A Simple Guide to Defending CentrePointe

With my post on the Urban County Council's questionable-but-unanimous decision to support a fraudulent new financing scheme for CentrePointe, I hoped to raise important questions about the wisdom of proceeding with public funding for the long-stalled project in downtown Lexington.

To some degree, that effort succeeded. That long article is now the most-read post in the short history of CivilMechanics. (Thank you!)

A Webb Companies DevelopmentWhat remains is to get answers for the questions raised there. I expect that council members, developers, Tax Increment Financing proponents, and their allies will face much more challenging questions as citizens and the local press begin to look for those answers.

I have attempted to explain why I think CentrePointe is a bad deal for the public and for investors. But I don't have a monopoly on information about CentrePointe and its most recent developments. Despite my best efforts, I may have made mistakes or missed important details. So I welcome information which helps clarify matters. But 'clarifying information' hasn't always been easy to get with CentrePointe.

Given past interactions with CentrePointe defenders, and in the spirit of fostering fair and healthy debate, I offer this helpful guide to defending CentrePointe.

Hopefully, these useful suggestions will help anyone sympathetic to CentrePointe formulate better, more thorough, and more effective answers than they have contrived in the past.

For all of you CentrePointe defenders out there, enjoy!*

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A Simple Guide to Defending CentrePointe

1. Refuse to attack your critics.

Although those rascally critics might infuriate you, try not to attack their character, their motives, their style, or their knowledge. Some examples:

  • "Mr. Morris has been against this project from the very beginning..."
  • "What Mr. Morris fails to understand is..."
  • "Mr. Morris feels that he is entitled..."
  • "Mr. Morris may be a competent businessman in his field, but obviously he knows little..."
  • "Mr. Morris said mean | slanderous | libelous things about us..."
  • "Mr. Morris is a crazy, no-good, rotten, dirty scoundrel obstructionist, who..."

If you find ourself beginning to respond with any variant of the above, stop immediately. 

While all the above assertions may be true, attacking your critics in this manner (or assuming that you know what they think, feel, or understand) sounds condescending.

It also betrays your lack of more substantive responses to legitimate questions.

2. Avoid resorting to 'privileged information'.

Secrets fail to bolster your case.

Referring to privileged information - secret plans, documents, financiers, underwriters, bond offerings, etc. - reinforces the impression that you are hiding something, and undermines the notion that you have a viable and legitimate plan. 

After last week's vote, we're all in this mess together now. So you might as well share all of that special, super-secret stuff that only you know.

Don't try to win the argument by referring to McCarthy-esque secret documents. In the end, everyone will know that you're bluffing.

3. At all costs, refrain from bullying and intimidation.

Don't pull $20,000 in advertising from publications which ask legitimate questions about your project. Don't berate critics in the newspaper. No. Really. Don't berate critics in the newspaper. And try not to imply that you may resort to legal action against your critics. 

Such desperate attempts only reveal how tenuous your position really is. (Besides, the discovery process of an actual legal case could get really messy. Lawsuits don't help you preserve secrets.)

People in true positions of strength don't issue such weak threats.

4. Try not to say 'private property' or 'private development'.

While these phrases have been quite effective for you in the past, they have worn whisper-thin.

By now, everyone understands that you are using public financing to help fund your development. Everyone knows that you are requesting that public agencies issue bonds to be paid back with public tax revenues.

So don't try to maintain the elaborate charade of privacy. Everyone knows it is a charade.

5. Suppress any impulse to play the victim.

You are powerful people who make big, important decisions. Most of you get paid very well (I'm excluding council members here). Pretending you are some sort of victim - especially a victim of bloggers and other commentators - is unbecoming of someone of your stature.

Besides, everyone now knows that you plan to be the recipient of a huge taxpayer-funded payday | bailout | bonanza. So lose the 'poor me' act.

If you are losing the war of words and ideas, try using better ones. 

6. Use facts and logic to support your case.

Believe it or not, this might be the most effective tool you have in your arsenal!

If your critics are wrong, use detailed facts and impeccable logic to spell out why. If you've got secret information which proves your critics wrong, start sharing it now.

Your critics have spelled out their cases. Now be detailed, thorough, and crystal clear in yours.

::

Hope this helps!

Love,

Rob

* The rest of us can use this as a simple guide to separate the CentrePointe nonsense from the CentrePointe substance - our very own B.S. detector!

How Council Voted to Defraud Investors to Benefit the Webbs

Call it "CentrePointe Fatigue".

After six-and-a-half years of bulldozing, promises, broken promises, half-truths, and outright lies on the CentrePointe project, folks are just plain tired of talking and thinking about CentrePointe. They're tired of waiting. They just want something, anything to be built on the long-empty block in the center of our city.

And I get it. After writing over twenty posts examining the business model, architecture, and politics of CentrePointe (see here and here for a sampling), I got tired of talking and thinking about it, too. The interest and outrage was hard to sustain (even if thoroughly justified). 

You can see it in online conversations. You can see it in the newspaper1. You can see it in Urban County Council meetings. The coverage and the questions got lazier. At some point, the fatigue just took over. People lost the will to keep investigating and to keep fighting, especially as the project stalled repeatedly.

And that's precisely what the developers have counted on all along.

If they just waited us out and wore us down, they could walk off with their bonanza payout financed with our tax dollars, and we'd all be too tired, too exasperated, or too relieved to notice.

Against this backdrop of CentrePointe Fatigue, Lexington's Urban County Council voted 15-0 last Tuesday to approve a new scheme to finance a $32 million parking garage for CentrePointe.

But what really happened was deeply disturbing: The Council unanimously approved a scheme which is designed to defraud investors for the benefit of the developers.

Is 'fraud' too strong a term? 

Let's dig in and find out.

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With any economic development initiative, governments hope to foster increased economic activity in a particular place. The increase in activity is sometimes called an 'increment'. Tax Increment Financing (TIF) is an economic development scheme where the projected future taxes generated by the new economic activity - the increment - are used to pay for 'public' infrastructure improvements.

In CentrePointe's case, these 'public' improvements included a $31.9 million underground parking garage, as well as improvements to sidewalks, sewers, streets, and the rapidly-deteriorating Old Courthouse. In all, CentrePointe includes about $45.5 million in so-called2 public infrastructure.

The CentrePointe TIF proposed financing the infrastructure by issuing bonds to investors, and paying those investors back - plus interest - over the next 30 years with the 'tax increment' generated from the project. 

Would CentrePointe be able to generate enough in new taxes to pay bond investors?

That was the central question of a 2013 report [PDF download] commissioned by the Cabinet for Economic Development and written by AECOM Economics, a Los Angeles based consultancy. 

The AECOM report stands as the only comprehensive evaluation of the economic impacts of CentrePointe in its current incarnation. 

AECOM's report is deeply flawed3. It uses non-standard valuation techniques which tend to dramatically overstate how much CentrePointe is worth to the community.

Despite its flaws, AECOM's evaluation is still instructive: it raises significant doubts about the viability of the CentrePointe TIF. It also contains what state and local officials knew (or should have known) about whether the TIF could be successful.

There are two key tables in the 52-page report which should have set off alarm bells for the Cabinet for Economic Development and for the Urban County Council.

In the opening pages of the report, AECOM sizes CentrePointe's tax increment: $48.8 million. Compared to what was there before, AECOM claimed that CentrePointe would be expected to generate nearly $49 million in new taxes over the next 30 years.

CentrePointe Tax Increment
CentrePointe Tax Increment: $48.8 million (AECOM Report, June 2013, p.3)

 

So, would that be enough to pay back bond investors?

No.

A little deeper in the report, AECOM summarizes the public costs of the CentrePointe infrastructure bonds. While the 'public' infrastructure would cost $45.5 million, the interest payments (called 'financing costs' in AECOM's report) on the infrastructure bonds would pile up another $47.7 million. Over the next 30 years, then, the infrastructure bonds would cost a little more than $93 million.

CentrePointe Bond Cost
CentrePointe Bond Cost: $93.2 million (AECOM Report, June 2013, p.10)

 

How can $49 million in new taxes from CentrePointe pay off $93 million in debt and interest for the infrastructure bonds?

It can't.

And therein lies the central fraud of the CentrePointe TIF. There will never be enough economic activity on the CentrePointe site to pay off the debt and interest on the infrastructure. That's what the only credible, comprehensive analysis of CentrePointe says.

The Cabinet for Economic Development should have known this. (It was their report.) The Urban County Council should have known this. (They were provided the AECOM report before approving the CentrePointe TIF).

Despite knowing that the CentrePointe TIF could never pay for itself, in July 2013 both the city and state approved this audacious scheme to offer fraudulent bonds to investors which they knew could never pay what was promised.

And they approved this scheme all for the benefit of the developers, who get a 'free', taxpayer-financed parking garage.

Pretty bad, huh?

Wait, it gets worse.

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For the CentrePointe TIF, the state will set aside the new, incremental taxes generated by CentrePointe, in order to repay the public infrastructure bonds. The state will hold on to those taxes until at least $150 million in capital is spent on the CentrePointe site. (This is a requirement of Kentucky's 'Signature TIF' law.)

Once the state and city approved the CentrePointe TIF scheme, the developers began to dig and blast for the development's $31.9 million underground parking garage.

After the developers completed most of the digging last month, they returned to the city and the state with an even more audacious scheme. They asked the city and the state to issue bonds for the parking garage now - before they had spent anywhere close to the $150 million required to release the incremental taxes for repaying the bonds.

The state Cabinet for Economic Development refused the request, and claimed that it was more appropriate for the city to issue the parking garage bonds.

The Urban County Council debated the request, with many council members (appropriately) expressing reservations about the liability for the city in issuing bonds before anything was built which would generate the funds to repay them.

Last Tuesday, the Council heard - and approved - an even more convoluted proposal. (This GTV3 video captures the entire 40-minute meeting.)

The Kentucky League of Cities (KLC) - a non-profit association of Kentucky's cities - offered to act as a conduit to issue the parking garage bonds under its authority. In order to do so, Lexington would need to enter into an interlocal agreement with another Kentucky city (in this case, Midway) to form a new non-profit corporation which would issue the new bonds. Lexington would pledge its portion of the TIF revenues to KLC for the repayment of the bonds.

While there were a few pointed questions from council members about the project, the overall mood in the room seemed to be a palpable sense of relief - something, anything was finally happening. There was also palpable relief that this whole issue would soon be someone else's liability.

The council voted 15-0 to pursue using KLC to issue the parking garage bonds. Most of the participants congratulated one another on the ingenuity of this new scheme.

They shouldn't have. Their hands are far from clean.

By inserting additional layers into the already-labyrinthine CentrePointe TIF scheme, the Urban County Council unanimously voted to make it nearly impossible for bond investors to understand that they will never get their money back.

During last Tuesday's Council meeting, Roger Peterman - a partner at Dinsmore and Shohl who consults with the city on bond issues - claimed that the potential bond investors "are sophisticated investors [who are] willing to analyze more difficult credits like these."

Let's parse that a little. As a so-called 'sophisticated investor' myself4, I wondered about how other sophisticated investors would get access to information on the CentrePointe TIF.

When I contacted the Cabinet for Economic Development to obtain a copy of the AECOM report, for instance, I was told "The consultant’s study is protected from public disclosure by state law." Remember, this is the only credible report on the CentrePointe TIF, and the public agency which commissioned the report was refusing to release it to the public.

I managed to obtain the report through other channels, but I wonder whether the average bond investor would have had the ability and the network to discover it.

Most of these bond investors would deal directly with KLC's proposed "Lexington-Midway interlocal non-profit bond-issuing shell corporation"5. Very few would have visibility into the convoluted TIF program, much less the precise financial details of the CentrePointe TIF. Even if they knew to look for the AECOM report, how many would press further after being stonewalled by the Cabinet for Economic Development?

'Sophisticated investors' also bought the AAA-rated bundles of mortgage-backed securities and collateralized debt obligations which supercharged the subprime mortgage crisis in 2008. Calling them 'sophisticated' doesn't mean that they have a clue about what they are investing in.

But the Urban County Council does know what they are doing: They are using KLC to issue bonds which they know can never be paid back. They are assisting in perpetuating the CentrePointe TIF fraud6.

Wait, it gets even worse.

