Published on 17 Mar 2015
“Anybody that drives around Southern California can tell you the infrastructure is falling apart,” says Joel Kotkin, a fellow of urban studies at Chapman University and author of the book The New Class Conflict. “And then we’re going to give money so a bunch of corporate executives can watch a football game eight times a year? It’s absurd.”
When the Inglewood City Council voted unanimously to approve a $1.8 billion stadium plan on February 24th, hundreds of football fans in attendance cheered for the prospect of a team finally returning to the Los Angeles area.
On it’s face, the deal for the city of Inglewood is unprecedented — Rams owner Stan Kroenke has agreed to finance construction of the stadium entirely with private funds. The deal makes the stadium one of the most expensive facilities ever built and is an oddity in the sports world, where most stadiums require millions in public dollars to be constructed.
And while the city still waits to hear if it will indeed inherit an NFL team, the progress on the new privately-funded Inglewood stadium has set off a bidding war between other cities that are offering up millions in public subsidies to keep (or attract) pro-sports franchises to their area.
St. Louis has proposed a billion dollar waterfront stadium financed with $400 million in tax money to keep the Rams in Missouri. And the San Diego Chargers and Oakland Raiders have unveiled a plan to turn a former landfill in Carson, California, into a $1.7 billion stadium to keep the Rams from encroaching on their turf. While full details of the plan have yet to be released, it’s been reported that the financing would be similar to the San Francisco 49er’s deal in Santa Clara, which saw the team receive $621 million in construction loans paid for with public money.
Even the fiscally conservative Scott Walker is not immune to the stadium spending craze. The Wisconsin governor wants to allocate $220 million in public bonds to keep the Milwaukee Bucks basketball franchise in the area. Walker has dubbed the financing scheme as the “Pay Their Way” plan, but professional sports teams rarely pay their fair share when it comes to stadiums and instead use public money to generate private revenue.
Pacific Standard magazine has reported that in the last 20 years, the U.S. has opened 101 new sports facilities and stadium finance experts say that almost all of them have received public funding totaling billions of dollars. Politicians generally rationalize this expense by stating that stadiums will generate economic revenue and job opportunities for the city, but Kotkin says those promises are rarely realized.
“I think this is sort of a fanciful approach towards economic development instead of building really good jobs. And except for the construction, the jobs created by stadia are generally low wage occasional work.”
“The important thing that we’ve forgotten is ‘What is the purpose of a government?'” asks Kotkin. “Cities instead of fixing their schools, fixing their roads or fixing their sewers or fixing their water are putting money into ephemera like stadia. And in the end, what’s more important?”
March 25, 2015
March 13, 2015
Reason posted an infographic showing which corporation gets the most state support for every state in the union:
March 6, 2015
At Coyote Blog, Warren Meyer wonders why so many states and cities are so eager to throw taxpayer money at movie and TV productions:
I am always amazed that the media will credulously run stories against “corporate welfare” for oil companies (which usually mostly includes things like LIFO accounting and investment tax credits that are not oil industry specific) but then beg and plead for us taxpayers to subsidize movie producers.
I wish I understood the reason for the proliferation of government subsidies for film production. Is it as simple as politicians wanting to hobnob with Hollywood types? Our local papers often go into full sales mode for sports team subsidies, but that is understandable from a bottom-line perspective — sports are about the only thing that sells dead-tree papers any more, and so more local sports has a direct benefit on local newspapers. Is it the same reasoning for proposed subsidies for Hollywood moguls?
Whatever the reason, our local paper made yet another pitch for throwing tax dollars at movie producers
Notwithstanding a recent flurry of Super Bowl-related documentaries and commercials that got 2015 off to a good start, Arizona appears to be falling behind in a competitive and lucrative business. The entertainment industry pays well, supports considerable indirect employment and offers the chance for cities and states to shine on a global stage.
Seriously? I am sure setting up the craft table pays better than catering a party at my home, but it is a job that lasts 2 months and is then gone. Ditto everything else on the production. And I am sick of the “shines on the world stage thing.” Who cares? And is this really even true? The movie Chicago was filmed in Toronto — did everyone who watched Chicago suddenly want to go to Toronto? The TV animated series Archer gets a big subsidy from the state of Georgia. Have they even mentioned Georgia in the series? Given the tone of the show, would they even want to be mentioned?
