St. Louis County, the city of St. Louis, and Kansas City are all seeing examples of preferred legislation for favored construction trade groups. Thankfully, some of the examples have not gone forward, but others have.

Let’s start in Kansas City, where the city council appears set to establish new code requirements for doors. That’s right — doors. Apparently, the incentive we all have not to get robbed isn’t good enough in KC; now you’ll be subject to mandates to install special doors on new homes, which will raise the cost of housing in KC (although probably only marginally). At least they got rid of one bad part of the proposal:

[Councilwoman Cathy] Jolly brought the idea to the council in April, but encountered resistance from some council members who worried that some of the new code requirements would give a competitive advantage to an Overland Park company that specialized in a device to reinforce door frames.

Jolly insisted she was not trying to play favorites, and the latest version of the ordinance deleted language aimed at a particular device or specification.

I still think the reinforced door requirement is unnecessary, but at least the most “rent-seeking” aspect of the proposal was removed.

On to St. Louis. Before I criticize, I shall praise. There was an insanely obvious example of rent-seeking this month as the fire sprinkler industry attempted to get a county code passed that would require a comprehensive fire sprinkler system in every new home built in the county. I give both the sprinkler industry and the union credit for not even trying to deny the obvious benefits to them. The next item will get no such credit. The article features this quote from the president of the Home Builders Association of St. Louis & Eastern Missouri:

“The sprinkler industry has been basically advocating mandatory sprinklers in all new homes for probably 20 years and realized, ‘We can’t sell this to the general public, so let’s focus our efforts on convincing the fire service community,’” he said.

Mike Mahler, business manager for the 500 members of Sprinkler Fitters Local 268, conceded [the] point but said that did not mean residential sprinklers were not a good idea.

“We got the ball rolling on this because this is a great product,” Mahler said. “We educated the fire marshals: Here’s what sprinklers can do, here’s how they can save lives. And the fire marshals carried the ball from that point on.”

I commend the St. Louis County Council for removing this requirement from the new building code. Mandatory sprinklers are not needed for safety in the county and were properly taken out of the bill.

But on the other hand, the council seems set to approve a new licensing requirement for residential HVAC workers in St. Louis County. The city of St. Louis just passed the same requirement in April. Jefferson County is supposedly going to consider it later this year. Wherever it passes, it’s bad. This type of licensing requirement is a totally unnecessary handout to current HVAC contractors who want to push current and future competitors out of their way. It is “rent-seeking” at its worst. I testified against the bill yesterday at a committee hearing. At least two of the councilmembers asked some terrific questions of the public works director, and appear set to vote against it — although it will still probably pass. One of them summed up the real reasons behind the move in the a Post-Dispatch article about the licensing proposal:

“There is no evidence of a dangerous situation,” [Councilman Greg] Quinn said after the committee meeting. The licensing “was not generated by the public. It was generated by the industry to protect itself from competitors and increase profit,” he said.

To sum up, the makers or installers of doors, fire sprinklers, and heating and air conditioning units have all sought protective measures from local government. The same thing happens all the time at the national level, and it is one of the most depressing aspects of democracy.

Good news for Missouri. In a recent press release, Unisys announced that its forthcoming Application Modernization Center of Excellence is expected to create 300 IT jobs right here in St. Louis. And it only cost Missouri taxpayers more than $5 million dollars.

This means someone in Jefferson City thought that it was a good idea to award more than $5 million dollars in tax credits to a Fortune 500 company. Although tax credits aren’t a direct transfer of funds from taxpayers to industry, if a targeted company receives such credits and government spending is not also reduced by that same amount, the marginal tax rate increases for everybody else. Shifting the tax burden in this way is in itself a form of corporate welfare.

There must be a mistake. Someone must have thought that Unisys’ $4.6 billion in revenue last year was a typo. I mean, sure, if the “b” in “billion” were an “m” instead, I would say, “Why not? They are obviously struggling for survival. Last time I checked, kids didn’t need that money for scholarships, the elderly sure don’t need it for health care, and our roads are in pristine shape everywhere I drive. Yep, go ahead and give our $5 million dollars to Unisys; we don’t need it around here.” Unfortunately, in immediate retrospect, I realize that a similar thought had to go through someone’s mind — and what may be even scarier is that this individual has the ability to shift hundreds of millions of dollars in tax burden away from whomever he or she deems worthy.

I’m glad we have safety nets for companies like Unisys; you never know when one of those multinational companies (whose revenue stream is more than half of Missouri’s revenue for last year) might just slip through the cracks.