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Because the state will hold the incremental taxes from CentrePointe until $150 million is invested in the site, that means that there will be no funds available to pay back bond investors until the project reaches that $150 million threshhold.

But if KLC issues the parking garage bonds through their shell corporation today - when only $5 million of capital has been invested - how will bond investors be paid?

What assurances do bond investors have that anything else will be spent, and that the parking garage bonds will ever begin to be paid back? Only the blithe assurances of the developers. And six-and-a-half years later, those assurances carry very, very little weight.

If the project stalls after the parking garage is built, then what?

Wait, it gets even worse still.

::

There's one more aspect of what the Urban County Council did last Tuesday which should alarm us: They prioritized the CentrePointe parking garage over the stuff that's truly public: sidewalks, streets, sewers, and the Old Courthouse.

Remember how the CentrePointe TIF application filed by the developers called for $45.5 million in 'public infrastructure', including the $31.9 parking garage?

What was approved on Tuesday was a scheme to fund the parking garage alone.

What happened to the other $13.6 million of infrastructure? When and how will bonds be issued for that? Will those bonds be prioritized behind (i.e., paid after) the parking garage bonds? 

It was disturbing to see how eager the Urban County Council was to set up financing for the stuff which benefits the developers (the parking garage) without advancing the stuff which is truly public in nature.

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If the KLC scheme for the CentrePointe TIF proceeds, the net effect of all of these maneuvers is that only one party involved with the CentrePointe TIF comes out ahead: The Webb Companies.

Bond investors are likely to lose about half of their investment - and that's if the project is ever completed as planned.

Lexington and Kentucky taxpayers will have earned the right to have their future taxes skimmed for the next 30 years to pay back part of the obligations to those duped bond investors, while incurring the additional legal liability for our city officials and KLC having set up a fraudulent bond offering.

The Webb Companies, however, come out way ahead.

By waiting until the public no longer noticed, The Webb Companies get a 'free' parking garage financed with our future tax dollars, while incurring none of its associated costs or risks.

If the rest of the project can never be built - and bondholders can never be paid - The Webb Companies still got a brand new underground parking garage (which they never paid for) on their land.

If they do happen to complete the project, their development will be much more attractive to tenants because of the taxpayer-financed parking garage.

The Webb Companies come out ahead whether the development gets built or not.

In the process of using this taxpayer-funded scheme, the Webb's have likely more than doubled their profits at our expense7

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By taking advantage of CentrePointe Fatigue, the developers have once again privatized gains while socializing their risks to the rest of us - as they have done repeatedly over the past 40 years.

Along the way, they have convinced city and state leaders to use our good names (and credit ratings) to defraud bond investors in order to benefit The Webb Companies.

After six-and-a-half years, I know that it is hard to sustain outrage and interest in CentrePointe. But it has never been more critical to be outraged at shameless hucksters who line their pockets with our money.

 

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Continue reading "How Council Voted to Defraud Investors to Benefit the Webbs" »


Moving the Goalposts on CentrePointe

In 2009, an analyst hired by Kentucky's Cabinet for Economic Development evaluated the CentrePointe development project in downtown Lexington.

The analyst looked at whether the Tax Increment Financing (TIF) that the developers proposed using made any sense. At the time, CentrePointe was slated to be a $298 million project, and the developers wanted to use Kentucky's new TIF law to help subsidize the project.

Under TIF, the state and city would issue bonds to investors, and pay those investors back (with interest) by using the incremental taxes generated by the new development over the next 30 years. The TIF law stated that projects like CentrePointe needed to invest a minimum of $200 million in capital to qualify.

The analyst expressed skepticism about projects like CentrePointe - the real estate market was imploding in 2009. CentrePointe's developers assured the analyst that the project was a sure bet: there was a mystery overseas financier willing to front all of the cash needed to build the project; there were top-notch tenants lined up ("Hard Rock Cafe", "J.W. Marriott"); 65 of the 91 million-dollar condos had already been sold in handshake deals; the office and hotel spaces would have exceptionally high occupancy rates (even though they would also have exceptionally high prices).

Taking all of the developers' assurances into account, the analyst thought the project would generate about $93 million in new taxes for the public. Sounds great, right?

Except that the same analyst found that CentrePointe's bonds would also cost the public about $96 million to finance.

Even with all of the developers' optimistic "best case" assurances - all of which eventually proved to be false - the Centrepointe bonds would still lose $3 million. [Updated*]

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CentrePointe, Version 12
Visions of CentrePointe, 6 1/2 years later...

As CentrePointe repeatedly evolved over the ensuing years, it also repeatedly shrank. From the nearly $300 million sizing used for the 2009 assessment, the project shrank to $250 million, then $200 million. CentrePointe was shrinking to the point where its TIF funding was at risk.

Then, early last year, CentrePointe's developers successfully lobbied the state legislature to lower the minimum capital investment needed to qualify for TIF to $150 million. In June 2013, the developers re-applied for TIF subsidies with a new, scaled-down CentrePointe.

The state hired the same analyst to evaluate CentrePointe, which was then estimated at $193 million (over $100 million less than in 2009). In their estimates, the analyst now estimated that the new Centrepointe Jr. would generate about $49 million in incremental taxes - about $23 million less than in the 2009 estimates.

This makes sense. As the size of the project shrinks, the incremental benefit also shrinks.

The problem? The new proposal still required an investment of $93 million to finance the CentrePointe bonds.

According to the state's own analyst, the CentrePointe TIF bonds would be an extraordinarily bad investment in which bond investors would hand over $93 million, only to lose $44 million in the process.

Despite this extraordinarily negative analysis, the state and city decided to approve the TIF application for CentrePointe anyway.

::

Earlier this year, the developers began digging and blasting for a proposed $32 million parking garage on the site.

With the huge hole nearly complete, the developers have returned to the state and city to request that the TIF bonds for the garage be issued now - before the developer has spent anything close to the $150 million capital investment that is required to qualify for TIF.

In essence, the developer is requesting that the city and state take on a $32 million bond commitment (with an additional $33.5 million in financing obligations - $65.5 million total) on the dubious promise that the yet-to-be-built CentrePointe will someday generate enough new taxes to pay off bond investors.

This simply isn't how TIF works. You don't get the tax-funded financing before you build the thing which generates the taxes.

::

The state's economic development analyst says that CentrePointe bond investors will never get paid back. And the analyst is undoubtedly correct.

The developers and their representatives repeatedly contend that TIF financing holds no risk for the city, the state, or taxpayers. (I don't believe this assertion, but let's run with it...)

If there really is no risk to taxpayers, then why do the developers need the city's help in issuing TIF bonds? Why involve the city at all? After all, the developers could always pursue financing through normal real estate investment markets.

The reason is that they need the city's help in creating the impression that the bonds are a safer investment than they really are.

But CentrePointe bonds aren't a safe investment at all. In fact, they are likely to lose money for bond investors, because the project will never produce enough new taxes to pay investors back.

But the developers can't let investors know that. Savvy investors would look at the risky business model of CentrePointe and refuse to fund it.

So the developers want to use our good name and credit ratings to help them deceive and defraud those investors, to assure them that the public stands behind those bonds and that the bonds are safe.

Today, the Lexington-Fayette Urban County Council will consider whether to ask the Kentucky League of Cities to issue TIF bonds for CentrePointe. While this move ostensibly shields LFUCG from liability when bond investors aren't paid back, it is really a shell game. The League of Cities is a non-profit which consists of Lexington and other Kentucky cities, and lobbies on their behalf. Whether the League or the city issues CentrePointe TIF bonds, the reality is that taxpayers are still ultimately liable when the bonds fail. (And they will fail.)

The developers have attempted to maintain a veneer of respectability in our community - frequently pointing to their many, many development projects around Lexington as proof of their virtue. And CentrePointe fits the developers' well-worn modus operandi of privatizing gains while socializing risks throughout those projects.

CentrePointe represents the very worst of corporate cronyism. By using an obscure and ever-shifting financing scheme, the Webb Companies are attempting to commit state-assisted fraud, while lining their own pockets and hoping that no one notices.

They've hoodwinked the Cabinet for Economic Development. Twice. They've hoodwinked the Urban County Council. At least two times. Now they want to hoodwink the Kentucky League of Cities.

These aren't the actions of upstanding citizens. These are the actions of con artists and swindlers. They should be treated as such.

* An earlier version of this post included a smaller, state-only estimate of the impacts of CentrePointe from the analyst's 2009 report. I've updated the post to reflect the full impacts to both the state and city. (This correction resulted in an even bigger shortfall for the TIF funding.)


Kentucky's Regressive Tax Reform

I was pleased to be asked to comment for today's story by Jack Brammer and Janet Patton for the Herald-Leader on the Governor's tax proposals. They did a great job accurately representing my views. This post helps elaborate on my perspective.

Dubbed "Kentucky Competes", Governor Steve Beshear's tax proposal consists of more than 20 changes to our state's tax code. The proposal contains a number of troubling components which place a disproportionate burden on Kentucky's poor, while providing large annual tax breaks which are skewed toward businesses and the wealthy.

I have three major objections to Governor Beshear's tax reform plan:

  1. It is a taxpayer-financed corporate tax giveaway.
  2. By relying on sales taxes, the plan hits the poor and middle class harder than wealthier citizens and businesses.
  3. By choosing which kinds of labor to include (and exempt) from the sales tax, the plan hits the poor and middle class even harder.

Let me step through each one in turn.

1) Corporate Tax Giveaway

Overview
Click to enlarge

Governor Beshear's proposals would generate an additional $210 million for the state. But like many tax reform initiatives, Beshear's plan contains a mixture of new taxes and new tax breaks.

The Governor's plan contains approximately $487 million in new annual tax breaks, more than offset with about $697 million per year in new taxes.

That's nothing especially disturbing, given that the reform plan is supposed to put the state on sounder financial footing, and raising taxes is one way to do that.

What is disturbing is how the mix of breaks and taxes are allocated. Nearly half of the Governor's tax breaks go to businesses (amounting to $234 million per year). So what's their share of the new taxes that Beshear proposes? Nearly zero:

 

Who benefits and who pays?
Click to enlarge

 

Businesses pay a lot less...

I say 'nearly' zero because there will be some businesses which pay the new sales taxes for covered categories like auto service or computer repair. But given the exemptions and restrictions on these new sales taxes, the business share of the almost $700 million in new annual taxes will likely be very, very small. 

So businesses (some of them, at least) will get a collective windfall of more than $234 million per year under Beshear's plan, while simultaneously contributing no new taxes to the state.

Throughout the documents Beshear's office released yesterday, there is the notion that this corporate giveaway will help Kentucky "compete for quality jobs." The underlying assumption is that if "job creators" are given enough tax cuts, that they'll hire our way to prosperity. This notion is, at best, misguided; at worst, it is an outright lie.

As I have written before (more than once, in fact), business owners do not hire because they have extra tax-cut money lying around. We hire because we have work to do, and we need someone to get it done. We hire when there's more demand.

...while Kentucky families pay a lot more.

Meanwhile, because businesses wouldn't pay these new taxes, the burden is placed squarely on Kentucky's families. When paired with the tax breaks for individuals, Kentucky households would pay about $444 million more in new taxes each year (or approximately $260 per household.)

While the Governor trumpeted the 'relief to every working Kentuckian' yesterday, the hard truth is that his scheme raises taxes on nearly every working Kentuckian in order to fund an enormous tax giveaway to select (usually large) businesses. This plan is a stunning, brazen, and inexcusable attempt to redistribute wealth from those who can least afford it to the already-wealthy.

2) Sales Taxes

Sales taxes are an incredibly regressive tool for raising money for Kentucky. They are regressive in the sense that sales taxes hit poorer people harder than wealthier ones.

Why are sales taxes especially burdensome for the poor? Because the extra tax takes up a greater portion of their income for the same product or service. The extra tax just hurts more.

Even though the Governor's proposal includes some $72 million in Earned Income Tax Credits (credits for the working poor - generally a good contributor to the economy and job production), he bleeds those benefits away with new sales taxes.

And the proposed sales taxes are almost exclusively in consumer services, while sales taxes for business services are largely exempt.

Ordinary Kentuckians would not benefit under Beshear's regressive plan.

