No Free Wunsch

Well, we are a year into the financial crisis and it's a good time to take stock. 

Congress has issued a report on the results of the GM and Chrysler bailouts and the results shouldn't surprise anyone.

According to the report, most of the $23 billion initially loaned to General Motors and Chrysler late last year, prior to their bankruptcy filings, will likely go unpaid, leaving U.S. taxpayers on the hook.

I think it's now clear that the bailouts were more about saving the union than they were about saving the companies.  However, some politicians actually believe that they can "create jobs" by "investing" in certain projects or sectors. 

When I was elected to the House in 1990, the big "Economic Development" scheme was the Wunsch Stock Exchange.  A guy named Steve Wunsch had created an electronic stock exchange and the Arizona Legislature got the great idea to rename it the "Arizona Stock Exhchange" and subsidize it to the tune of a few hundred thousand dollars a year.  The scheme was supposed to facilitate investors' providing capital to Arizona companies.  Whatever.  The exchange closed in 2001 due to lack of volume. 

Of course, no one much noticed the decline and eventual closure of the Wunsch exchange.  That's because the political class had moved on the next big thing in economic development...call centers.  Dude, I kid you not.  Somewhere between the outsourcing to Pakistan and the rise of the internet, Arizona decided that the next big thing would be call centers...whatever.
 
There were some fun side trips on the economic development pathway, like the time that the state Commerce Department established program to bring retirees to the valley…until someone figured out that when you add up the total cost associated with them, the state lost money on each person who moved here.  But most of the economic development has involved building things that couldn’t get financed privately.

So while the call center hype was dying down, the state planners moved to the next big thing…downtown redevelopment.  In theory, if you build a really nice stadium you will bring in a bunch of jobs…hmm, well, maybe if you spend two billion on a new Civic Center it will generate some revenue…dang.  Of course, the stadium and the civic center are only viable if you build a third downtown Phoenix hotel.  What?  The private sector won’t finance a new downtown hotel?  That’s fine.  The city can build it.  Hmm, I wonder how that’s all going?

Of course it’s not all bad news, the Cardinals got a new stadium out of Economic Development mania…and  if Maricopa County is going to get a stadium—the political process being what it is--then Tucson should get $80 million for Rio Nuevo.*  Let’s see, for $200 million dollars, you can…hmm buy a study with a really glossy cover and a movie theater. ..but if you spell it “Theatre” it’s totally worth the price.

Speaking of the Cardinals, Glendale doubled down on the Cardinals stadium by investing in…Desert Hockey.  Now, I don’t have anything against hockey—especially since it’s the last remaining sport for mid-sized white guys—but Glendale will be lucky to avoid bankruptcy, of course, by the time the garbage is piling up in the streets, the current council and mayor will be long gone.

However, Glendale’s folly  turned out to be Scottsdale’s gain.  It didn’t look that way immediately, but in hindsight,  Scottsdale caught a break when Steve Elman and Glendale Mayor Elaine Scruggs moved the Coyotes to Glendale in the middle of the night.   That  freed up  Scottsdale Mayor Mary Manross  to invest in…Skysong.  D’oh.  

Speaking of investments, how’s City North doing?  I drove through there recently and , if you are looking to make a zombie movie and need a lot of vacant real estate as a backdrop, I guess it’s doing OK.

Speaking of flesh- eating zombies,  it was really fun to build new Spring Training Stadiums in order to lure teams to Arizona, but the cities are beginning to learn that cannibalism works both ways.   That’s why the Cubs are demanding concessions from Mesa while the Florida Grapefruit League promises  some “investment” of its own.  Golly, you mean that other cities will actually outbid you and you could end up holding the bag on a bunch of incentives while your Economic Development Big Fish goes to a greener pond?    Err, whatever.   Too bad the cities  didn’t figure that out before they spent all that money on all the “motor mile” incentives.

Speaking of Florida—the guy, not the state—the big economic development fad of the last decade  (somewhere between stadiums and bio tech) was luring the so called “Creative Class.”  Economic development guru Richard Florida posited that by luring the sushi-loving, Bohemian “Creative” people, cities could incubate the next generation of Hewlit Packards, Googles and Microsofts—and Richard Florida knew EXACTLY what the Creative People wanted—gay bars and grunge bands. 