In the free market, supply and demand intersect at the point of equilibrium. At this point, the amount that individuals pay for an appliance equals its value. If more individuals were willing to buy an energy-efficient appliance but the suppliers were producing at full capacity, then the price would increase. For some individuals, the higher price will exceed the amount that they value the appliance, and they will not buy one. Additionally, the higher price will incite more firms to enter the market and manufacture energy-efficient appliances, which will push the price back to its equilibrium level.

By offering a rebate, the government distorts the market for energy-efficient appliances, resulting in a loss to the economy. I made the following graph to demonstrate how this happens. (Please keep in mind that I was an economics major, not an art major!) The critical error that many make when evaluating this policy is ignoring this loss.

Graph of Supply and Demand for Energy-Efficient Appliances

Let’s assume that the price of an energy-efficient appliance is $500. At this price, a certain number of people will buy one. For the sake of this example, lets assume that 1,000 individuals will buy one appliance at $500. Next, the government provides a rebate of $175 to incite additional people to buy them. At this lower price, a greater number of people will buy one.

Let’s say that 1,200 people are willing to buy them at this price. Now, these individuals consume a product that the economy-wide equilibrium values at $500, but which the individual values at $325. This means that there is a cost to the economy of $175 (the amount of the rebate) for each appliance sold under the new program. This number, multiplied by the number of additional of appliances sold, roughly equals the dead-weight loss to the economy. In this example, the dead-weight loss equals $175 * 200 = $35,000. In this simplified example, this represents the goods and services that would have been bought in the absence of the rebate, which constitutes destroyed wealth.

Another factor that contributes to the economic loss is the amount of the old appliances that are destroyed despite still being operable. This, too, is represented in the graph.

What’s more, this distortion does not increase the number of energy-efficient appliances sold in the long run. This is because the rebate incites transactions that would have occurred anyway in the future. As old appliances break down, individuals will replace them with new appliances that use improved technology.

Ultimately, the rebate program will destroy wealth and fail to hold down energy prices in the long term. Missourians would be better off if the state and federal governments considered the long-term negative consequences of this policy and let the price system work its magic without this kind of short-sighted intervention.

According to his biography:

Governor [Jay] Nixon has put forward an agenda to make government more efficient, effective and responsive to the needs of Missouri families. He is committed to [...] placing a college education within reach for middle-class students.

The governor’s budget decisions, however, send the message that his priority is big businesses that have lobbying power — not students, not low-income or middle-class families, and not people who have mental illnesses or disabilities.

Just last week, the governor cut from the state budget hundreds of millions of dollars from programs that benefit these disadvantaged groups, including transportation aid and college scholarships. He says that the state government is strapped for cash and has run out of programs to cut, but then he doles out hundreds of millions in tax credits to big companies like Ford and IBM. As Martha King wrote yesterday, it’s nonsense.

Every day, it seems, there is a new company and/or industry seeking a handout from the Missouri state government, which is eager to oblige. According to the Columbia Daily Tribune (link via John Combest), the proposed beneficiary du jour is data centers:

Rep. Tim Flook, R-Liberty, submitted an amendment Monday afternoon to expand the bill offering incentives to Ford Motor Co. to include new incentives for data centers.

I’ve argued previously that offering state tax credits to data centers is not good policy. To make the situation worse, as part of the proposal, any data centers that locate in state will contribute zero revenue to the state:

Flook’s amendment, which passed out of the committee by a vote of 14-1 with one abstention, would give a sales tax exemption on the utilities for data centers. It also would exempt retail sales of certain tangible personal property and materials from sales tax if they are for facilities used by data storage centers and server farm facilities. A fiscal note outlining the cost to the state has not been attached yet.

By carving out sections of the tax base, the state government shifts the tax burden to those who remain. This leaves those who lack lobbying power to pick up the tab. The businesses that locate in Missouri as a result of this proposal will still consume services from the state government, but they won’t have to pay for them. (The rest of us will.)

Bertrand Russell was right about one thing, “There is no nonsense so errant that it cannot be made the creed of the vast majority by adequate governmental action.”

According to the Post-Dispatch, St. Louis city residents will soon face increased water and trash bills in response to budget pressures. The purported justification for these rate increases is because, in the words of one alderman:

“There is nothing left to cut,” he told the board.

In the very same meeting that the rate increases were approved, however,  $61 million in tax credits to Peabody Energy were also approved.

A great deal can be said about the problems with these tax credits, but it’s pure nonsense to assert that the city’s budget troubles require soliciting more funds from taxpayers, while simultaneously agreeing to “spend” that money on further tax abatements.