3) Different Kinds of Labor

The Governor's plan also targets only certain kinds of labor for sales tax expansion. In particular, it chooses to apply sales taxes to labor involved in the "installation, maintenance and repair of taxable personal property." In other words, the repair and service of personal items (like cars or computers) would be taxed under Beshear's plan.

But not all service labor is equal, under the Governor's scheme. Other kinds of labor - say, accounting or legal services - would be exempt from the new taxes. And who disproportionately uses a lot of those exempted services? Businesses and the wealthy, of course.

Even within the "installation, repair, and maintenance category", there are exclusions. Because these new taxes apply to 'personal property', they exclude repair and maintenance services for machinery, farms, and real estate properties -- the kinds of services consumed in greater amounts, once again, by businesses and the wealthy.

By steering the new taxes away from services which impact the wealthy, Beshear hits ordinary Kentuckians especially hard.

::

Governor Beshear's new tax proposal is an audacious attempt to take wealth from Kentuckians who are hardest hurt by our economy, and attempts to transfer that wealth to the already-well-off.

It is a colossally bad idea which will leave millions of Kentuckians worse off. And we shouldn't let him get away with it. 

After the jump: Backstory

Continue reading "Kentucky's Regressive Tax Reform" »


Anatomy of a Con

Imagine, for a moment, that you build houses.  

You're a competent - and pretty crafty - builder, so you earn a profit of 10% of the sales price on each house you build.

You've found a cheap lot on the edge of town which is a decent prospect for a $125,000 home design. At your 10% margins, you'd usually stand to make $12,500 on this house.

Trouble is, your land is in the middle of nowhere: the nearest street dead-ends before it even reaches your lot.  You know that paying to extend the street will cut into your profits by $5,000, and you definitely don't like that.

As you're thinking really hard about how to avoid having to pay for the street extension, you hit upon a really crazy scheme: What if, you think to yourself, I could not only get our town to pay for the street extention, but I also got them to finance the house's two-car garage!

But how could you possibly convince the townsfolk to fork over the $25,000 needed for the street extension and the garage? The town is already struggling with its finances, and you know your proposal won't go over well. Why should the town pay for a private garage?

And here is where you get your craftiest.

You decide to focus more on what the town gets than on what they spend. So you play up 'benefits' the town stands to gain from your 'economic development initiative'. Here's your basic approach:

  • Building the house will generate higher property taxes for the town over the next few decades, where today there is just a vacant lot.
  • The construction will increase economic activity for the town as you pay for supplies and labor on the site.
  • The house will bring in working residents, who will generate new payroll taxes for the town.
  • The garage and street extension - 'public infrastructure', as you now call the garage and road that you need more than anyone - are essential to this future tax revenue.  You'll point out that no one will buy a new house without a garage; and without the garage, the town won't get the benefits of this project.
  • Yes, the town would have to borrow the $25,000 (and, over the years, pay another $25,000 in interest) to help fund the 'infrastructure', but you'll point out that the new property and payroll taxes will offset those costs.
  • Finally, to sweeten the pot, you artificially inflate the price of your house by 20% to $150,000.  You know the project is really only worth $125,000, but boosting the price by 20% has the nifty effect of inflating the estimated 'benefits' by 20%, which makes the whole scheme easier to sell.

You know you are way out on a limb with this scheme, but - who knows - maybe the town will go for it. 

And why would they? Because you've done the math, and you're betting that they haven't.  

If you had paid for the street extension on your $125,000 house, you would have spent $117,500 and pocketed $7,500 - a tidy 6% profit. Not what you usually make, but a profit nonetheless.

But if you can get the town to finance the street and the garage, that removes $25,000 from your cost. Now, you can build the $125,000 house for just $92,500 out of your pocket (and another $25,000 out of the public purse), and you make a cool $32,500 profit for a 26% margin.

If you can get the town to go for your scheme, you've 'magically' quadrupled your profits.

::

So you package up your scheme and present it to the town's economic development manager.  You brace for her to laugh you out of her office, but have decided that you can live with a little ridicule in exchange for the chance - however remote - to quadruple your income.

Instead, she just smirks.

She knows that you need the garage and the street extension more than anyone, and isn't sure what valid public interest the town has in helping with the house you want to build. She know that you need to build something on the lot anyway even if you don't get the town's financial support. She's not sure she believes that your project is really worth the $150,000 you are claiming.  Even if it is worth $150,000, she thinks your estimates on how much the town stands to benefit are extremely exaggerated.

She appreciates the ingenuity of your argument, but the whole scheme strikes her as farcical and not really worthy of being called an 'economic development initiative'.  

And yet, she also knows that you are close to several members of the town council. She seems to recall a picture of you with your arm around the mayor in the local paper. She suspects that you have contributed to several local political campaigns.

These connections intimidate her. So she decides to pass the whole suspect bundle (and the decisionmaking) along to the town council.

And to your delight, the council routinely passes your scheme with only modest resistance. They simply require that you spend at least $100,000 on your project to qualify for these incentives.  

::

Just as you rub your hands in glee at the prospect of making so much money, the economy takes a nosedive. Banks aren't willing to lend for housing construction, even for a 'sure thing' like your project.  

After a long delay in lining up financing, you return to the town council with a proposed amendment to your initiative. You ask for a 'hardship exemption' to lower the total amount which needs to be spent on the project to just $75,000, even though you initially justified the town's financial involvement based on the inflated $150,000 amount.  

You hope that no one notices that a half-sized project would only generate half-sized benefits.

And, sure enough, the town council unanimously approves your amendment without debate. No one noticed. Or, more accurately, no one publicly objected.

At this point, another important revelation strikes you: The smaller your project gets, the more you come out ahead.

You now figure that you can finance and build an $80,000 house on your lot.

If you had built on your own, the house would have cost you $72,000 to build, plus $5,000 for the street improvments, which would have left you with about $3,000 in profit. At just under 4%, the margins are substantially less than you usually make, but the project is still profitable.  

But the town is still on the hook for the same garage and street extension - even though the overall house has shrunk.  So you'll really spend $52,000 to build your $80,000 house (while the town still pays $25,000), and you'll clear a neat $28,000, or over 9 times as much as if you built the project on your own

The town's 'public infrastructure' commitment lets you multiply your profit as the overall project shrinks. You put in less money and get higher return on investment.

You are quite crafty, indeed. 

::

Yes, this thought experiment is ludicrous, if intriguing. And no town would ever support such a ludicrous scheme.

Right?

Except that they already have.

The above fable is true. Mostly.

It's just 2,000 times too small.  

Multiply all of the dollar amounts by 2,000, and you have the fiscal outlines of the CentrePointe project in Lexington.  

Just substitute 'town' with 'The Commonwealth of Kentucky' and 'Lexington'. Then substitute 'you' with 'The Webb Companies'. Substitute 'house' with 'CentrePointe'. And substitute 'incentive' with 'Tax Increment Financing' or 'TIF'. 

CentrePointe started as a $250 million project in 2008. As it sought state and local support for $50 million in 'public infrastructure' (including a $30 million parking garage), CentrePointe's cost ballooned to $300 million. After getting approval for Tax Increment Financing incentives from the state - based on that $300 million price tag - CentrePointe still couldn't get financing, and stagnated.

CentrePointe, Version 5.0
After continual financing troubles and multiple revisions, last week CentrePointe's developers got unanimous approval from both houses of the state legislature to drop the overall project size to just $160 million - while still receiving the full TIF incentives of the inflated $300 million version of the project.  

In other words, no one noticed that a half-sized project only generates half-sized benefits to the state and city. No one recalibrated the incentives when CentrePointe shrank.

In the process, The Webb Companies multiply CentrePointe's profitability with no additional risk to themselves.

::

We've often called Tax Increment Financing (or TIF) a scam or a con. While this sounds like hyperbolic exaggeration, we think what's actually happening is sleazy enough to merit these labels.  

TIF's scamminess stems from several interrelated components:

First and foremost, the developers shouldn't need public help. They benefit from this 'public infrastructure' more than anyone else, but have no financial stake in it. The theory of TIF is that the taxes stemming from new economic activity will pay for the infrastructure.  In return, the city gets the benefits of increased economic activity. That's the theory.

But the reality is quite different.  The most aggressive, best-case scenario from the state's economic development consultant showed the city and state tax increments not quite breaking even after 30 years. 

All of the incremental benefits that the project is supposed to bring are plowed right back into debt and interest payments which benefit the developers.

So in return for taking on $50 million in debt and $50 million in interest on behalf of the developers, the public gets nothing after 30 years. Nothing.

And that was the best case? 

Wait. It gets worse.  The consultant's 'not quite breaking even' case was based on CentrePointe at its bloated $300 million apex.  Now, CentrePointe is a half-sized $160 million project. At this reduced size, CentrePointe can never pay the city and state back for the infrastructure investment.

The developers need the parking garage. The developers would benefit most from the parking garage. Even so, the developers have managed to offload their parking garage costs onto others, using public taxes to do so.

Second, this means that TIF allows The Webb Companies to socialize the many risks of CentrePointe while privatizing the gains. Bondholders and the public take on the risks that CentrePointe might fail to live up to the promised (and unlikely) stream of tax revenues, while the developers avoid (and pocket) the costs of a $30 million parking garage.  The developers get the benefits of a parking garage to serve CentrePointe, while someone else gets stuck with the tab.

Will bondholders or the public ever get paid back? Maybe. Maybe not. We're pretty sure that they won't. In any case, none of this is the developers' concern. They get a big parking garage - essentially for free.

From a developer's point of view, TIF offers all upside with no downside.

Third, this asymmetry in risk rewards the developer for, in essence, making stuff up. In order to win the profit-multiplying $30 million upside of TIF approval, the developers can (and did) say anything. "We're building the state's tallest building!" "We've got all-cash financing!" "We're building a $300 million development!" "We've got handshake deals for 65 condominiums!" "Construction starts in 60 to 90 days!"

The fact that all of those statements were false is beside the point. There was little downside to lying or being profoundly wrong. And the developers were repeatedly, incredibly, and thoroughly wrong.

With no downside, their multi-dimensional wrongness helped the developers secure a $30 million windfall at public expense.

Fourth, as the nature of CentrePointe shrank and changed, the TIF funding stayed the same

CentrePointe's TIF was approved when the developers were proposing a $300 million project.  At that time, the developers also promised that they had financing in-hand. They promised 91 residential condominiums at a $1 million average price. They promised to begin construction in March 2009.

None of these overly optimistic assertions turned out to be remotely true. The project shrank to half its approved size. The size and mix of residential, retail, hotel, and office activity changed dramatically. The project slipped 4 years (and counting) past its promised construction start date. But none of these facts changed the city's or state's TIF obligations.

CentrePointe is a fundamentally smaller and different project than when it was proposed. Yet the developers' rewards remain the same: The developers still get a $30 million parking garage, at public expense.

There appear to be no mechanisms at the state or local level to revisit the TIF commitments when a project fails to live up to its rosy projections. And CentrePointe certainly failed to meet those projections.

Worse, TIF actually rewards the developers for shrinking the size of the project: The smaller the project gets, the greater the developers' return on investment.

The Webb Companies appear to be able to alter the project on every whim of the developers. They can and have overpromised and underdelivered. And the city and state appear to have no recourse - or desire - to reevaluate their support of the project.

Fifth, state law is maddeningly unclear about what happens if a TIF project fails to deliver on its promises. The law goes into great detail about how to subsidize the developers, but it does not make clear who pays when the project falls short of projections. 

When a TIF project is approved, it allows the city and state to take on debt by issuing special TIF bonds. In return for $50 million from bond investors, the city and state promise to use a steady stream of taxes coming out of the new economic activity at CentrePointe to pay back the $50 million (with another $50 million in interest) over the next 30 years. 

Under the original best-case assumptions from the state's economic development consultant in 2009, taxes from CentrePointe just missed fully paying for the bond payments.  

Since 2009, however, everything changed. The project got much, much smaller. Key assumptions justifying TIF for CentrePointe have crumbled. 

In other words, it is not remotely possible for CentrePointe to generate enough taxes to pay back the bond investors.

Three years ago, we re-ran the consultant's analysis for CentrePointe using (in our judgment) generous-but-realistic assumptions.  The result: Taxes from CentrePointe only generated 20% of what was needed to pay bond investors. 

And that was before the project shrank another $40 million - rendering even our dreary projections too optimistic.