Golly, it turned out that the people who actually create things drive Hondas, have a couple kids and are really looking for convenient parking and low taxes.  Dude, who would have guessed that?  Meanwhile, the cities like Tempe that adopted the Richard Florida hipster model learned that the hacky sac playing, moderately stinky street people who gravitated to these new urban playgrounds not only didn’t create anything, they didn’t even buy anything.  So the independent stores that used to line Mill gave way to the chain stores that also couldn’t survive and now we have another back lot for our next zombie film.

Speaking of film, how’s that state tax credit for the movie industry doing?

While all this waste seems vaguely comical, it’s by no means harmless.  Politicians from both parties believe that they can make strategic investments to improve the economy.  That’s fine when we are talking about these cute little stadium, grunge band, historic Theatre, civic center and motor mile boondoggles, but we are eventually going to get into real money.

This quote from Monday’s New York Times will give you a flavor for the extent of problem.

Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government.

If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank.

Perhaps the most pernicious side effect of  this Economic Development fever is that is that projects are more likely to get funded based on the skill of your lobbying team than the skill of your engineering team.  That means that elected officials are supported and evaluated based on their ability to dole out stimulus money and fund individual companies.  Gone are the days when pork meant a bridge to nowhere, now pork is handed out to individual companies and naturally, those companies work to ensure that their sponsors remain in power.
 
I don’t want to sound too cynical, but if elected officials believe that they are smart enough to make healthy returns by playing around with public money, there’s a fund available.  It’s called EORP—The Elected Officials Retirement Plan.  That’s the separate pension system that the state of Arizona maintains for retired elected officials.   I think they should all get together and invest the fund in a downtown hotel or a start up bio tech company. 

Then they can actually live with the consequences of their "economic development" decisions.

*Footnote:  One funny side note to the Rio Nuevo project is that the Star’s  Rob O’Dell ran a great series of front page stories about what a financial disaster Rio Nuevo has been and the legislature actually read the stories and decided to do something about it.  Then the Star Editorial Board had to write an increasingly frantic series of editorials telling policy makers not to pull the plug because the project was so worthy.

It's also been fun to watch the Rio Nuewvo finger pointing...after all, if a project wastes $200 million, at least a head or two needs to roll.  Here's what happened to the former Rio Nuevo Director.

Shelko's position was written out of the city budget in April by then-City Manager Mike Hein before Hein was fired by the City Council in April. New City Manager Mike Letcher also decided to let Shelko go.

Of course, heads don't actually roll very far in government.  Here's the update. 

Former Rio Nuevo Director Greg Shelko is back working for Rio Nuevo as the board that oversees the redevelopment district voted Tuesday to hire him as a $100-an-hour consultant for a new convention hotel downtown.

Gotta love it.

 

Comments

[Name]

How could you possibly have gotten so cynical without even mentioning light rail and renewable energy?

[Craig]

Greg,

Your best post ever!

[silver surfer]

OMG, Greg, I'm laughing out loud at this post-although it's so true I should be crying at all this sad news of the pattern of poor decisions our leaders have made when spending public money for what private enterprise should be doing. Although I will admit, in spite of my desire for lower taxes, I like the new Phoenix owned hotel! Agree with "Name"-the only thing missing is the light rail and renewable energy!

[chad]

i dont understand your point on city north. not that i know much about that issue but the way i understand it phoenix invested no money in that. they were going to rebate a portion of 2d phase sales tax. the city rebates nothing on vacant zombie land meaning they invest nothing and lose nothing. so i guess its gone pretty well from phoenix's perspective.

[Sen. Ron Gould]

I like the EORP angle. Watch for it in some future Gould floor speech.

[Jack]

While you make some great points, some of your associations are a little off. The call center "craze" was not a matter of policy; it was an observation of what was actually happening. I don't recall anyone throwing incentives at call centers. They just came because we had lots of young people without jobs who were willing to work for relatively low pay. Also, for whatever reason, the Phx Convention Center seems to be booming this summer - if lunch time restaurant business and unavailability of rental cars is any indication, that investment seems to be working. But don't get me started on Glendale. Their Camelback Ranch project is what has Mesa in trouble, and it is not paying off anytime soon.