To simplify: The city budget is so strapped that cuts needed to be made across the board, including to the fire department, in conjunction with rate increases on water and trash services. The city budget is also so strapped that it can easily afford to forgo millions of dollars in tax revenue from Peabody.

If the city truly can’t find anything left to cut, perhaps it should start looking at tax credits.

[NOTE, 6/28/10: According to officials at the Department of Economic Development (DED), the DED did undertake a review of NorthSide Regeneration LLC's tax credit application, and fixed the discrepancies it found in the company's application before formal application submission. Show-Me Institute research found discrepancies in approximately 20 percent of the reported property values in the initial submitted application. The DED did not send some of the documentation surrounding the application process after a Show-Me Institute Sunshine Law request, because DED officials say it was part of the issuance process, rather than the review process. An earlier version of this post stated that the DED overpayed for tax credits; the present version does not. Indeed, the DED now asserts that it paid according to figures on a document other than the application submitted.]

The Show-Me Institute’s public information specialist, Audrey Spaulding, released a report on Friday documenting more than 100 discrepancies in the 2009 application for Distressed Areas Land Assemblage Tax Credits submitted by NorthSide Regeneration LLC to the State of Missouri. On New Year’s Eve, the state’s Department of Economic Development (DED) approved the inconsistency-riddled application, granting $20 million in taxpayer funds to the LLC.

Internal documents from the DED disclosed last week reveal that a state agency moving full-speed ahead to grant “the maximum allowed issuance ($20M) before the end of [2009],” while failing verify the applicant’s purchase price claims. Indeed, the DED’s outreach to a St. Louis–based independent private consultant consisted solely of a request to verify the number of parcels per acre in the area submitted for tax credit reimbursement.

In its typical bureaucratic fashion, the DED pressed ahead in its approvals without asking even the most basic question: What exactly is the state paying for, here?

Thanks to Audrey’s reporting, we can answer the question that our state’s bureaucrats failed to ask. Consider the following:

2829 Saint Louis Avenue, pictured above in June 2010, is a one-story, red brick, flat-roofed home with side entry, wood porch, and full basement. A raised limestone water table extends horizontally across the one-bay primary facade below a centered rectangular window opening, while a narrow band of white terra cotta projects outward from the brick wall above the window opening and below a band of white terra cotta coping. The west facade appears to be a former party wall, revealing a parapet that steps downward to the rear of the regular, 25-foot-by-130-foot lot. Presently in poor condition, the modest 908-square-foot home still retains remarkable stability — a product of its solid 1880s construction.

According to the city of St. Louis Assessor’s Office, the home has a total assessed valuation of $1,370.00, of which $360.00 is assessed land. During the past three years, its property tax bills were as follows: $119.06 (2009), $122.45 (2008), and $122.68 (2007). At present, the City of St. Louis lists the property’s appraised value at $7,200.

Prior to its acquisition by N&G Ventures LC in late 2005, the building appears to have served as a modest residence. Since its acquisition, the building’s condition has likely deteriorated, as evidenced by a collapsed rear wall and disintegrating side wood porch.

The above image places 2829 St. Louis Avenue in the context of its contemporary St. Louis streetscape. I could not resist adding a few annotations, courtesy of information contained both within the approved DALATC application and the St. Louis city Assessor’s Office.

I would venture to guess that most residents of St. Louis city would scratch their heads and dig a little deeper if confronted by such an outrageous claim.

Now, the DED says that they were not hoodwinked; they did their job.

I still have to ask — what did the DED think that it was paying for, here?

When I was a guest on Sarah Steelman’s radio show on Thursday, a person called in to ask what would happen to the people who work at Ford’s Claycomo plant if it were to close. This is a common concern raised when discussing the fate of struggling industries, and it is designed to tug at our emotions. Those who employ this argument intend to makes us feel sympathy for the people who are in danger of losing their jobs, and open our collective wallets to save them. I explained on the air that the workers’ skills would not disappear when the door to the plant closes permanently, and that many of them will be able to find work elsewhere in the economy by performing a task that is demanded. The caller didn’t seem to be convinced by my argument. “Tell that to Detroit,” he said. After thinking more about the subject, I realize that there are other additional arguments that I could have made that may be more convincing.

First, I realize that the caller suffers from “make-work bias,” a concept developed by Bryan Caplan, a professor of economics at George Mason University, in his book The Myth of the Rational Voter: Why Democracies Choose Bad Policies. In an excerpt published in Reason, “The 4 Boneheaded Biases of Stupid Voters,” Caplan writes (emphasis mine):

The public often literally believes that labor is better to use than conserve. Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where noneconomists see the destruction of jobs, economists see the essence of economic growth: the production of more with less.