So the state and city issue TIF bonds. And the CentrePointe TIF can never pay the bond investors. Then what?

If the city and state default (i.e., fail to pay) on the bonds, whose credit rating takes a hit? Who is responsible for the shortfall? 

Some analysts assert that bondholders would be on the hook for any shortfall. But then, any bond analyst looking at CentrePointe would recognize that they'd never get paid, and investors would flee. Then where do the TIF funds come from?

It is hard to look at the CentrePointe TIF without realizing that there is great risk of loss to state and local taxpayers, as well as bond investors.

It is also hard to look at the CentrePointe TIF without realizing that The Webb Companies incur no risk at all.

Finally, the fact that the city and state sanction TIF for CentrePointe doesn't make TIF more legitimate; It makes TIF more despicable.

TIF is the worst kind of reverse-Robin-Hood welfare scheme for developers. At a time when the state and city are starving for money, TIF uses public tax dollars to help reduce the developers' expenses and helps line their pockets. It transfers risk away from the developers and to the public and to investors. It literally takes from the poor and gives to the rich.

The CentrePointe TIF is a con.  The fact that the city and state assist in the con doesn't make it any less of one.

::

We've often had fun at the developer's expense with CentrePointe, pointing out their serial incompetence and their tendency to lie and exaggerate.

But the truth is that their 'incompetence' and mendacity have served them quite well. It has helped them dramatically compound their profitability and reduce their risk. All at public expense.

Quite crafty, indeed.


Five Years of Failure: Lessons from CentrePointe

Five years ago today, the Webb Companies announced CentrePointe, a then-$250 million downtown Lexington development effort which planned to produce 900 jobs and the city's tallest building on one block in the center of the city. Citing the urgency of the project, the developers moved quickly to demolish several neglected-but-historic buildings on the block.

Then, CentrePointe stalled.

The developers made some cosmetic efforts to clean up the site, ultimately transforming the pit of demolition rubble into a tiny pasture, complete with horse farm fencing.  But actual construction never began.  

Today, CentrePointe is still stalled.

Centrepointe, Version 4.0Over the past five years, the developers have repeatedly revised their plans and their explanations for delay.  At every revision, construction was imminent, slated to begin "60 to 90 days from now".  

The financial and physical ambitions of the project have shrunk somewhat: the plans now call for a $200 million development which no longer includes the city's tallest building.  Instead of the hulking monolith of the first three designs, the developers are now pursuing a less-imposing design which promises to blend with the surrounding city much more effectively.

But approval for the developers' fifth major design iteration expires next week, and we've seen little progress on CentrePointe over the past year.  

After five years, we have no economic activity on the site. No construction. No jobs. No building. No progress.

Over the years, we've been frequent critics of the CentrePointe project.  Those critiques have stood up well to history.

The fifth anniversary of the announcement of CentrePointe, as well as the expiration of the project's fifth design, seem like a good time for us to take stock of what Lexington should learn from the five years of failure with CentrePointe.

Hopefully, we can apply some of these lessons to CentrePointe (and to other major development initiatives in the city).

::

The developers lied.
They lied repeatedly. And with no trace of shame. It isn't a pleasant or polite thing to say, but Lexington needs to stop being polite to hucksters and charlatans.

They lied about their secret mystery financier. They lied about his death. They lied about his heirs and 'numbered Swiss bank accounts'. They lied about backup financing. They lied about backup financing for the backup financing. They lied about the urgency of demolishing historic buildings. They lied about their schedule. They lied about tenant commitments. They lied about 61 (or 64! or 65!) 'handshake' deals for their condominiums. They lied with pretty pictures of ugly buildings. They lied with pretty pictures of pretty buildings. And they lied with overly optimistic financial projections.

They lied to the press. They lied to the public. They lied to the Urban County Council. They might have even lied to themselves. 

And when their thick layers of lies wore thin, they resorted to insulting and bullying their critics instead of offering substantive rebuttals.

TIF is a scam.
CentrePointe has always depended upon tax-increment financing, or TIF, to support approximately $50 million of the project. TIF allows cities and states to allocate future incremental tax revenues to finance today's public improvements related to new economic development initiatives.  

The logic behind TIF is that the increase in economic activity which stems from a new project will generate taxes that will - eventually - pay back the state and city for improving roads, sidewalks, utilities, parking, or other infrastructure around the project.

Sounds reasonable, right? Build CentrePointe; generate new economic activity; generate new taxes from that activity; use future taxes to help pay for the "public" parking garage which CentrePointe needs to be viable.  The city issues CentrePointe TIF bonds to investors, uses the investors' money to build the CentrePointe parking garage, and pays back investors (with interest) out of the tax revenues from all of the economic activity CentrePointe creates.

But here's the core problem: CentrePointe never generates enough economic activity to pay back bondholders.  

How'd this happen? CentrePointe's developers used wildly inflated projections to qualify for TIF, and few city or state mechanisms were in place to effectively challenge the developers' assertions.

And therein lies the problem with TIF more broadly.  Developers have every incentive to exaggerate their estimates of a project's value to the community. If the project comes up short of their rosy projections, developers still reap the benefits of TIF ("Free parking garage!"), while taxpayers and bondholders assume all of the risks.

Those supporting TIF programs often assert that only bond investors bear the risk of project failure.  But that rarely happens. As LEO's Joe Sonka meticulously chronicles with Louisville's Yum! Center (another state-sanctioned TIF program), the reality is that taxpayers are the true backstop when a project fails to live up to its projections.

TIF amounts to little more than an elaborate corporate-welfare scam. 

With no downside risk, developers have no motivation to be realistic in their projections in their pursuit of state and local support, while state and local governments provide few checks on that runaway optimism. 

Further, TIF provides developers with their infrastructure goodies now, and in exchange taxpayers and bondholders get a trickle of unreliable and unpredictable tax revenues over the next 30 years.  

So far, the saving grace for the CentrePointe TIF has been that the developers have been unable to secure financing for the rest of the project, and haven't yet been able to invoke the state and city support needed to build the parking garage.  

Financials trump design.
Perhaps because the design has changed so often, many CentrePointe critics - including us - spent much of their time obsessing on the project's design.  This was especially true when the design got good following Jeanne Gang's involvement in June 2011. Because the Studio Gang process was so inclusive, many in the community felt a sense of ownership of the resulting design.

But the reality is that the design of CentrePointe matters very, very little in comparison to the finances of CentrePointe.  

Pretty pictures are nice, but pretty pictures crumble without viable financing.  (And they have crumbled several times without viable financing.) Pretty pictures don't matter as much as pretty business plans.

And CentrePointe has never had a pretty business plan, even when it had pretty designs. 

Big is fragile.
The state's agreement with the city specifies that at least $200 million be spent on CentrePointe by 2016 in order to qualify for TIF.

And the project's price tag has dutifully maintained that $200 million threshold over the past 5 years.  

As a result, CentrePointe has always been big and complex; it contains residential, retail, hotel, and office components.  The viability of the project requires the success of all of these components - if any one fails, the whole project fails.

This is why the developers have had five years of trouble securing financing.  A project of this size and complexity is inherently fragile.

A smaller project (or collection of smaller projects) would likely be much more robust, but then it wouldn't qualify for TIF funding.

When projects get bigger and more complex, there's greater risk for something to go wrong. CentrePointe's size is a liability, not an asset.

Speculation is just gambling.
Speculation is not economic development. Speculation is gambling.

The developers gambled. They gambled with historic buildings. They gambled that they could get financing before the economy crumbled. They gambled that they could get they city to help finance part of their project. They gambled with the center of our city.  

And they lost.

And we lost, too. We lost a little of our city's history. We lost economic activity. We might lose even more if the project goes forward.

::

These are just a few of CentrePointe's lessons for Lexington. There are undoubtedly many more (for instance, I haven't delved into the project's many historic preservation failures here).  

Feel free to add what you've learned over the past five years in the comments below.


How Mitt Romney Disqualified Himself

Mitt Romney has taken multiple-choice campaigning to dizzying postmodern heights, demonstrating a well-documented, disturbing adeptness for adopting any position which provides a momentary political advantage.  

But in last night's debate, he disqualified himself from the presidency.  Rachel Maddow nailed the very human costs of Romney's strategic "issue position-switching":

Visit NBCNews.com for breaking news, world news, and news about the economy

 

 

 


Mitt Romney's Impressive Word Gymnastics

In the past 48 hours, we've seen some truly epic logical contortions from Mitt Romney's Republican presidential campaign.

Yesterday, hoping to slow his public opinion nosedive two weeks ahead of the Michigan primary, Mr. Romney attempted to defend his infamous 2008 "Let Detroit Go Bankrupt" editorial with a second editorial in the Detroit News.  

Mitt Romney's Contortions

In his new valentine to Michigan and the auto industry, Mr. Romney somehow managed to simultaneously take credit for and attack President Obama's successful 2009 bailout of the industry.  Witness (my emphasis):

Ultimately, that is what happened. The course I recommended was eventually followed. GM entered managed bankruptcy in June 2009 and exited it a month later in July.

Then, two short paragraphs later:

By the spring of 2009, instead of the free market doing what it does best, we got a major taste of crony capitalism, Obama-style.

"They did what I told them to do, and it was a disaster."

Not only was yesterday's editorial internally inconsistent, it was also inconsistent with Mr. Romney's 2008 editorial, which actually called for increased goverment involvement and investment, rather than simply leaving the "free market" to its own devices.

On Monday, Mr. Romney pre-empted President Obama's 2013 budget release in an e-mail to reporters (my emphasis):

This week, President Obama will release a budget that won’t take any meaningful steps toward solving our entitlement crisis.

The president has failed to offer a single serious idea to save Social Security and is the only president in modern history to cut Medicare benefits for seniors.

I believe we can save Social Security and Medicare with a few common-sense reforms, and – unlike President Obama – I’m not afraid to put them on the table.

Mr Romney starts by attacking Mr. Obama for not addressing entitlement spending.  

Then he attacked Mr. Obama again for addressing entitlement spending.  

Then he attacked Mr. Obama a third time for not addressing entitlement spending.

And Mr. Romney accomplishes this amazing flip-flop-flip in three successive sentences.

And to make Mr. Romney's linguistic artpiece even more mind-blowing: all three assertions are demonstrably false.  Mr. Romney is lying.

First, President Obama's 2013 budget proposes cutting $360 billion in Medicare and Medicaid spending over 10 years.  

Second, the Affordable Care Act did not cut benefits for seniors. It created provider-side efficiencies which reduced future Medicare spending to the tune of $500 billion.

Finally, Mr. Obama proved all-too-willing to put entitlement reforms "on the table" during last year's debt ceiling negotiations.  (It is worth noting that Republicans walked away from the difficult discussions, not Obama.)

Mr. Romney was already renowned for his serial flip-flopping.

It seems that Mr. Romney has now taken his fact-free postmodern candidacy to a new plateau with his most recent linguistic art project. 

His new statements don't just thoroughly contradict previous ones; Indeed, Mr. Romney's most recent statements thoroughly contradict themselves.


The Austerity Drag

The U.S. economy added 243,000 jobs in January, far surpassing analysts' expectations of around 155,000 jobs for the month.  As a result, the unemployment rate also unexpectedly ticked down to 8.3 percent for January.  

The private sector added 257,000 jobs in January, while public-sector employment dipped another 14,000.  

And that last part is important, because it begins to reveal the truly destructive nature of austerity.

Amid the wrong-headed drive to shrink the size of federal, state, and local governments (government employees make up one-sixth of the workforce), private sector job gains have been partially thwarted by the losses of government jobs.  

With the release of the jobs data each month, the ever-insightful Steve Benen - who joined The Maddow Blog this week - republishes his two charts showing job losses and gains for each month since the beginning of the Great Recession.  

The first chart shows the overall jobs picture, while the second shows the jobs picture for the private sector alone.  My shameless rip-off adaptation of these charts is below. As with Steve's charts, the red columns show monthly job losses under George W. Bush, while the blue columns show monthly job totals under Barack Obama:  

 JobsJanuary2012Total

The second chart shows that the private sector has been adding jobs for each of the past 23 months.

JobsJanuary2012Private

Also worth noting: there are more total private-sector jobs today (110.4 million) than in February 2009 (110.3 million), just days after Barack Obama took office.  