When government subsidizes an industry, it is explicitly saying that resources are better and more productively invested in the subsidized industry than in other industries in which the money would have been spent in a free market. Does the author really have evidence that the money I would have spent to improve the campgrounds we operate in Arizona is better taken from me and spent to get a Hollywood movie shot here instead? Which investment will still be here 6 months from now?
March 2, 2015
Ethanol, produced by corn, “biomass,” cane sugar or other plant matter, is considered by many to be a great alternative to fossil fuels. They consider the origin to be more renewable (plants grow rapidly), the fuel to produce less pollution, the production to release fear “carbon emissions,” and as a bonus, it costs more so people might drive less.
Ethanol is so beloved by some that legislation to subsidize farmers who grew crops for biofuels was pushed through in many countries including Germany and the United States. It would save us from dependence on foreign oil, it would reduce pollution, and cars can run on plants, won’t that be wonderful? Some even argue that it would reduce gas prices because we could shake that oil addiction from the middle east and produce it here cheaply and efficiently!
The truth is, ethanol has its advantages. When burned, it pollutes less than straight gasoline, and it actually has a higher octane rating, making it produce more horsepower per weight than gasoline. It also burns somewhat cooler than straight gasoline.
These days ethanol is less popular, and you don’t hear so much about how great it is. BP isn’t running bright green ads with happy cars driving around on corn any more. But the legislation is still in place, the farmers are still growing corn to turn into fuel, and any attempt to stop this or repeal the legislation is met with exactly the same environmental claims and protests.
So what about these fuels, are they really that great? Are people who oppose ethanol just oil company stooges?
Greg Giraldo is dead now, but he was a very brilliant, very funny comedian. He was one of those comedians that all other comedians loved and thought was so hilarious but for some reason never really caught on or broke big.
He had a bit on biofuels in which he pointed out that for every gallon of corn ethanol, it requires two gallons of gasoline to produce. He noted the only reason corn ethanol is even pushed is because corn farmers want that sweet subsidy money. Al Gore not long ago admitted it wasn’t about the environment, but about kickbacks to farmers for political gain:
First generation ethanol I think was a mistake. The energy conversion ratios are at best very small. […] One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president.
Every so often a politician will be honest.
The truth is, ethanol is not just a failure in every single category it was supposed to succeed, but a disaster. From food shortages to riots, to slavery and beyond, ethanol in all its forms is a horrific failure. Let us count the ways.
Christopher Taylor, “COMMON KNOWLEDGE: Ethanol and Biofuels “, Word Around the Net, 2014-04-25.
January 19, 2015
In the Globe and Mail, Eric Atkins tells the tale of another shortline railway shutting down operations:
The railway, which did not reapply for a $3-million yearly government subsidy, has been granted permission by a Nova Scotia regulator to abandon the 100 miles of track between Port Hawkesbury and Sydney by October.
The move leaves some factories facing soaring shipping costs and scrambling to find new ways to bring in raw materials.
Beverage container maker Trans-Atlantic used to rely on the railway for 70 or 80 railcars a year carrying plastic pellets from Quebec and South Carolina. John MacLean, vice-president of the manufacturer that employs 40 people, said the railway raised the $600-per-car rate by $5,500 in the fall, and last week notified customers each car would cost $18,000.
“They obviously don’t want to do business here,” Mr. MacLean said by phone from Sydney. “They opted not to take the subsidy but they cited a decrease in traffic as the reason they had to increase the rate.”
The loss of rail service means Trans-Atlantic has been saddled with the expense of trucking its raw material from Moncton, and has lost the flexibility and storage the rail cars offered.
“We have to be very vigilant on the way we operate. It has a huge effect on our competitiveness,” he said.
Railway executives said at December hearings they did not renew the subsidy application because the future costs of maintaining and repairing the line outweighed the scrap and market value of the steel and other materials.
The railroad’s bridges and culverts would need repairs that cost at least $30-million, while the company figures it can get $15-million to $20-million scrapping and selling the rails and other material.
“As a company we feel that’s a much better use of our assets than simply operating on a subsidy that allows us to break even for 500 carloads a year. That’s why we did not renew,” said Josée Danis, assistant vice-president of Cape Breton & Central Nova Scotia Railway.
December 10, 2014
Tim Worstall debunks a headline statistic from earlier this month:
We’ve a new report out from the Mailman School of Public Health telling us that in some urban parts of the US child poverty is up at the unbelievable rates of 40, even 50% or more. The problem with this claim is that it’s simply not true. Apparently the researchers aren’t quite au fait with how poverty is both defined and alleviated in the US. Which is, when you think about it, something of a problem for those who decide to present us with statistics about child poverty.
