year, that emotional response, frequently picked up directly by the media, is not true for the vast majority of Americans. As CBPP's Figure 1 below shows, for the federal portion of taxes, more than 80% of Americans are paying less than the 20.1% federal component of Tax Freedom Day® would suggest. (In addition, the burden of some taxes does not fall on individuals at all.) The Tax Foundation responds that it's not trying to mislead anyone, it's just comparing "total U.S. tax collections with total U.S. income." Of course, if that were all it was really trying to do, it could just say that projected tax collections equal x% of NNI. But no, it trumpets Tax Freedom Day®.

Moreover, a relatively late Tax Freedom Day® is usually a sign that incomes are increasing, so taxes are, too. As the Foundation writes this year,

Tax Freedom Day is three days later than last year due mainly to the country’s continued slow economic recovery, which is expected to boost tax revenue especially from the corporate, payroll, and individual income tax.

 Despite the dig "slow," the Foundation is saying that economic recovery boosts tax revenue. Another example should make this clearer. The same document continues, "The latest ever Tax Freedom Day was May 1, 2000, meaning Americans paid 33.0 percent of their total income in taxes." Horrors! Such confiscatory taxation obviously meant that the economy was in the tank in 2000. You know I'm joking: Actually, the economy was booming and the federal government had a budget surplus. Again, higher incomes and profits boosted tax revenue. Indeed, the economy in 2000 created 2,088,000 jobs, way more than during the entire George W. Bush administration (1,282,000). Maybe the Tax Foundation should pay attention.

This brings me to the ultimate point about Tax Freedom Day®. It's all there in the ®. As it indicates, Tax Freedom Day® is a trademark registered with the U.S. Patent and Trademark Office. If it were a serious concept, there would be no reason to trademark it at all. What the ® tells us is that Tax Freedom Day® is just a marketing gimmick.

Class dismissed.

Reading Piketty

Like everyone else, it seems, I'm reading Thomas Piketty's (many good links there, including the technical appendix) Capital in the Twenty-First Century. I can't remember when I last looked forward to reading a 650-page non-fiction book with such anticipation. I'll report back soon if work doesn't intrude too much.

In the meantime, take a look at Paul Krugman's review of the book here, and the roundup of reactions at Bill Moyers' blog.

Real Wages Rise Slightly but Remain below Peak for 41st Straight Year

Remember the Economic Report of the President? If you've been reading this blog for at least a year, of course you do. It's where we get our annual data on real wages (and apparently some other stuff, too). The 2014 edition was released on March 10. As you may recall, I made my first post on the declining real wage trend through 2011 and was literally the first person to notice 2012's further slight decline.

The good news is that, in what is now Table B-15 rather than B-47, real wages advanced somewhat in 2013, from $294.31 per week (in 1982-84 dollars) to $295.51, an increase of 0.4%. Woo hoo!

The bad news, of course, is that this is still 13.5% off the peak real weekly wage of $341.73, achieved in 1972. One swallow doesn't make a spring, and all that.

Interestingly, last week Paul Krugman felt compelled to argue that real wages aren't going up all that fast, but so what if they did? He said that basically, this was something primarily only visible in the real hourly (my emphasis) wages of production and non-supervisory workers, which happens to be one of the components of Table B-15. However, he was reporting based on the Bureau of Labor Statistics' monthly reporting of this stat.

As he puts it, the folks he is criticizing are saying that "a dangerous acceleration in the pace of wage increases is already underway. Time to raise interest rates!" His response to them is fine as far as it goes, but he misses that even on the terrain of the supposedly most rapidly increasing measure, there is no there there.

Table A-2. Current and real (constant 1982-1984 dollars) earnings for production and nonsupervisory employees on private nonfarm payrolls, seasonally adjusted(1)