But I always wanted to see a chart which showed us what was happening in the public sector.

So I took matters into my own hands.  Here's my own homemade chart showing jobs totals in the public sector since the beginning of the Great Recession:

JobsJanuary2012GovtCensus

As I plotted the data, I began to understand why Steve might not show the public-sector data each month: The one-time massive hiring bump (and susequent wind-down) surrounding the 2010 Census dwarfed all of the other changes in the chart, obscuring the other month-to-month changes.

As a result, the chart provided little insight into the fundamentals of public-sector jobs.

Fortunately, the Bureau of Labor Statistics published a press package which isolated hiring for the 2010 Census.  This allowed me to disentangle the one-time effects of the Census from the underlying fundamentals of public sector jobs.  

The result is this chart showing monthly job totals in the public sector, excluding the volatile Census hiring data:

JobsJanuary2012GovtNoCensus

In many ways, this public sector chart is the inverse of the private sector one.  

At the very moment when the private sector began to recover, at the very moment the economy needed to be firing on all cylinders, at the very moment the government should have leveraged negative real interest rates* to invest in jobs and infrastructure, one-sixth of the economy was (and continues to be) stuck in reverse.  

And as austerity economics kicked in, the losses in the public-sector have only deepened, creating significant drag on the economic recovery.   

Since Barack Obama took office three years ago, the public sector has shed some 603,000 jobs - averaging roughly 17,000 job losses per month.  (Compare that to the 840,000 public-sector jobs added during George W. Bush's second term - an 18,000 per month clip.)

Without these public-sector job losses over the past three years, the unemployment rate would stand at 7.9% today instead of 8.3%.

While some might celebrate the wholesale destruction of government jobs, I don't.  

Public sector employees are vital to our economy and to my business.  Many of my customers are teachers, first responders, court personnel, and a wide array of other local and federal government employees. Public employees create better roads and safer neighborhoods and smarter students, all of which benefits my business.

The destruction of public sector jobs negatively affects my business and our economy.  As public sector employees lose their jobs, I lose business.  And the wider economy suffers, as well.

Austerity just doesn't work.  

::

* A bit of explanation here on "negative real interest rates": instead of expecting a positive return on government bond investm0ents, investors are now willingly paying to have the federal government hold their money for 5, 7, and 10 years. In essence, investors from around the world will pay us to invest in our jobs and infrastructure - which would, in turn, pay even greater dividends to our economy as we emerge from recession.


2012 and the Local Economy

I was privileged to be surveyed late last week by the Herald-Leader's Tom Eblen for today's column on the state of Lexington's economy for 2012.

I don't envy Tom: distilling the often-disparate views of eight different business owners into 800 words or less must be tough.  (As regular readers might imagine, my views didn't exactly align with many of my peers.)

My response alone was over 1000 words, so the understandable - and necessary - result was that some context was stripped from my comments.  

Still, Tom asked very thoughtful questions, and I liked some of my answers.  So I thought it might be worthwhile to share them here on CivilMechanics.

And if you haven't read Tom's column, go check it out here.

(Note: I wrote these answers early Friday morning.  Some local events have already outdated at least one answer...)

1. Are you optimistic or pessimistic about the economy this year. Why?

I'm kind of bipolar on the economy.  For the first time in 4 years, I'm seeing signs of strength in our business, in our customers and their ability to buy our services, and in the national economy.  

At the same time, I see two major "storms" on the horizon: the apparent willingness of Republicans in Congress to scuttle the economy for political advantage (and I don't think this is a "both sides" thing - see this, for example), and the apparent unwillingness (or inability) of Europe to deal effectively with their debt crisis.

In my view, both storms are fueled by wrong-headed drives for austerity - forcing governments to spend less when no one else is spending, and further drying up demand.

2. How is your business doing?  How are business conditions better or worse for you than they were a year ago?

Our business is still weaker than I'd like in the wake of the recession, but it is growing.  Sales are up about 3% over last year, but some of the underlying fundamentals still aren't where they need to be. While we've seen some improvement, many of our customers are still delaying basic maintenance on their cars because they can't afford it.

3. What’s your biggest business concern for the coming year?

I've hired two new technicians in the last 9 months, including one last week, bringing us to six mechanics in total.  Having more technicians will help us enormously in the busy spring and summer months.  But the winter is typically our slowest time of the year, so bringing on an additional employee now is a bit of a risk: Will there be enough work to keep everyone busy and happy? Will there be enough business for me to make a profit while paying them?  

Getting through the next few months with a bigger staff is my biggest current concern.  Keeping them busy throughout the year by bringing customers through the door is my biggest concern for 2012.

4. What do you see as your biggest opportunity for the year?

Having a larger staff will allow us to serve more customers more quickly.  Toward the end of 2011, we were frequently scheduling appointments up to a week in advance because we were too busy to get customers into the shop sooner, and we lost some business because we couldn't get them in right away.  We want to improve our service and accommodate our customers more quickly in 2012, and the additional employees will help us with that.

5. What would you like to see the president and/or Congress do to improve the economy?

I'd like to see another massive stimulus package.  

120106_privatejobs

While it may not be popular with your readers, there is no doubt that the early 2009 stimulus worked.  (See chart of private-sector job losses and gains at right, stolen from the estimable Steve Benen.)  We were losing hundreds of thousands of jobs every month and the economy was imploding.  Immediately after the stimulus, the economy stabilized and the jobs losses dropped dramatically, and jobs have been growing slowly and steadily since early 2010.  But a stable and slow-growing economy isn't enough.  I'd like to see another stimulus to help jump-start a more dynamic, fast-growing economy.

A lot of folks will say that we need to cut taxes and regulation in order to get the economy growing again.  That's a head-scratcher for me.  Lowering my taxes and putting a little extra money in my pocket won't help me create a job.  Neither would letting me pollute more.  

I've hired two new employees in the last year (growing 25% from 8 employees to 10), and the decision to hire them was driven by customer demand for faster and better service - which had nothing to do with my taxes or regulations.  Customer demand drives hiring; giving business owners extra money or convenience really doesn't.

I like President Obama's American Jobs Act as a starting point for a stimulus - investment in infrastructure, schools, and public safety is a sound way to grow economic demand.  But I'd like to see even more investment in other areas, such as energy research and American manufacturing, and I'd like to see a stimulus closer to $1 trillion to really get the economy growing again.  

That's what I'd like to see.  I see zero chance of this actually happening with this Congress.

6. Will this year’s presidential election make the economy better or worse? Why?

I fear that it will make things worse, at least for the short term.  It is hard to imagine how our political system could be more gridlocked than it was in 2011.  Still, as congressional Republicans obstruct any initiative which might make the President look good, I worry that they'll sacrifice the economy on the altar of politics.

As for the race itself, I see a worrying thread of extremism from the GOP candidates.  Even the supposedly-moderate Mitt Romney is proposing extreme policies which benefit the wealthy even more and skewer the middle class and poor even more (thereby skewering most of my customers).  I worry that the austere policies a Republican President might attempt to implement would decimate my customer base and my business.  

7. What is Lexington’s biggest asset during these economic times? It’s biggest problem?

I think our schools - particularly UK - are our biggest asset.  They provide our city with well-educated people, great research to improve our lives and build businesses upon, and a vibrant "student economy" which spills over into the rest of our city. 

I see two big problems for Lexington.  First, if the proposed redistricting is approved by Governor Beshear, a huge chunk of our city will not be represented in the Kentucky State Senate for two years.  Proper representation in Frankfort is vital to protecting Lexington's interests and to protecting UK, and these undemocratic redistricting plans would deprive one-third of our city of its vote.  I worry about the impacts of Lexington not being represented in Frankfort.

Second, I think our city, our state, and our schools are under-funded.  I appreciate all of the efforts Mayor Gray has made to trim Lexington's budget, but at some point, we citizens need to fund all of the services and infrastructure and improvements we've come to expect.  

I want nice roads for me, my customers, and my employees.  I want them to be plowed and salted when nasty weather strikes this winter.  I want the best schools for my son and for my employees' families.  I want the best fire and police protection.  I want a beautiful and safe city to live and work in.  But those benefits come at a price.  And we're responsible for funding all of those "nice things".

It won't be popular, but I think we need to start a frank conversation about raising taxes to fund our city's (and state's and schools') obligations.  We need to pay for the great things we want to do together.

8. What else should readers know that I haven’t asked about?

I hope they'll go out of their way to buy local goods and services when possible.  That will keep more of Lexington's money in Lexington, which helps foster a more vibrant local economy.


The 1345

McConnell
Mitch McConnell
Yesterday, despite having support from a majority of the Senate, the $60 billion Rebuild America Jobs Act was blocked from even being debated on the floor of the Senate by Kentucky's own Mitch McConnell and Rand Paul - along with every other Republican senator.

The Act included $50 billion in direct spending for roads, bridges, and other infrastructure, as well as $10 billion towards starting the National Infrastructure Bank.  Both ideas have traditionally enjoyed bipartisan support.

The bill would be paid for by a 0.7% surtax on incomes over $1 million.

The Department of Transportation estimated that the Act would create about 800,000 new jobs.

McConnell was unapologetic for blocking debate on the bill:

"The truth is, Democrats are more interested in building a campaign message than in rebuilding roads and bridges," said Senate GOP Leader Mitch McConnell of Kentucky. "And frankly, the American people deserve a lot better than that."

800,000 jobs seems like more than a campaign message.

But these national numbers are a bit hard to get our arms around.  

It's worth evaluating the impacts of this bill on a more local level.  What would the Act do here in Kentucky?

Over 200,000 Kentuckians are out of work.  That's nearly 10% of the labor force.

And since September, one of two major bridges crossing the Ohio River in McConnell's hometown of Louisville has been shut down after inspectors found cracks. Another bridge between Kentucky and Cincinnati has been deemed "structurally deficient".

Paul
Rand Paul
The bill McConnell and Paul voted against would have spent over $450 million on roads and bridges in Kentucky, and would have created 5,900 jobs.

Why would Mitch McConnell and Rand Paul reject 5,900 jobs for Kentucky? Why would they oppose fixing Kentucky's infrastructure?

Maybe they're concerned with raising taxes.  As McConnell said on Meet the Press, "We don't want to stagnate this economy by raising taxes" on those who make over $1,000,000, who Republicans are fond of calling "job creators" and "small business owners".

So let's take a look at who makes over $1,000,000 in Kentucky.  According to Citizens for Tax Justice [PDF Link via Greg Sargent] out of Kentucky's 4.3 million citizens, there are 1345 Kentuckians who would be affected by such a tax, and they make an average of nearly $3.5 million.

And it's worth noting that The 1345 are folks who don't just have $3.5 million - enough to qualify them as multi-millionaires.  These are people who clear $3.5 million per year.

The 1345 are the ultra-wealthy.  And businesses which help their owners reap $3.5 million per year are not ordinarily considered "small".

And what is the onerous burden the "millionaire's tax" would place on The 1345?  

Out of their $3.5 million in income, The 1345 would pay $17,409 more to fix Kentucky's roads and bridges which they undoubtedly benefit from more than Kentucky's other 4,338,000 citizens.

So: McConnell and Paul blocked the creation of 5,900 jobs and the improvment of roads and bridges for all Kentuckians in order to protect The 1345, a tiny group of ultra-wealthy Kentuckians who would pay only $17,409 to rebuild the infrastructure they use more than anyone else.

McConnell claims he doesn't want to "stagnate the economy" by taxing The 1345, which raises the question: What have these ultra-wealthy "job creators" been doing with this money while they've kept it?

Because they certainly haven't been creating jobs.

Mitch McConnell and Rand Paul chose to protect The 1345 at the expense putting 5,900 Kentuckians back to work.  At the expense of our crumbling roads and bridges.  At the expense of the other 4,338,000 Kentuckians.

And frankly, the American people - and Kentuckians - deserve a lot better than that.


The American Idea

My wife and I are one-percenters.  

We have amassed a small fortune - built over some 20 years of climbing our respective corporate ladders, saving very aggressively, and making some favorable investments.  

We worked very hard to build our wealth.  

But we are also incredibly lucky.

We were both winners of what Warren Buffett has dubbed "the uterine lottery": through no effort on our part, we were both born into safe, stable, American, loving family environments where hard work and academic success were built-in expectations.  We were granted this huge headstart in life and had no part in earning it.