Everyone else [in the world] (as well as using a relative poverty standard, usually below 60% of median earnings adjusted for family size) measures poverty after the effects of the tax and benefits systems on alleviating poverty. So, in my native UK if you’re poor you might get some cash payments (say, unemployment pay), some tax credits, help with your housing costs (housing benefit we call it), reduced property taxes (council tax credit) and so on. Whether you are poor or not is defined as being whether you are still under that poverty level after the effects of all of those attempts to alleviate poverty.
In the US things are rather different. It’s an absolute standard of income (set in the 1960s and upgraded only for inflation, not median incomes, since) but it counts only market income plus direct cash transfers to the poor before measuring against that standard. Thus, when we measure the US poor we do not include the EITC (equivalent of those UK tax credits, indeed our UK ones were copied from the US), we do not include Section 8 vouchers (housing benefit), Medicaid, we don’t even include food stamps. Because the US measure of poverty simply doesn’t include the effects of benefits in kind and through the tax system.
The US measure therefore isn’t the number of children living in poverty. It’s the number of children who would be in poverty if there wasn’t this system of government alleviation of poverty. When we do actually take into account what is done to alleviate child poverty we find that it’s really some 2-3% of US children who live in poverty. Yes, that low: the US welfare state is very much child orientated.
November 12, 2014
Tim Worstall isn’t impressed with a recent report that claims traditional energy companies (oil, gas, and coal) get government subsidies that amount to $88 billion per year, just from the G20 countries:
The report itself is here. Have a look at it yourselves, by all means, but here’s the three things they’ve added up to get to that $88 billion figure:
A fossil fuel subsidy is any government action that lowers the cost of production, lowers the cost of consumption, or raises the price received by producers of fossil fuels. Types of fossil fuel subsidies include financial contributions or other support from the government, such as grants and direct payments, tax concessions, non-market investments made as a result of government ownership of fossil fuel companies, in-kind support (including specific infrastructure), credit support (loans and loan guarantees), insurance and indemnification, market price support, procurement, and responsibility for decommissioning (Koplow and Charles, 2010; Steenblik, 2008). This report divides ‘exploration subsidies’ into three categories:
• ‘national subsidies’, such as tax breaks to companies and direct spending by government agencies
• ‘investment by SOEs and
• ‘public financing’ including support from domestic, bilateral and multilateral international (e.g. loans, equity, and guarantees)
To take that second one first, SOEs are state owned enterprises. So when Rosneft spends money on drilling a new well, given that Rosneft is largely state owned (and most certainly closely state connected) then this is a government subsidy to fossil fuel exploration. No, this isn’t normally what we mean by a subsidy and shouldn’t be counted as one. Just that one classification error accounts for up to half of their $88 billion. Just to repeat the error: claiming that investment by a state owned company on purely commercial terms is a subsidy simply isn’t true. If Statoil drills a new well, upon which it makes the usual profits and finances it in the normal manner, this is not a state subsidy. Yet this report is trying to claim that it is.
The public financing part is a bit of a stretch to be honest. The claim is that if the World Bank lends money to open a coal mine in some poor country then that’s a subsidy from the rich countries (who subsidise the World Bank) to fossil fuels. You could, I suppose, make that case but it is very much a stretch. And if you were to make that case then the subsidy would be only the difference between commercial lending terms on that mine and the concessionary terms that the World Bank is offering. Which isn’t what they measure at all.
But the real problem is with their insistence that any tax break is a subsidy. In their estimates of tax breaks they include things that any normal company gets it’s just that given the differences in the extractive industries we tend to give them different names. Every company is, for example, able to write off the cost of R&D against future income. Drilling or surveying is a form of R&D but we just have a slightly different set of names for how fossil fuel companies can write off those costs. To include all of those “tax breaks” as subsidies when they’re on offer, in slightly different forms and slightly different names, to all producers of anything is not quite being accurate.
Update: In a post today, he revisits the subsidies argument.
Here’s one report on what the IEA is saying:
Fossil fuels are reaping $550 billion a year in subsidies and holding back investment in cleaner forms of energy, the International Energy Agency said.
Oil, coal and gas received more than four times the $120 billion paid out in incentives for renewables including wind, solar and biofuels, the Paris-based institution said today in its annual World Energy Outlook.