Second, I failed to point out that the caller focuses on the needs of a select group rather than those of everybody in the economy. This is a common error that people make when evaluating policies, as Frédéric Bastiat discussed in “What Is Seen and What Is Not Seen.” On the subject of subsidizing employment, Bastiat writes (emphasis mine):

[I]t is clear that the taxpayer who will have been taxed one franc will no longer have this franc at his disposal. It is clear that he will be deprived of a satisfaction to the tune of one franc, and that the worker, whoever he is, who would have procured this satisfaction for him, will be deprived of wages in the same amount.

Let us not, then, yield to the childish illusion of believing that [a vote in favor of subsidy] adds anything whatever to national well-being and employment. It reallocates possessions, it reallocates wages, and that is all.

When arguing in favor of tax incentives for the Claycomo plant, the radio caller considered only the benefit to the 3,700 plant workers who will keep their jobs. He doesn’t consider the unseen cost that, if the state legislature approves the proposal to provide $150 million in tax credits, the rest of the tax base (a much larger group) will be $150 million poorer. This policy doesn’t increase income; it merely displaces it. As a related unintended negative consequence, the organizations that may have employed these factory workers, had they been laid off, will be restricted in their growth because they would face a smaller supply of labor.

This brings me to my third point. Subsidizing the Claycomo plant would contribute to a higher level of unemployment in the long run, negatively affecting all of the workers in the Claycomo region. Caplan explains this too:

The hard lesson to learn is that giving people “rights to their jobs” is a drain on productivity—and makes employers think twice about hiring people in the first place.

The fact that Claycomo Ford plant will close if unsubsidized indicates that the area no longer has a comparative advantage in manufacturing Ford cars. The area would be better off if its resources — human and otherwise — were employed in activities that do not require subsidies. As a direct consequence, the region would have the capacity to produce more, and the individuals in the market would be able to keep a greater percentage of their income.

On Friday, the Kansas City Star printed a editorial that praises Missouri’s appliance rebate program (link via Combest). It communicates a short-sighted view, failing to consider all of the consequences of the policy. As I have previously discussed in an editorial and blog posts, the appliance program is undesirable policy for many reasons.

The author of the editorial states:

[W]hen [Department of Natural Resources officials] noticed that the recycling requirement seemed to be slowing the program, they bumped up the amount of the rebates. The one for dishwashers, for instance, rose from $75 to $125.

Just like “Cash for Clunkers” did, the rebate program distorts the market to nudge individuals to buy appliances that are government-approved, not those appliances that they would have otherwise purchased. The fact that people were slow to buy these appliances despite these increased marginal incentives demonstrates that there is little market demand for them.

By providing a subsidy to individuals to incite them to buy something they otherwise consider to be too costly, rebate programs create dead-weight loss and therefore destroy wealth in the economy. (Targeted tax credit programs do this, too.)

From the article:

The program lasted longer than expected, partly because the state didn’t go overboard — as a few other states did — in offering generous rebates for energy-efficient appliances.

Exactly how much rebate should the state give in order to “go overboard?” What is the socially optimal level of energy-efficient appliances in the economy? I don’t know what this level is, and our friends in Jeff City don’t know, either. The problem is that no one has access to perfect information. It would be beneficial if the state government stayed out of the market and instead let Missouri residents determine this level for themselves through spontaneous order.

To date, Missouri has made good use of federal stimulus dollars to help families use energy more efficiently and produce a cleaner environment.

Is this quantifiably true? Statements like these are impossible to refute because they include no facts. It is quite possible that the intended environmental impact is negated through the construction of the program. I wish that supporters of programs like these would provide specific facts about their environmental outcomes, so I could perhaps dispute them by offering a more complete set of facts.

Furthermore, even if this rebate program did provide environmental benefits, the state should weigh those benefits against the marginal cost of the program.

The boost in business for appliance dealers is an extra benefit.

This boost is both artificial and temporary, and it will end when the rebate program ends. When the government stops funneling other people’s money to the appliance dealers, this “boost” will disappear. In fact, appliance dealers will likely see fewer sales in the immediate future because the transactions that would have otherwise occurred were pushed into the present.

Furthermore, although this policy may help a small group (appliance dealers) in the short term, it will hurt a much larger group: taxpayers. The $4 million that is transferred via rebates isn’t found money; every cent of it comes from the pockets of taxpayers. When this money is devoted to rebates, taxpayers can’t spend it in the private sector on goods and services that they desire more and would have otherwise bought had they been allowed to keep it.