That early headstart only snowballed as it helped us accumulate advantage upon advantage in our early lives.

We benefitted greatly from our society's investments in all sorts of public goods, public works, and public innovations.  

More bluntly, because of our unearned headstarts, we benefitted disproportionately as we often extracted more value and more opportunity from these public goods than did our less-advantaged peers.  

In our youth, we both got into honors-level courses at great public schools.  We both had great professors at our public universities, where we both received advanced degrees.

In our professional lives, we continued our disproportionate wins, taking greater advantage of public investments in roads, airports, research, computers, the Internet, housing, and police and fire protection.

As a business owner, I continue to receive disproportionate share of the benefits from the public investments which deliver customers and vehicles and qualified employees into my shop.

My wealth is - in great part - the result of decades of personal hard work, constant learning and creativity, and deep thought.  

But my wealth is also the product of decades of unearned advantage which allowed me to receive an undeserved greater share of our society's prosperity.

For my disproportionate bounty, I owe a disproportionate debt.

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This "disproportionate debt" is the basis of the American system of progressive taxation - the reason that those with higher incomes and greater wealth pay taxes at higher rates.  The wealthy owe more to the nation which co-produced their wealth.

As President Obama's jobs proposals and the Occupy Wall Street protests have gained favor among independents and an increasing proportion of Republicans, the national conversation has begun to focus on the responsibility of the wealthy in creating, perpetuating, and resolving our current economic woes.  

In polls, the overwhelming majority of Americans support greater public investments in infrastructure, education, and public safety in order to create jobs.  And they support raising historically-low taxes on the wealthiest Americans to do it.

And yet, an increasingly-prominent conceit of conservative ideology holds that every person is merely the product of their own singular efforts, and that those with success owe nothing (or owe very little) to the society which made their success possible.

Purveyors of this ideology live in a kind of denial - conveniently ignoring the significant roles of simple luck, coupled with public investments in infrastructure, education, and research, in improving their own lives and in enabling the lives of the wealthy. They contend that the wealthy pulled themselves up by their bootstraps, and everyone else should as well.

After Warren Buffett - history's most successful investor - argued in August that the very wealthy have a duty to pay more in taxes, Harvey Golub - former Chairman and CEO of American Express and former Chairman of AIG - expressed the "bootstraps" mentality in his opening to an indignant Wall Street Journal screed [emphasis added]:

Over the years, I have paid a significant portion of my income to the various federal, state and local jurisdictions in which I have lived, and I deeply resent that President Obama has decided that I don't need all the money I've not paid in taxes over the years, or that I should leave less for my children and grandchildren and give more to him to spend as he thinks fit. I also resent that Warren Buffett and others who have created massive wealth for themselves think I'm "coddled" because they believe they should pay more in taxes. I certainly don't feel "coddled" because these various governments have not imposed a higher income tax. After all, I did earn it.

The corollary to Golub's "I earned it" meme is that poverty and joblessness are presented less as a result of unfortunate circumstance than they are as a reflection of moral failings on the part of the poor or unemployed.

When asked about the Occupy Wall Street protests, for instance, GOP presidential candidate Herman Cain told the Wall Street Journal [emphasis added]:

"Don't blame Wall Street, don't blame the big banks, if you don't have a job and you're not rich, blame yourself!"  

At a book signing in Florida one day later, Cain added that the OWS protesters were un-American and anti-capitalist for protesting against Wall Street banks because "they're the ones who create jobs" - despite overwhelming evidence to the contrary.  At a Republican debate a couple of weeks later, Cain was asked if he stood by his remarks, and his affirmation garnered the night's biggest applause from the partisan crowd.

Paul RyanBut perhaps no one in today's politics defends the rights of the wealthy quite like Wisconsin Congressman Paul Ryan. Ryan, who requires his staff to read Ayn Rand's Atlas Shrugged for its policy insights, is the chair of the House's Budget Committee.  

Ryan is well known - and mystifyingly well-regarded as a "serious thinker" - for his attempts to use the budget process to accelerate social inequality.  Ryan's 2011 budget plan, dubbed The Path to Prosperity, was an audacious reverse-Robin-Hood attempt to slash safety nets for the most vulnerable even as it it further slashed taxes for the already-wealthy.

With the President's jobs agenda and the Wall Street protests gaining popularity, and the national conversation now squarely focused on jobs and inequality, Republicans have been losing control of the political narrative they dominated during this summer's debt crisis.  

In a much-anticipated speech, "Saving the American Idea: Rejecting Fear, Envy, and the Politics of Division", delivered to the conservative Heritage Foundation last week, Ryan attempted to recast that narrative with an ideological agenda nearly worthy of an Ayn Rand protagonist.

In that speech, Ryan outlined the American Idea as defined by the "principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense".

 After chastising the President for promoting his jobs initiatives while "sowing social unrest and class resentment," Ryan laid out the contours of his new narrative.

The central problem of economic justice in America doesn't revolve around a wealthy class which isn't doing its part, Ryan asserted, but around a social welfare system which inhibits economic opportunity and economic mobility.  Ryan contends that progressives don't understand this because they confuse "equality of opportunity" with "equality of outcome" [emphasis added]:

These actions starkly highlight the difference between the two parties that lies at the heart of the matter: Whether we are a nation that still believes in equality of opportunity, or whether we are moving away from that, and towards an insistence on equality of outcome.

If you believe in the former, you follow the American Idea that justice is done when we level the playing field at the starting line, and rewards are proportionate to merit and effort.

If you believe in the latter kind of equality, you think most differences in wealth and rewards are matters of luck or exploitation, and that few really deserve what they have.

That’s the moral basis of class warfare – a false morality that confuses fairness with redistribution, and promotes class envy instead of social mobility.

There are a couple of major problems with Ryan's new "equality of opportunity" narrative.

First, the playing field is never level at the starting line. Unmerited inequalities exist, and they often grow exponentially over time.

Ryan would have us believe, for instance, that a child born some forty years ago with dark skin to an impoverished single mother in, say, inner-city Detroit had all of the same advantages and opportunities afforded to a child born some forty years ago into a stable, upper-middle-class white family in, say, Janesville, Wisconsin.  

The circumstances of the starting line matter.  And it is all-too-convenient for those given headstarts to pretend they don't.

Second, economic justice doesn't stop at the starting line.  We must also assure that the race is run fairly.

Running the race fairly isn't about insuring "equality of outcome", as Ryan contends.  Most participants will not "win" the economic race. But it is about making certain - through establishment and enforcement of the rules - that participants do not cheat or exploit one another. It is about making certain that we flatten very real hurdles of race, gender, and income (to name just a few).

And asking the wealthy to pay disproportionately into the system which helped provide their disproportionate prosperity isn't "redistribution" - it is merely the repayment of a disproportionate debt. It is fairness.

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I'm sure that Harvey Golub, Herman Cain, and Paul Ryan all worked incredibly hard to achieve their successes.  But somewhere along the way, as they deified their individual efforts and accomplishments, they forgot - if they ever recognized in the first place - the enormous and undeniable roles that luck and public welfare played in their successes.  

In a town hall two weeks ago, for example, Ryan told a student that the Pell Grant program (federal assistance for lower- and middle-class students) was "unsustainable", and Ryan noted that he worked three jobs to pay off his student loans.  Good for him.

But Ryan also leveraged his public school and public university education to get his start in Washington.  And while he promoted his private sector student loan as some sort of ideal, Ryan failed to mention that he also used his father's Social Security death benefits to help pay for college. He went on to a taxpayer-supported career in Washington, including the last 13 years as an employee of the very government he regularly demonizes.

With no trace of apparent humility for their remarkable good fortune (nor apparent blush for their remarkable hypocrisy and greed), these successful men promote the mythology of the completely self-made success.

But no one with wealth got that wealth solely on the basis of their own virtues.  On their paths to success, each got help - sometimes deserved, often not.  To ignore the help we have received is to ignore our obligations to one another.  Worse, it betrays an unfortunate ungratitude.

The wealthy and successful extract greater value (and wealth and success) from our public goods, and thus owe a greater debt to the communities which contributed to their successes.

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Paul Ryan is right, but inadequate: the American Idea does revolve around rewarding individual merit, effort, and ingenuity. But that isn't all.  That isn't nearly enough.

The American Idea also revolves around our ability to work together to do and build great things. Our civic commitments to greatness - especially in times of crisis - mark our national identity and our national success every bit as much as (maybe even more than) our individuality does.  

Many of our nation's greatest accomplishments - Social Security, Interstate highways, successes in World Wars I and II, the Civil Rights Act, National Parks, and even the free enterprise system itself - are built upon a foundation of mutual cooperation and mutual sacrifice.  

The American Idea is simply not the either-or cartoon presented by Paul Ryan.  

We are a great nation because of our individual efforts, of which we are justifiably proud.  And we are a great nation because of our mutual commitment to one another, of which we are profoundly humbled.  We must ensure both to build upon our greatness.

That is an American Idea worth saving.

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One final note: I find it increasingly difficult to tolerate condescending, one-sided lectures on the virtues of individual effort and private enterprise (and on the evils of "redistribution") when they come from political mercenaries who have financed their professional careers with public money.  

And, yes, I'm looking at you, Paul Ryan.


Confessions of a Job Creator

I'm a job creator.  And job creators are important.  

At least that's what we've been hearing from Republicans lately.

House Speaker John Boehner cited "job creators" and "job creation" 26 times in a speech about the economy last week.  

And in that speech, the Speaker invoked us job creators to attack the Republicans' Unholy Trinity: taxes, regulation, and government spending:

Private-sector job creators of all sizes have been pummeled by decisions made in Washington.

They’ve been slammed by uncertainty from the constant threat of new taxes, out-of-control spending, and unnecessary regulation from a government that is always micromanaging, meddling, and manipulating.

To hear Boehner's version of events, the government stands as the sole obstacle to us job creators as we valiantly attempt to create more jobs.

Indeed, the entire Republican establishment keeps talking about the special role we job creators play in our fragile economic recovery.  

In their "House Republican Plan for America's Job Creators" - a 10-page, large-type tome [PDF link] about the same length as this blog post - the House Republican leadership repeatedly promise to slash the Unholy Trinity of tax, regulation, and spending.  On Sunday talk shows, more of the same.

If only we job creators paid less money in taxes, Republicans say, we would hire more.  

If only we were free from government regulation, we would hire more.  

If only we were less concerned about government spending, we would hire more.

As much as I appreciate Republicans' apparent concern - their willingness to dump money in my pocket, their longing for my freedom to pollute with abandon, their eagerness to drive the nation to the edge of default to keep government spending in check - here's the thing:

Their efforts won't help me create a single job.

Not one.

In fact, Republican attacks on taxes, regulation, and spending do quite the opposite, because Republicans are thoroughly wrong on the mechanics of hiring.  

I don't hire because I have extra jingle in my pocket.  I don't hire because I can avoid complying with some regulation or tax.  I don't hire because the government is spending less.  I hire because there's more work to do

No responsible businessperson is going to hire simply because they have extra money lying around or because they can dump motor oil in the sewer. As generous as I might be, I won't hire out of charity. 

Entrepreneurs hire because they have work to do, and a new employee can help them get that work done.  They hire to help meet demand. And demand is fueled by customers who have money to spend.

And that's the fallacy of the Republican job creator mythos: Job creators don't "create" jobs.  Our customers do.

And the evidence proves the Republican fallacy. Taxes are at historic lows [PDF link]. Corporate profits are at record highs. Government spending has collapsed.  These are the very conditions under which, according to Republicans, we job creators should be creating jobs.

But we aren't.

Despite these supposedly wonderful conditions for job creators, one in six Americans remain unemployed or underemployed. Income and household wealth has stagnated for over a decade. Instead of hiring in this environment, corporations are hoarding record stockpiles of cash in the face of weak demand.  

No demand, no jobs.

That's not to say that we entrepreneurs - let's just drop the "job creator" garbage - are powerless.  We can foster conditions which promote growth (the right business model, the right service, the right people); but we need customers with a willingness to spend to make our businesses grow and to create an environment where hiring is possible and profitable for us.  

Bottom line: Give me money, and I'll sock it away in the bank.  Give me customers, and I'll give you jobs.