Yes, all of that is entirely true. And it’s also true, as the IEA has said in the past, that we really would like to stop those subsidies to fossil fuels. On three grounds, the first that they’re very inefficient, the second that they don’t actually reach the poor they’re aimed at and the third that removing them would take us a long way to meeting our climate change targets.
However, nothing is ever that simple: and the big point to note here is that it really isn’t us in the rich countries that are subsidising fossil fuels.
There’s our two numbers, the renewables subsidy and the fossil fuel one. And yes it’s entirely true that we’d like to reduce that second, the fossil fuel one. Either so we can increase the renewables one because we have more money or so we can decrease it as we now longer have two policies working in opposition to each other.
However, here’s the thing for public policy. It’s us in the rich countries, largely so at least, who are subsidising the renewables. Great, that’s under our control. But it’s almost entirely not us in the rich countries subsidising the fossil fuels. That means, absent the reintroduction of colonialism, that those subsidies are not something under our control.
We should also note that these are “real subsidies”. These aren’t games being played with statistics as yesterday’s attempt to persuade us that we do subsidise by $88 billion. We’re not including tax breaks, not totting up R&D allowances or anything. This really is $550 billion in cash being spent by governments to subsidise fossil fuels.
September 17, 2014
Gregg Easterbrook on the difference between ordinary jobs and government subsidized job creation:
Elon Musk Recharges His Bank Account: Tesla’s agreement with Nevada to build a battery factory is expected to create about 6,000 jobs in exchange for $1.25 billion in tax favors. That’s about $208,000 per job. More jobs are always good. But typical Nevada residents with a median household income of $54,000 per year will be taxed to create very expensive jobs for others. Volkswagen is expanding its manufacturing in Tennessee, which is good. But the state has agreed to about $300 million in subsidies for the expansion, which will create about 2,000 jobs — that’s $150,000 per new job, much of the money coming from Tennessee residents who can only dream of autoworkers’ wages. The median household income in Tennessee is $44,140, about a third of the tax subsidies per new Volkswagen job. The Tesla handout was approved by the Democratic state legislature of Nevada; Tennessee’s Republican-controlled state government approved the Volkswagen corporate welfare deal.
At least it’s a bargain compared to federally subsidized solar jobs. A Nevada solar project — state that is home to Senate Majority Leader Harry Reid, President Barack Obama’s closest ally on Capitol Hill — cost $10.8 million in subsidies per job created. Local public interest groups noticed the extreme subsidy while the national media did not.
This cheeky website monitors giveaways state by state.
August 8, 2014
If you listen to big government fans, you’ll often hear how much better it is for the economy for the government to spend money — much better than letting the taxpayers spend that money themselves — because the government is able to get a much higher “multiple” for every dollar that it spends. The “Cash for Clunkers” story may support that theory, but only if you reverse the sign: the program may have been more economically helpful to the auto makers and the taxpayers if they’d just piled up a few billion bank notes and set them on fire. The program ran for two months, and the government doled out $3 billion in subsidies to new car buyers (their old cars were destroyed). The new car owners benefitted, although it seems to merely have brought forward intended new car purchases in most cases, and the auto makers seemed to benefit by moving out a lot of unsold inventory.
However, a new National Bureau of Economic Research working paper shows that the program actually ended up costing the auto makers between $2.6 and $4 billion. Coyote Blog quotes the WSJ‘s summary:
The irony is that the goals were to help Detroit through the recession by subsidizing sales and to please the green lobby by putting more fuel-efficient cars on the road. By pulling forward purchases that consumers would make later anyway, the Obama Administration also hoped to add to GDP. Christina Romer, then chair of the Council of Economic Advisers, called Cash for Clunkers “very nearly the best possible countercyclical fiscal policy in an economy suffering from temporarily low aggregate demand.”
The A&M economists had the elegant idea of comparing the buying behavior of Texas drivers who owned cars that barely qualified for cash (those that got 18 miles per gallon of gas or less) and those that barely did not (19 mph). Using state DMV sales records, this counterfactual allowed them to isolate the effects of the Cash for Clunkers incentives and show what would have happened without the program.
The two groups were equally likely to purchase a new vehicle over the nine month period that started with Cash for Clunkers, so the subsidy did not create any extra auto business. But in order to meet the fuel efficiency mandate, consumers who got the subsidy were induced to purchase smaller vehicle models with less horsepower that cost on average $2,500 to $3,000 less than those bought by their ineligible peers. The clunkers bought more Corollas, and everybody else more Chevys.
