Tag Archives: WAMU

Do targeted economic development deals work as advertised?

Every so often, journalists write quid pro quo stories about government officials who accept favors (campaign donations, sports tickets, airplane rides, etc.) from people who stand to benefit from government-granted privileges (special tax deals, subsidies, favorable government contracts, etc.).

Like this report in the Post this weekend, most of these stories seem to nudge the reader in the direction of thinking that the solution is more regulation of campaign activity or more oversight of gifts to politicians. My question is: why focus exclusively on the gifts that politicians receive instead of on the privileges that politicians dispense? Why focus on the quid and not the quo?

That’s where a five part series by WAMU’s Julie Patel and Patrick Madden comes in. They are only two stories in, but it is shaping up to be an excellent critique of the entire practice of local economic development privileges:

Construction cranes can be seen throughout the district. Less visible are the symbiotic relationships between land developers and city officials awarding tax breaks and discounted land deals. Those government subsidies are meant to revive neighborhoods, and to create jobs and affordable housing. But in some cases, the benefits never materialized, or the subsidies simply weren’t needed.

And what began as a targeted economic development tool now looks to some like government hand outs that could have paid for other city services.

Appropriately, Patel and Madden plumb the data to look for insider deals and conflicts of interest. But their analysis seems to go beyond that. In tomorrow’s segment, for example, they plan to look at whether targeted economic development tools work as advertised:

Developers receiving subsidies pledge jobs, affordable housing and other benefits for D.C. residents. Yet with little oversight and enforcement, many of the promises were downsized, delayed or broken.

Another intrepid reporter who recently asked this question is Louise Story of the New York Times. She and her team “spent 10 months investigating business incentives awarded by hundreds of cities, counties and states” and assembled a unique database along the way.

If local subsidies worked as advertised, we’d expect to see greater economic growth in those states that give away more subsidies. But simple analysis of Story’s data suggests that, if anything, there is a negative relationship between per capita subsidies and economic growth:

Subsidies and growth

In this graph, the x-axis plots per capita subsidies and the y-axis plots real (inflation-adjusted) state economic growth from 1997 to 2011 (the general time period over which Story has data).

I also ran a series of econometric tests, sometimes controlling for other factors (regional effects, the initial size of state economies, and economic freedom) and sometimes not. In every test I ran, per capita subsidies were negatively associated with state economic growth and often the relationship was statistically significant (I should note that the Mercatus measure of economic freedom was always positively and statistically significantly related to growth).

I’ll be the first to admit that this is a back-of-the-envelope exercise (for example I do not try to control for reverse causality). I hope to see more careful research based on Story’s database soon. But based on what I’ve seen so far, I see no reason to presume that local, targeted economic development schemes work as advertised.

Given the social and economic problems associated with government-granted privileges, I think we should view such schemes with a healthy dose of skepticism.

D.C. tries again to protect taxi industry from competition

Last year, the D.C. City Council threatened to impose regulations that would have effectively barred Uber, the popular sedan-hailing car company, from the D.C. market. In a surprising show of candor, the proposed legislation admitted that the goal was to ensure that the politically powerful taxi lobby didn’t lose any business. Public reaction was swift and negative and the council eventually relented, letting Uber into the market.

While many were celebrating, I played the part of the skeptic, noting that Uber’s gain seemed to have come at the expense of other start-up transportation companies. Writing in the Washington Examiner, I noted:

But when you dig into the legislation, it appears that the council earned Uber’s praise by — you guessed it — finding a way to privilege Uber. That’s because the legislation mandates that “public vehicles-for-hire using a digital dispatch service shall be licensed.”

As tech reporter Ryan Lawler points out, the licensing requirement erects a barrier to entry for other businesses. SideCar, for example, is a West Coast service that, according to its website, “instantly connects people with extra space in their cars with those who need to get from one place to another.” It is, they say, “like a quick and hassle-free carpool.” Since these instant carpoolers are obviously not licensed, they’d be illegal in DC. That’s handy for Uber. The company managed to cross the regulatory velvet rope and, alongside taxis, obtain access to a lucrative market. But once inside, Uber put the rope back up.

I’m sorry to say that my skepticism was warranted. This morning, WAMU’s Martin Di Caro reported:

The commission that regulates all vehicle-for-hire services in the District of Columbia once again finds itself at odds with a tech start-up.  After battling the sedan service Uber in 2012 before creating a sedan class license to allow the company to operate legally in the District, the Taxicab Commission has notified SideCar management that its drivers may not pick up passengers in D.C. without the proper licenses and vehicle tags.

“Individuals who join this rideshare operation must be licensed taxicab or limousine drivers in the District of Columbia and must have vehicles that have L tags,” said Commission Chairman Ron Linton.

You can listen to the full story here.

Maryland realtors fight to protect their subsidy

Image via Flickr user Images_of_Money

We’ve already explored Governor O’Malley’s proposal for the Maryland budget here and here, but recently, a perhaps unintended consequence of the budget came to light. By limiting the deduction that residents earning over $100,000 can make on their state income taxes, the proposed budget would limit the size of the mortgage interest tax deduction for many taxpayers.

I stand by my earlier argument that reducing deductions for only one group of people is not a step in the direction of fairness, but a reduction in the mortgage interest tax deduction may be a positive side effect of an otherwise bad policy. From a limited-government perspective, the obvious downside of a reduction in the mortgage-interest tax deduction is that this represents a revenue-positive change in Maryland’s tax code in a state that already has one of the highest tax burdens in the country. Overall though, I think reducing this tax expenditure is a positive change because the policy has many negative consequences.