[NOTE, 6/28/10: According to officials at the Department of Economic Development (DED), the DED did undertake a review of NorthSide Regeneration LLC's tax credit application, and fixed the discrepancies it found in the company's application before formal application submission. Show-Me Institute research found discrepancies in approximately 20 percent of the reported property values in the initial submitted application. The DED did not send some of the documentation surrounding the application process after a Show-Me Institute Sunshine Law request, because DED officials say it was part of the issuance process, rather than the review process. We are engaging in further research to verify these claims and will post more as we learn more. Stay tuned.]

Today, I appeared on the Charlie Brennan Show to talk about the discrepancies in NorthSide Regeneration LLC’s tax credit application filed in late 2009 (you can read more about that, and the discrepancies, here).

A lawyer for NorthSide, Irvin Ness, called in to explain the discrepancies, which appear to total more than $500,000. Ness said that the tax credit application we used to conduct our review was outdated — that NorthSide had submitted an updated application in December 2009 to update the reported property prices in a way that would correctly reflect the certificates of value on file with the city of Saint Louis.

Although this explanation could prove to be true, there are at least two reasons to doubt it:

1. I based my review on a copy of NorthSide’s tax credit application, which was provided to me by the Department of Economic Development (DED) in response to a Sunshine Law request submitted on Jan. 13, 2010. If an updated version had been filed before that time, the DED should have sent it rather than an out-of-date version.
2. My request specified that I wanted to receive “Copies of documents and emails regarding the review of NorthSide Regeneration LLC’s application for DALA tax credits in 2009.” I have made the documents they provided available online (in six parts, here, here, here, here, here, and here). They include no mention of property price discrepancies, or that the application had been resubmitted to reflect new property prices. If the application had been updated to reflect different prices than those that were initially submitted, and the DED had any correspondence about such an updated application, the DED failed to fulfill my request adequately.

At least until NorthSide can produce an updated version of its tax credit application that was actually submitted to the DED in 2009, it’s difficult to determine which error was committed — errors on the application, or errors in fulfilling my requests.

In any case, Charlie Brennan has invited me to appear again on his show, along with Ness, on Tuesday morning. Tune in then to hear more!

The title of this blog entry should be spoken as if you were Johnny Cochran (R.I.P.).

The Post-Dispatch is reporting that the city of St. Louis is raising its water rates (link via Combest). Now, I have no criticism of the rate increase — things cost what they cost, and government utilities have historically underpriced their products. If rates are rising, though, it should be a good time to consider the benefits of privatizing the St. Louis water system. C’mon, St. Louis. It’s good for what ails you.

The special legislative session starts Monday in Jefferson City. I am very excited that one of the bills being considered is Rep. John Diehl’s proposal to amend how counties charge the commercial surcharge property tax. Instead of handing out additional tax credits, here is a perfect opportunity to lower taxes for all businesses, including the Ford Plant in Claycomo, which paid more than $80,000 in surcharge taxes alone in 2009. This legislation would:

• Make it easier for counties to lower the surcharge if they want.
• Require the surcharge to roll back like all other real property taxes.
• Sunset the entire tax in five years.

Counties would be able to adjust to the sunsetting of the tax without unduly putting the burden on residents by adopting the St. Louis County system of setting different rates for different property classifications. First, they would have to adopt that system, and legislation might be required to reopen that option. These surcharge changes would be terrific for the economies of Missouri’s larger counties, and I am excited that they will again be considered in special session.

While spending the week at a seminar sponsored by the Foundation for Economic Education, I’ve repeatedly noticed the presenters tripping over a wired microphone. With some help from the Google machine, I learned that this is because the Federal Communications Commission recently placed a ban on wireless microphones that use the 700 megahertz band. The space will be reserved for the use of emergency responders.

Although this ban may provide some social benefits in terms of improving emergency services, these should be weighed against the increased marginal costs of doing business — costs that are inevitably imposed on others.

This ban will negatively affect the organizations that use such microphones in their operations — businesses, theaters, churches, schools, news stations, etc. Organizations that have already made a capital investment in wireless microphones will have to spend additional money to replace them. This is money that they could have invested in other areas of their business, or kept as profit. Furthermore, manufacturers of wireless microphones will have to close or produce a different product, not for lack of consumer demand, but because of government mandate.

If this ban means that I can’t play Beatles Rock Band on my Nintendo Wii because the signal for my wireless guitars is blocked, then I will be inconsolable.