Extrapolated nationally, auto revenues may have plunged by more than what the government spent. And any environmental benefits cannot be justified under the federal social cost of carbon estimate of $33 a ton. Prior research from 2009 and 2013 has shown that the program cost between $237 and $288 a carbon ton.
… cash for clunkers was just sinful. You’re taking a bunch of perfectly good vehicles, inexpensive vehicles that could be used by people without much in the way of material means, and crushing them. If someone took a valuable resource — something that could really be useful to people — and destroyed it, they’d be in jail if they were private citizens.
Steve Chapman probably put it best back in 2009, “Cash for Clunkers has been a thrilling moment for advocates of expanded government, who say it proves what we can accomplish when our leaders put their minds to it. They are absolutely right. The program proves the federal government is unsurpassed at two things: dispersing money and destroying things.”
July 23, 2014
There’s capitalism and there’s crony capitalism: they share a name, but they’re very different creatures. Crony capitalism thrives when government controls a large share of the economy, because then the politicians and bureaucrats have more goodies to share with their “capitalist” cronies. The bigger the slice of the pie controlled by political leaders and unelected regulators, the better the situation for the favoured companies — and that usually means the biggest of the big corporations. In the US government, one of the best examples of institutionalized crony capitalism is the Export-Import Bank (Ex-Im): it exists to allow big corporations like Boeing to sell their products to foreign buyers at highly favourable interest rates, with the taxpayer picking up the risks and the American corporation creaming off the excess profits.
This system works so well — for the businesses being subsidized and the politicians who control the process — that it’s difficult to see it being stopped any time soon. Ex-Im’s enabling legislation is due to be re-authorized later this summer, so this is one of those brief chances to stop it. The problem is that it isn’t just Republicans who support it (because “what’s good for
General Motors Boeing is good for America”), but also Democrats … sometimes the very same Democrats who make a lot of speeches about the evils of Wall Street. Jonah Goldberg explains why:
The Left’s anti-big-business populism is very different. It doesn’t want to cut the government’s incestuous relationship with big business; it simply wants to bring business to heel. Big business should do what Washington tells it to do, and when it does, it will get treats. When it doesn’t, it will get the newspaper to the nose. But big business will never be let off its leash, if the Left has its way.
“[Senator Elizabeth] Warren doesn’t have a problem with big banks or corporations,” the Federalist’s David Harsanyi writes. “She has a problem with banks and corporations that make profits in ways that she finds morally intolerable. She is an opponent of dynamism, not cronyism.”
This has always been the central idea behind progressive economics. Bureaucrats and other planners need — or at least want — ever more power to decide how economic resources are arranged and allocated. That doesn’t mean they’re socialists, it just means that corporations need to follow their lead. Indeed, good “corporate citizenship” means acquiescing to the priorities of progressive state planners and whatever their latest idea of “public–private partnerships” might be. The one constant in such partnerships is that business is always the junior partner.
This was the vision behind Woodrow Wilson’s “war socialism,” FDR’s New Deal, LBJ’s Great Society, Bill Clinton’s “Third Way,” and virtually all of Barack Obama’s economic policies. What is Obamacare but an attempt to turn the entire health-care industry into Washington’s well-fed lapdog?
What’s amazing is that people are still capable of shock when it turns out that a policy of treating businesses like dependent lapdogs yields businesses that try to have the government’s lap all to themselves.
July 22, 2014
Last week, Chris Edwards posted a short article at the Cato@Liberty blog, discussing the long history of government malinvestment in infrastructure projects:
Most politicians are optimistic about the government’s ability to intervene and solve problems. That’s one reason why they run for office. Neocons, for example, have excessive faith that foreign intervention can fix the world, while liberals embrace the misguided idea that subsidies and regulations can boost the economy.
The Erie Canal was a misleading outlier: it was a major infrastructure project that actually succeeded in turning a profit, and it set off a string of copycat government initiatives … most of which quickly turned into expensive mistakes for state governments:
Chapter 3 of the book [Uncle Sam Can’t Count by Burton and Anita Folsom]looks at the orgy of state government canal building from the 1820s to the 1840s. Here is the basic story:
- New York State funds construction of the Erie Canal, which opens in 1825.
- The Erie Canal is a big success, which spurs canal fever across the nation and encourages other state governments to hand out subsidies. Government canal schemes are launched in Michigan, Pennsylvania, Ohio, Indiana, Maryland, and Illinois. There is particular excitement about subsidized “internal improvements” among Whig politicians, including Abraham Lincoln.