 


Introducing CivilMechanics

Since its inception three years ago, the Lowell's blog (blog.lowells.us) has been a strange beast.  

It has been an admixture of news about Lowell's, tips for car maintenance, thoughts about business and the economy, and assorted commentary on our community, on downtown, and on the city of Lexington.

While this assortment was in line with our stated intent to offer "our perspectives on cars, business, Lexington, and life," it also resulted in a divided audience: those who care about cars and what is happening at Lowell's (usually customers); and those who care about more civic matters.

As you might imagine, the practical overlap between these groups is quite small.  The car folks probably don't care about musings on CentrePointe or Lexington's streets and roads.  The civic folks probably don't care about what's happening with the Lowell's website or how a brake flush works.

Still, I could kind of rationalize the Lowell's blog as a local blog by, for, and about a local business and local issues.

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I have been the sole contributor to the Lowell's blog.  And over the past year or so, my postings have been far less frequent than I'd like.  

Part of that has to do with the busy-ness of our business (I haven't had as much time to devote to writing), but most of it lies in the fact that I've been wanting to write about new and different things.

In particular, I've wanted to shift my focus from predominantly local issues to predominantly national and global ones - to try, for instance, to decode what's happening in Washington or Wall Street from my own distinct perspective.  These topics just didn't feel at home among car care tips and shop news.

At the same time, I've wanted to extend the content of the Lowell's blog to include new contributions and new kinds of content from my employees here at Lowell's.  As I contemplated such a move, I didn't want them to feel overshadowed by strongly-expressed views which they might not share.

CivilMechanics To resolve this dilemma, I've created a new blog called CivilMechanics (www.civilmechanics.com) - sponsored by Lowell's - in which I will express my unique perspectives on a variety of issues.  (And, yes, "CivilMechanics" is an intentional multiple-entendre. I like that kind of stuff.) Please check out our first post, "Confessions of a Job Creator".  

I've also taken the liberty of migrating a few old Lowell's posts to CivilMechanics which capture some of the spirit of this new blog.   

Over the coming weeks, we'll introduce new contributors to the Lowell's blog.  I'll also continue to post on the Lowell's blog from time to time with items of interest to Lowell's customers and Lexingtonians.

With these changes, I'm hoping to increase our overall frequency of posts, both for customers (through the Lowell's blog) and for civic-minded followers (through CivilMechanics).  Please check them out, and be sure to let us know how we're doing.

The Lowell's Blog: blog.lowells.us

CivilMechanics: www.civilmechanics.com


On Compromise

Last night, Congress passed the $900 billion tax compromise reached between President Obama and Republican leaders.  

In the end, progressives and conservatives alike lambasted the deal.  And that might be a very good thing.

I'm no fan of the bonus tax cuts for the wealthy that Obama conceded to congressional Republicans; Despite Republican claims, those cuts fail to create significant job growth.

Lost in much of the analysis over what Obama conceded, however, is just how many bigger concessions he won back from Republican leaders, as Ezra Klein points out with this chart:

Tax Cut Compromise Proportions

Unproductive and unneeded tax cuts for the wealthy make up only one-eighth of the compromise. The other seven-eighths of the deal are much more stimulative to our economy and to job production.  

In essence, this tax deal is a second "stimulus" which is much-needed at this stage of our fragile economic recovery.

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During the Constitutional Convention in Philadelphia in 1787, representatives of each state teetered on the knife's edge between walking away from the proposed Constitution for what they might have to give up, and giving up important principles (and power) in order to gain something better, stronger, and more resilient.

While the present compromise is not nearly as momentous, it does remind me of what Benjamin Franklin - then 82 years old - said when addressing that convention in September, which galvanized the representatives into agreement:

I confess that there are several parts of this constitution which I do not at present approve, but I am not sure I shall never approve them: For having lived long, I have experienced many instances of being obliged by better information, or fuller consideration, to change opinions even on important subjects, which I once thought right, but found to be otherwise. It is therefore that the older I grow, the more apt I am to doubt my own judgment, and to pay more respect to the judgment of others. Most men indeed as well as most sects in Religion, think themselves in possession of all truth, and that wherever others differ from them it is so far error. Steele a Protestant in a Dedication tells the Pope, that the only difference between our Churches in their opinions of the certainty of their doctrines is, the Church of Rome is infallible and the Church of England is never in the wrong. But though many private persons think almost as highly of their own infallibility as of that of their sect, few express it so naturally as a certain french lady, who in a dispute with her sister, said "I don't know how it happens, Sister but I meet with no body but myself, that's always in the right - Il n'y a que moi qui a toujours raison."

In these sentiments, Sir, I agree to this Constitution with all its faults, if they are such; because I think a general Government necessary for us, and there is no form of Government but what may be a blessing to the people if well administered, and believe farther that this is likely to be well administered for a course of years, and can only end in Despotism, as other forms have done before it, when the people shall become so corrupted as to need despotic Government, being incapable of any other. I doubt too whether any other Convention we can obtain, may be able to make a better Constitution. For when you assemble a number of men to have the advantage of their joint wisdom, you inevitably assemble with those men, all their prejudices, their passions, their errors of opinion, their local interests, and their selfish views. From such an assembly can a perfect production be expected? It therefore astonishes me, Sir, to find this system approaching so near to perfection as it does; and I think it will astonish our enemies, who are waiting with confidence to hear that our councils are confounded like those of the Builders of Babel; and that our States are on the point of separation, only to meet hereafter for the purpose of cutting one another's throats. Thus I consent, Sir, to this Constitution because I expect no better, and because I am not sure, that it is not the best. The opinions I have had of its errors, I sacrifice to the public good. I have never whispered a syllable of them abroad. Within these walls they were born, and here they shall die. (...) I hope therefore that for our own sakes as a part of the people, and for the sake of posterity, we shall act heartily and unanimously in recommending this Constitution (if approved by Congress & confirmed by the Conventions) wherever our influence may extend, and turn our future thoughts & endeavors to the means of having it well administered.

On the whole, Sir, I can not help expressing a wish that every member of the Convention who may still have objections to it, would with me, on this occasion doubt a little of his own infallibility, and to make manifest our unanimity, put his name to this instrument.

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Progressives hate what was conceded in this deal.  So do conservatives.  And everyone should be concerned over how much this deal grows our national debt.

Both sides wanted their leaders to stick to core principles - no matter the cost.  But that's demogoguery, not democracy.  It isn't how our country works.  It isn't how our country was formed.

"Compromise" has become a foul word in this political season.  

But it is the very heart of a functioning democracy.


A Small Business Perspective on Jobs and Tax Cuts

Lowell's

In late July, one of our technicians left our award-winning auto repair shop to return to his hometown.  He has been our only employee to leave since I bought the business over two years ago.  

His departure raised a question for us that a lot of small businesses have faced in this economy: Do we accept the risks of hiring a new employee to replace him?

The answer, I think, is instructive for many of the economic and political issues facing our country.

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Impatient voters punished Democrats two weeks ago for not giving enough focus to our nation's sputtering economy after the near-implosion of 2008.

With our nation's unemployment rate hovering just under 10% (and 'real' unemployment much higher), voters sent a clear signal that they want government to focus on creating jobs and growth.

According to the Small Business Administration [PDF Link], small businesses like ours make up 99.7% of employer firms, and account for two-thirds of new job creation.

Both Republicans and Democrats have reiterated the importance of getting small businesses hiring to get our country's economy moving again.  

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This week, congress reassembles in the wake of the elections to consider extending temporary tax cuts  implemented under the Bush administration in 2001 and 2003.

Republicans want to extend the entirety of the Bush tax cuts, which would add $5 trillion to the national deficit over the next ten years, and vastly expanded the national debt over the past decade.

Democrats want to extend the tax cuts as well, but would let them expire for the highest-income households which make over $250,000 per year.  The Democratic plan would cost almost $700 billion less than the Republican plan over the next ten years.

Republican leaders claim that giving tax breaks to top earners is critical to generating the new jobs that the economy needs to recover.

Unfortunately, they're wrong.

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Just how would the Republican proposal affect small business jobs? A hypothetical example from my industry might help us get to an answer.

A very healthy auto shop might have annual sales of $1,000,000 - an amount which would put it well into the top 5% of shops nationwide.  If that shop is exceptionally well-run, it might see net profits of 30%, or $300,000.

For those few shop owners in such a fortunate situation, what are the implications of extending the Bush tax cuts for those making more than $250,000?  Under the Republican plan, that shop owner would save an incremental $1,500 in taxes over the Democratic tax cut plan.  

As a small business owner, I'd happily take the $1,500.  But such a small amount would give me zero incentive to undertake the much greater expense - and risk - of hiring a new employee.  

So while extending the Bush tax cuts would certainly line my pockets, they would do little to encourage me to create jobs in my small business.    

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Some observers might contend, as incoming House Budget Committee Chairman Paul Ryan did on CNBC yesterday, that most job growth comes from larger "small" businesses and that my example above isn't really that relevant to job creation.

So let's pretend, for a moment, that our hypothetical business is actually 10 times as large as the example above: It has annual sales of $10,000,000, and its owners see profits of $3,000,000 per year.  

Under the Republican plan, that business owner would save an additional $125,000 in taxes over the Democratic tax cut plan.  Now, this seems like an amount which might let a business hire a couple of additional employees.

But while the tax savings might be enough to hire additional employees, it provides little actual incentive to use that newfound money to hire in an uncertain economic environment.  

A tax windfall fails to meet a prudent business owner's criteria for making a hiring decision. Business owners don't hire because we have extra money laying around. We don't hire out of charity. We hire when there is more work to do.  

Again, I'd happily take the $125,000.  But I'd also know that a drop of just 1% in my sales - a fairly likely risk in our current economy - would wipe out my tax savings.  If I were that business owner, I'd stash my cash as a hedge against an uncertain economy.  Net effect: no new jobs created.

The criteria for hiring is scalable: Whether a business has $1 million, $10 million, or $100 million in sales, the decision to hire is based on needing employees to meet demand - not on having spare cash supplied by tax cuts.

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In my shop, the economic slowdown - coupled with a nearby street closing for almost a year - contributed to a sales decline of over fifteen percent from our record 2008 levels.  The declines would have been worse if not for our solid reputation, our increased community involvement, and our vigorous marketing.

In fact, our business has more customers than ever before; It's just that each one is investing far less in their cars.  We see a lot more folks putting off needed maintenance and hoping that their cars won't break down.

And as I look at replacing the technician who left in July, this drop in sales has been my primary consideration.

An extra $1,500 from tax cuts wouldn't induce me to hire a new technician.  Neither, frankly, would an extra $125,000.  

I'll hire when our core business is better - when there is more work to do - and not just when I have a convenient pile of cash.

And to make our business better, we need more customers with more money - and more willingness to spend. 

::

To encourage small business hiring, policymakers need to encourage spending.  In particular, they need to encourage the kind of spending which reverberates through the economy as that money is spent and respent in the form of wages, further buying, more wages, and - ultimately - hiring.  

This respending feedback loop is key to creating enough demand that businesses like mine will start to hire again.  It is key to driving our nation's self-sustained economic growth.

The fatal flaw of tax cuts for the wealthy is that the cuts don't foster respending at a scale which drives significant hiring.  As seen in my examples above, a large chunk of each dollar given out in tax cuts to the wealthy is stowed away in savings - thereby stunting the benefits to the economy.

Mark Zandi, Moody's Chief Economist, has found the same phenomenon in his research (Full PDF Here).  

Tax cuts to the rich don't yield as much overall economic benefit because the wealthy don't need to (and won't) spend that money, thus diminishing the virtuous feedback loop.

Zandi

Government spending which goes to those in need - the poor, the unemployed, state governments - does get respent (often out of necessity) and the feedback loop is much, much stronger than with tax cuts.

::

If I'm looking at my bank account, the tax cuts seem like a fantastic idea. More money for me!

But if I'm looking at my business, my employees, their families, and my community - I want the government to focus on assisting those in need.  I want the government to encourage buying (especially from small, local businesses).  That's what will help my business for the long term. That's what will - ultimately - encourage me to hire. 

Lose the tax cuts.  Give me customers instead.


The Limits of Local

I am a strong proponent of 'buying local' - purchasing goods and services from local businesses to boost the local economy.  I made a case for Local First in our recent To-Do List for Lexington series late last year.