	Feb. 2013	Dec. 2013	Jan. 2014(p)	Feb. 2014(p)
Real average hourly earnings(2)	$8.73	$8.81	$8.83	$8.86
Real average weekly earnings(2)	$294.96	$295.22	$295.69	$295.08
Consumer Price Index for Urban Wage Earners and Clerical Workers	229.180	230.919	231.233	231.344
Average hourly earnings	$20.00	$20.35	$20.41	$20.50
Average weekly hours	33.8	33.5	33.5	33.3
Average weekly earnings	$676.00	$681.73	$683.74	$682.65
OVER-THE-MONTH PERCENT CHANGE
Real average hourly earnings(2)	-0.3	-0.1	0.2	0.3
Real average weekly earnings(2)	0.2	-0.6	0.2	-0.2
Consumer Price Index for Urban Wage Earners and Clerical Workers	0.6	0.3	0.1	0.0
Average hourly earnings	0.3	0.2	0.3	0.4
Average weekly hours	0.6	-0.6	0.0	-0.6
Average weekly earnings	0.8	-0.3	0.3	-0.2
OVER-THE-YEAR PERCENT CHANGE
Real average hourly earnings(2)	0.1	0.8	0.8	1.5
Real average weekly earnings(2)	0.4	0.2	0.4	0.0
Consumer Price Index for Urban Wage Earners and Clerical Workers	1.9	1.5	1.6	0.9
Average hourly earnings	2.0	2.3	2.3	2.5
Average weekly hours	0.3	-0.6	-0.3	-1.5
Average weekly earnings	2.3	1.7	2.0	1.0

Source: Bureau of Labor Statistics (link above), footnotes omitted

First of all, we should remember that a couple months' trend is not really equal to a 41-year trend. That kind of error we'll leave to Reinhart and Rogoff.

Second, we can see the "scary" number: nominal hourly earnings increased from $20.00 in February 2013 to $20.50 in February 2014, or 2.5%.

Third, we know that we actually want to adjust that for inflation; hence we find that real hourly earnings went from $8.73 in February 2013 (1982-84 dollars) to $8.86 in February 2014, or just 1.5%,

Fourth, what Krugman appears to miss is that average weekly hours have fallen substantially since 1972. In fact, as the BLS table shows, they fell by half an hour, from 33.8 to 33.3 hours, from February 2013 to February 2014, or 1.5%.

You can see where this is going now: Real weekly earnings went up by 0. More precisely, 0.04%. And you'll note that the February 2014 figure is lower than the full-year 2013 level. So there is actually no increase to explain in the production/non-supervisory workers series.

But Krugman does hit the nail on the head: "What's so bad about rising wages?" And the answer, of course, is "Absolutely nothing." ("Say it again!")

Cross-posted at Angry Bear.

RIP BartCop

I'm a little late on this, but I would be remiss if I did not mention the recent death of Terry Coppage, aka BartCop. Bart died March 5th at the age of 60, from complications of the flu, pneumonia, and leukemia.

Bart was one of the pioneers of the liberal blogosphere, starting out in February 1996 with an email newsletter that was converted to web pages by Marc Perkel. He gave much support to new bloggers, including luminaries like Digby and Atrios. Though I never knew him, I am in his debt as well. The affiliated site, Marty Pflugrath's BartCop Entertainment, was the first to permanently and prominently link to me.

In his final column, Bart requested financial help for his wife to help pay for his medical bills. You can send a PayPal payment to bartcop@bartcop.com. If you still use checks, you could send a contribution to bartcop.com, PO Box 54466, Tulsa, OK 74155.

Hawaii Cuts Uninsured Population in Half

In case you haven't seen Charles Gaba's great website ACAsignups.net, you really need to see it. It is the best source available for tracking Obamacare enrollments, covering all categories of signups, including Medicaid, the federal and state exchanges, off-exchange signups, and estimated under-26ers.

One of the most notable achievements of Obamacare is in the President's birthplace, Hawaii, where the number of uninsured people has already fallen by more than half, despite having a horrible website for the state-run exchange. The biggest chunk of this is through Medicaid enrollments, both people newly eligible and those previously eligible who had not signed up ("woodworkers," people who've come out of the woodwork). Here are the totals:

Uninsured: 102,000
Medicaid: 48,000
Exchange: 4,661
Off-exchange: 4,000

Total newly insured: 56,661, or 55.6%.

Moreover, approximately 10,000 Hawaii residents are ineligible for Medicaid or ACA subsidies due to their immigration status, so the state is doing very well indeed.

For those of you who haven't seen it, below is Gaba's pride and joy, "The Graph." It's the best visual interpretation we have of how signups have proceeded since the rollout of Obamacare October 1. Note that we can expect a big last-minute rush over the final weeks of open enrollment, so we will see soon just how well the first year's signups have gone.

Cross-posted at Angry Bear.

Source: ACAsignups.net

The Graph