While the causes of the financial crisis were many, by subsidizing investment in homes, the mortgage interest tax deduction played some part in the overvaluation of housing stock. Aside from the poor incentives that this tax expenditure creates in financial markets, it amounts to favoritism of suburbs over cities. In Triumph of the City, Ed Glaeser argues that the deduction leads many people to abandon renting in a city center for homeownership in the suburbs. However the Federal Reserve Bank of Boston provides evidence that the policy is more likely to lead people to buy larger homes than they otherwise would rather than trading renting for buying a home. Richard K. Green and Andrew Reschovsky write:

If one set out to design a policy to encourage homeownership, it would make sense to target the
largest subsidies to the households least likely to be homeowners, while providing little or no subsidy to
households likely to become homeowners even without a subsidy. Data from countries that do not
subsidize homeownership (such as Canada, Australia, and Japan) indicate, not surprisingly, that
homeownership rates rise with household income. This suggests that a policy to encourage
homeownership should give the largest incentives to households with modest incomes and no subsidies
to high-income households.

The MID, however, does exactly the opposite. For low- to middle-income taxpayers, the mortgage
deduction provides little financial incentive to abandon renting for homeownership. For those
purchasing modestly priced houses and facing the lowest marginal tax rate (currently 10 percent) the
benefits of the mortgage deduction are small. In fact, for households with low state income taxes, the
mortgage deduction may be of no value at all, because the mortgage deduction, even when combined
with other itemized deductions, may be smaller than the standard deduction.

For most high-income taxpayers, the tax savings resulting from the MID are a minor influence on
their decision to become homeowners; these households are likely to own a home regardless of the tax
treatment of housing. Rather than encouraging homeownership among high-income households, the
MID provides an incentive to buy a larger house and to take out a bigger mortgage. Economists have
long argued that the result is an inefficient pattern of investment, with too many resources invested in
housing and too few resources placed in more productive investments in factories and machinery (Mills,
1989; Poterba, 1992).

This analysis ignores that those at the margin of being least likely to be homeowners are likely the riskiest loan candidates and those most likely to foreclose, but they do make a strong case for why the MID leads to larger homes. Regardless of whether the deduction primarily increases homeownership or leads to larger houses, it results in a subsidy for suburban sprawl and its negative side effects of traffic congestion and demand for public services across a wider geographic area.

Unsurprisingly, the Maryland Association of Realtors is strongly opposed to a budget that would lead to lower tax expenditures on housing. The current policy directly subsidizes their industry. The Washington Post reports:

The Greater Capital Area Association of Realtors says that mortgage interest and property taxes account for almost 70 percent of total itemized deductions in Maryland, and they argue that the proposal, if passed, would further harm the area’s housing market, which has struggled to recover.

WAMU interviewed a leader among MD realtors on the issue:

Jim Scurvin, past president of the Howard County Realtors Association says it’s just wrong to jeopardize an industry responsible for 49 percent of revenue that goes to state and local government

“When someone buys a house, on the average you employ two people, and you put $60,000 into the economy right then and there,” he says. “Real estate is the lead when it comes to getting the economy moving again. We have the wind in our sails, the last thing we need is someone to knock the wind out.”

Scurvin, however, is acknowledging only the visible impact of the tax expenditure. As Frederic Bastiat artfully explained, all policies have unseen consequences. In this case, the unseen impact is that the mortgage interest tax deduction fuels malinvestment in housing at the expense of other, more productive sectors of the economy. While Governor O’Malley’s budget proposal has many negative features, the potential for reducing the state subsidy to housing could be its silver lining. Unfortunately as Maryland realtors demonstrate, eliminating tax expenditures is a painful and politically difficult process.

In DC Job Market, it is Who You Know, Not What You Can Produce

When making hiring decisions, how does one determine the productivity of a prospective worker? Assessing productivity is difficult even after you hire someone but it is even trickier when all you have to go on is a resume and some references.

Pete Thompson of the local DC NPR station (WAMU) had an interesting story yesterday on the DC job market. He interviewed George Mason economist James Bennett:

Bennett says it’s common sense that networking is the key to many jobs in DC including those in government, nonprofits, and especially politics.

But he says the end result is that many people — qualified or not — wind up wasting valuable time applying for open positions that have already been filled.

“All these people have job searches but half the time that’s show and tell, the real candidate has been picked out long ago,” he says, “but you have to go through the motions of government regulations, all this stuff’s been going for a hundred years.”

This, I think, is one of the ugly side-effects when government employment crowds-out private employment. As hard as it is to determine the productivity of a prospective worker, it is even harder when that worker is responsible for producing a public good instead of a marketable private good. And thus, compared with private employment, public employment is more likely to be subject to arbitrary standards.

In private industry, one can attempt to measure the marginal productivity of labor with the measuring rod of profit and loss: if I add one more man-hour, how does that affect my net profit? From this assessment, an employer can offer a wage based on some knowledge of the return he or she will get from hiring the worker. Of course, the prospective employee can reject that offer if he or she can find another firm that will pay more.

There are many ways to get tripped up—especially in complicated production procedures that require the collaboration of multiple workers and their machines. But competitive pressures help hone the estimation procedure: workers can leave the firm if another firm offers a greater wage (perhaps because, in using the new firm’s machines, the workers are more productive there). And as employees come and go, the employer can better-assess marginal productivity.

In public employment, however, there is no measuring rod of profit and loss and so employers must rely on more-arbitrary procedures. How does one determine how much a prospective congressional aide will add to the productivity of government? As Professor Bennett notes, a common shortcut is to look at who the job-seeker knows.