PB080070But I'm not a local 'purist'.  There are times when buying local is just not practical.  And there are times when non-local competition creates a healthy diversity for local consumers (and providers).

So a recent Twitter discussion and this blog post got me thinking about the limits of 'local'.  The tenor of these conversations was that a candidate for Lexington mayor [one that I personally support, by the way] was 'disloyal' to Lexington for using a Washington, D.C. firm to design the campaign's temporary website.

These discussions echoed several earlier ones about the purchase of non-local services by our city's government.

For me, the discussions raised an important question about buying local, especially with regard to public dollars and public figures:

Should buying local goods and services be a requirement or an aspiration for a political candidate?  For a local government?

The indignation of the writers seemed to imply that buying local goods was some sort of requirement - some sort of 'litmus test' for determining whether a candidate was good enough to run.

From my perspective, this line of thought leads to unreasonable conclusions about what disqualifies candidates (or what constitutes good governance).  For instance:

  • They can't shop at Walmart.  Or Kroger.  Or Best Buy.  Or Home Depot.
  • They can't eat at Chick-Fil-A.  Or Qdoba.  Or Five Guys.  Or Bonefish.
  • They can't drive a Toyota.  Or a Ford.
  • They can't drink Coca-Cola.  Especially the imported Mexican Coke with real cane sugar.
  • They must only drink Bourbon produced in Fayette County.  (And wait a few years until it is actually available.)
  • They can't update their blog with an HP or Dell laptop.
  • They can't tweet with their iPhone.  Or BlackBerry.  Or Droid.
  • They can't watch TV produced in Hollywood.  Or New York.
  • They can't use Microsoft Office.  Or Adobe Acrobat.
  • They can't use Facebook.
In short: They can't use any product or service which contains any non-local content.

Is such a list of prohibitions ridiculous?   Of course.  

And that's precisely the point: Requiring some sort of 'purity' in local purchasing creates an excessive, unreachable, and unproductive standard.

Buying local should be an aspiration - something we strive for, something we measure and attempt to improve, something we do more of.

Do we need our city, our political candidates, and our citizens to buy more local goods and services?  Should we actively encourage more purchasing at great local spots like Fáilte (profiled by Tom Eblen in yesterday's Herald-Leader)?  Absolutely, on both counts.  That was why I wrote my original Local First post.

We should spend more of our money here in Lexington.  But forcing our city to spend all of our money here would stifle Lexington's economy, and restrict us from being truly productive.

So let's adopt a reasonable posture aimed at encouraging our leaders to buy local.


Health care reform: A small business perspective

This week, we're finalizing our shop's health insurance requirements for the next year.  Our policy will be 25% more this year for the same coverage.  Last year, it grew by 16%.  Compounded, that's 45% in two short years.  No other cost increases on that scale for us.

As a small business, the spiraling costs of health care hit us particularly hard each year.  And the need for a new approach to health care is particularly acute, for us and for our employees.

I've been puzzling over health care for a long while - and I won't claim to have the answers here.  But I thought it could be helpful to step away from the town hall and cable channel histrionics and fear-mongering to share some observations on health care from a small business perspective.

Insurance companies are like casinos: The house always wins.
Insurance companies have received a lot of criticism during the health care reform debate.  But they are doing precisely what they are designed to do.  They make money for investors by taking bets on the health requirements of their customers. 

Insurance companies operate like casinos or racetracks: the table is always tilted in favor of the house.  They may lose big on a single 'jackpot', but across the full array of customers they nearly always win.  And when they don't win 'enough', they'll raise the cost of making bets with them. 

When we enter into agreements with insurance companies, we're always taking a sucker's bet that we're very likely to lose.  The only reason an insurance company takes our money is because they 'bet' that we won't need that amount of medical care.

Ultimately, as with the casino, the house wins.

The oddity of employer-provided health insurance.
We don't really question it much today, but it is just plain strange that something as personal and as private as health care is mediated by employers at all.  We don't usually involve our employers in house payments or banking or appliance purchases or car insurance.  But, somehow, we've come to expect them to provide health care insurance.

Employer-provided insurance is an historical artifact from negotiations between General Motors and labor unions in the late 1940's and early 1950's.  Charles Wilson, GM's CEO, saw it as a last-ditch concession to help prevent the 'nationalized healthcare' system that Harry Truman was championing - which Wilson saw as a threat to the integrity of the free enterprise system.  (Funny how many things just don't change.)  Soon, other employers adopted health care coverage as a standard part of their benefits packages, and employer-provided insurance became the norm.

But, really, why are we employers involved at all?

Leverage
One reason that employers remain involved is that they often have more buying power than individuals.  Over the past 60 years, we've been able to provide leverage which lets us negotiate somewhat better plans with insurers and medical providers. 

But small businesses have scant more negotiating leverage than an individual.  Often, our employees choose to get independent coverage rather than participate in our group plan. 

When Lowell's bid out to three other health insurance companies, the results were disheartening.  The other three companies offered rates that were 200% to 300% higher than our current rates with Anthem.  So we're 'trapped' with Anthem.

Expanding waistlines, increasing costs.
As a nation, we're getting a lot unhealthier.  We eat more.  We exercise less.  We sleep less.  We're in worse health.  We're living longer.  And we need more care.

We don't spend much time, effort, or money on the preventative health care and self-care which would help eliminate the much more expensive catastrophic care.  We're too busy to exercise.  We don't want to pay for the mammogram.  We don't like waiting in the doctor's office. 

And we require more medical care as a result.  Often, we get that care after a catastrophe built upon years of self-abuse: We have a heart attack.  Our knees fail.  The cancer spreads.  (We see the same phenomenon with routine maintenance in the car business - put it off, put it off, put it off, then replace an engine.)

Health care is getting more expensive, in part, because we are getting unhealthier.

Rising expectations, increasing costs.
We've come to expect more from our medical system.  We expect our doctors, staff, drugs, equipment, and facilities all to improve.  And we should expect improvement as medical science advances.

But those advances are costly.  The astronomical research and development costs for the medical 'miracles' of MRIs and cholesterol-fighting drugs and 'little blue pills' have to be paid for in some fashion.

And doctors, hospitals, and insurance companies won't simply absorb those costs.  They will pass them on to patients.

Health care is getting more expensive, in part, because health care is getting better.

There are no painless solutions.
We've seen politicians, lobbyists, pundits, and fellow citizens all offer various versions of 'painless' solutions to the healthcare problem.

They promise that government should bear more of the burden. Or that government shouldn't bear any of the burden.  Or that we just need full, universal insurance.  Or that insurance companies should pay.  Or drug companies.  Or hospitals.  Or doctors.  Or that we shouldn't have to pay for the chronically uninsured.  Or that we should just collar all the lawyers and their malpractice suits.  Or we should just have more competition.

Nobody says that we must bear the responsibility.  But we must.

If we refuse to provide insurance or government coverage for the roughly 45 million uninsured Americans, what happens to those who can't pay?  Hospitals and emergency rooms will still provide care.  Their costs will go up.  And they will pass those costs to other patients in the form of, say, an $8 dose of ibuprofen.  We pay.

If we provide government-paid health care to them (or to ourselves), what happens?  Our national deficit will rise.  This week's projection of a $9 trillion deficit over 10 years amounts to about $30,000 per man, woman, and child.  Which will have to be funded through taxes.  We pay.

If we have full universal coverage in a government program, what happens?  Because they don't bear the initial brunt of the costs, patients get more health care than they really need.  And doctors and medical institutions will happily provide (or suggest) that profitable care.  More deficit.   More taxes.  We pay.

If we squeeze insurance company profit (or put greater requirements on them), what happens?  They will likely refuse coverage for the riskiest, least profitable customers.  Unable to find private coverage, those customers will opt to go without coverage or to go with a public plan.  More $8 (or, now, $10) ibuprofen.  More taxes.  We pay.  

If we squeeze drug or equipment company profits, what happens?  They have less to invest in research and development.  They take fewer risks, and release fewer blockbuster drugs or fewer equipment breakthroughs.  Improvements in our medical care falter.  We pay.

If we collar lawyers and malpractice suits, what happens?  Doctors' malpractice insurance costs will likely go down.  But a few careless doctors who commit malpractice may inflict injury or death without significant penalty.  And who ultimately bears the cost of that irresponsibility and that injury or death?  We do.  We pay.

If we allow more competition between insurance companies, what happens?  The insurance companies look at the same basic actuarial tables.  They evaluate risks in the same way.  They put a price on the 'bets' they are willing to take in the same way.  And their prices remain about the same as without as much competition.  We pay.

We want ever-better medical care.  We are getting unhealthier.  We want someone else to pay for it.  But they won't.  We must bear the responsibility.  We must pay.

Can government, insurance companies, hospitals, and doctors get more efficient?  Sure.  Are there opportunities to eliminate waste?  You bet.  Can we patients get healthier and do more preventative care?  Absolutely.  But it will cost us in some way.

There are no painless solutions.  In the end, we all pay.

The moral obligation
"Is health care a right or a privilege?"

It is a question that we don't talk about enough, and which underlies much of the national divide about health care today.  Is health care a right to which all people are entitled?  Or, is it a privilege bestowed only upon those who have earned it?  

It is an interesting question, and the health care debate has hinged upon how people answer it.

Except that I think that it is the wrong question.

The "right or privilege" question presupposes that rights and privileges are somehow separable. I don't think that they are.

I think of health care in many of the same ways as I think of citizenship or, even, to being a human being.  As citizens and as humans, we have certain 'inalienable' rights.  Heck, our country was built upon them - "Life, liberty, and the pursuit of happiness".  

But those citizen's (and human) rights come with deep responsibilities.  We must participate.  We must act in certain ways.  We must work together to improve our nation and our well-being.  We can't abuse the fundamental rights we have been given.

For me, health care comes down to a moral issue.  I can't tolerate 45 million fellow citizens living without a safety net.  I can't tolerate wasteful spending on needless tests and procedures on the public dime.  I can't tolerate 45% increases in insurance costs over 2 years.  I can't tolerate 'competition' which triples my existing rates.  I can't tolerate people (including me, unfortunately) who don't take good enough care of themselves.

I can't tolerate the status quo.  Can you?

For me, health care is a citizen's right.  And an earned privilege.  We must strive to provide health care for fundamental human needs whenever possible, while simultaneously striving to ensure we grapple with the responsibilities that come along with that privilege.

So to the politicians, lobbyists, pundits, and citizens engaged in the public debate, I say: Grow up.  Step up to the plate.  Quit attacking.  Get realistic.  Have adult discussions.  Lose the scare tactics.  Work together.  Compromise.  Take responsibility.  Live up to your moral obligations.

Then, maybe, just maybe, we can build a better health care system.  For our nation.  And for one another.

LowellsSquare

Taxes, Taxes, Taxes

I'm quite a bit different than my business-owning peers -- I actually don't mind paying taxes. I get a lot of benefit from those taxes: providing for our common defense, local police and fire protection, and a pretty great infrastructure (by world standards), among many other services that our governments provide.  It is my duty as a citizen to financially support the governments that protect and enable our freedoms.

I feel this way even though those services and those governments should be much more efficient and much less bureaucratic than they are.  So I'm not a typical all-taxes-are-evil type of business owner...

But I hate dealing with taxes.Tax-burden

When I bought this business, I knew that I was going to have to deal more with taxes and payroll issues than when I was an individual employee of a corporation. (Unlike many businesses, we don't send our payroll or most of our taxes out to other professionals. Yet.)

But I totally underestimated the crushing administrative burden of the variety, frequency, and complexity of tax payments.  Besides dealing with federal, state, and local governments (which I expected), I quickly learned that each entity had many different types of taxes, each with different weekly, monthly, and quarterly schedules, and each out-of-sync with the others.  There were many taxes which we paid and documented on a regular basis which had to be re-documented periodically.  Then, in January, the schedule gets jumbled from every other tax period.  It is needlessly complicated and time-consuming. 

Again, I'm a willing taxpayer (although I'd always welcome paying less).  But I don't want to be a tax expert.  And I don't want to be forced to hire one.  And I don't want to spend so much time managing our taxes when it should be spent managing our business... 

There must be a simpler way for businesses to contribute to their governments.