[ron]

Corporate welfare is alive and well. I wonder how that is working in Iraq where we handed out cost plus contracts without a bidding process. Anyone care to guess?

[John]

It is really interesting to hear a Republican's perspective on these "economic development" strategies because it matches that of a progressive pretty closely. That is to say that subsidies and giveaways are clearly the cause of the problems outlined in your post and it seems like you're opposed to these problems. Even though taxpayer monies provide the start-up cash for a downtown hotel or a new stadium the fact remains that the corporate interest yeilds the greatest financial return. I am all for building new stadiums, hotels, light rail, and other urban investments IF the receiving entity is held accountable to the promises it makes.

[Rick Banter]

I'm a free market libertarian and I put most of the blame squarely at the lobbyist culture in our local government.

Republicans have generally run this state for the last 50 years, and the bedrock principle of the conservative philosophy is the belief in the free market and smaller government, yet these same Republicans change their tune as soon as the lobbyists come knocking on their door with cash.

Just look at the ridiculous things you can get passed in this state with even an inept lobbyist, like a Rock and Roll museum in Eloy paid for by taxpayers.

The Democrats are no better, they also have their lobbyists and are usually part and parcel to all this ridiculous corporate welfare.

What we need is a constitutional amendment similar to California's where 2/3rds of the legislature is needed to pass a budget. That would put a severe dent in all this nonsense. And we also need to nominate better Republicans that will stick to their conservative principles.

[Mark Smith]

Speaking of cannibalism, let's not forget what Mesa's Riverview project has done to West Mesa. Riverview's current tenants are comprised in large part of businesses who left other shopping centers in West Mesa to relocate to the new taxpayer-subsidized Riverview. These include Wal-Mart, SkiPro, Peter Piper Pizza, Office Max, Pretty Party Place, Bed Bath and Beyond, Radio Shack, Taco Bell, etc.

The effect has been lots of zombie shopping centers lining a 4 mile stretch of both Alma School and Dobson roads. And guess what? The businesses that relocated (Wal-Mart, SkiPro, etc.) are not adding NEW sales tax revenue to Mesa--their sales tax revenue was already benefitting Mesa.

Add to this (or subtract if you prefer) that the new businesses that opened up shop in the taxpayer-subsidized Riverview cannibalized market share from other nearby car dealers, restaurants, and retailers. For example, ABC Nissan has a beautiful new facility in the taxpayer-subsidized Riverview, but there are almost no car dealers left on Broadway between Alma School and Dobson.

The Riverview development has not done much to help Mesa because a lot of the sales tax revenue is simply due to cannibalization from other businesses and shopping centers. It has hurt West Mesa by encouraging vacancy in other nearby shopping centers.

But there is some good news for Mesa--Waveyard may never actually get the financing it needs to start construction.

[Reagan Republican]

Excellent post--and I love the EORP idea, as long as there are no bailouts when it goes under, of course.

[Donna Minor]

The one thing government could have done to actually help our economy was to let the new mine in Superior open up. But typical as always liberal Raul Grijalva and his bunch blocked progress.

After all the government would simply have to trade some land and no cash would have gone to anybody, and we could have had hundreds of new jobs for a long time.

My point: the one time government could really have created jobs, they screwed that up too. The lobbyist for the mine must really suck; or at least the lobbyist for the enviro's must really be good.

[Steve F.]

"They just came because we had lots of young people without jobs who were willing to work for relatively low pay."

Call centers also were attracted to the excellent weather and the fact that Arizona is a right-to-work state.

No closing down call centers because they're snowed out, and no unions to screw things up.

We still have a lot of call centers, even though Bangalore also has good weather and no unions...

[ron]

Here is the new standard for public largesse for personal corporate playgrounds;

Originally estimated to cost $650 million, the (Dallas Cowboy) stadium's current construction cost was $1.5 billion, making it one of the most expensive sports venues ever built. To aid Cowboys owner and general manager Jerry Jones in paying the construction costs of the new stadium, Arlington voters approved the increase of the city's sales tax by 0.5 percent, the hotel occupancy tax by 2 percent, and car rental tax by 5 percent. The City of Arlington provided over $933 million (including interest) in bonds as funding, and Jones covered any cost overruns. Also, the NFL provided the Cowboys with an additional $150 million, as per their policy for giving teams a certain lump sum of money for stadium financing.