- However, politicians overestimate the demand for canals in their states and underestimate the costs and difficulty of construction. They do not recognize that the Erie Canal is uniquely practical and economic as it traverses relatively flat land and connects the Great Lakes with the Atlantic.
- Some of the state-sponsored canals are huge boondoggles and are abandoned. And other than the Erie Canal, all of the state canals sustain heavy losses, including other subsidized canals in New York.
- After the failures, numerous states privatize their infrastructure and change their constitutions to prevent politicians from wasting further money on such schemes.
May 31, 2014
In the Globe and Mail, Simon Houpt looks at the rise and rise of Ezra Levant and finishes with what he clearly thinks is a “gotcha” moment:
… for a man who seems to have studied his American forebears so extensively, he has failed utterly to learn how to mimic the persuasive charms of a Bill O’Reilly or the wackadoodle authenticity of a Glenn Beck. He has a genuinely nasty streak that flares up in his attacks – on the Roma people, for example – that have landed him in hot water with the Canadian Broadcast Standards Council.
He seems less interested in free speech than in listening to his own speech. Perhaps fatally, he has no visible sense of humour about himself.
In Groundswell, he has great fun mocking one of his favourite targets: Hollywood stars, whom he accuses of gross hypocrisy for promoting environmental causes while flying around in private jets. He points to Matt Damon’s anti-fracking drama Promised Land, which was backed in part by financing from the United Arab Emirates. And he mocks Josh Fox, the director of the anti-fracking documentaries Gasland and Gasland 2, for being a one-time New York-based actor.
Yet there is more than enough hypocrisy to go around: Levant is a critic of government support whose books have been published by a company that took plenty of government money until a recent change in ownership precluded the practice; a free-marketeer who works for a network that spent months last year trying to convince regulators to let it extract a monthly payment from every TV subscriber in the land.
At one point in Groundswell, Levant suggests activists are primarily driven by the salaries they receive. It’s a worldview that is so breathtakingly cynical that we’re left to wonder if Levant himself would blithely change his position for a fatter paycheque. If true, what kind of free-speech champion is that?
As far as the publisher collecting government money … most of the Canadian publishing business does that. It’s an unusual publishing company that manages to avoid suckling at that particular teat. Sun TV’s campaign for a better placement in cable TV packages certainly didn’t show the company in a good light, but the regulators have deliberately created a two-class system for cable, with the favoured channels required in each cable offering (a subsidy-by-another-name) and the disfavoured ones excluded. Sun TV could have taken the high road, but they’d have gone out of business for no purpose, and it wouldn’t have changed the system at all. (Full disclosure: I don’t watch Sun TV, although I have read a couple of Levant’s books.)
May 27, 2014
Stephen Gordon linked to this rather boggling Wall Street Journal article that outlines how the Canadian and provincial governments are attempting to lure start-up technology businesses to locate in Canada with vast bribes of taxpayer money:
Imagine you are launching or running a startup and there’s a place where all of your developers — the biggest expense for most tech companies — cost one quarter what they do in Silicon Valley. Sure, it’s cold there, but talent is plentiful and the locals are friendly. Would you trade your hash browns for poutine?
Adam Adelman, co-founder of Mighty Cast, a startup working on a new kind of wearable technology, recently told me the Canadian government is paying almost 80% of his developers’ salaries. And that’s not a tax credit. It’s a rebate, a check he gets from the government whether or not his startup makes money.
Even at Mighty Cast, a two-year-old hardware startup, salaries have been 80% of expenses. Combine that with the lower salaries demanded by engineers in Montreal, where Mighty Cast moved its headquarters after its genesis in Silicon Valley, and Mr. Adelman says he’s able to stretch his angel round of investment four times as far.
So the federal government is literally giving away money to start-up tech companies to compete at a huge advantage against actual Canadian companies? Nearly 80% of the payroll is funded from taxes, partly collected from the domestic competition? Does this seem like a good idea to anyone who isn’t already drawing 100% of their income from Ottawa?
The government is particularly badly suited to picking technology winners, and this program sounds like a vast give-away for the well-connected few, literally at the expense of everyone else. Maple-flavoured crony capitalism, with the official stamp of approval of Stephen Harper’s “conservative” government.
Just as democracy can be corrupted by repressive populism, so can capitalism be perverted by “rent-seeking” — when people seek to gain more than the goods and services they produce are worth to others.
Sometimes they use political influence to sustain monopolies or to prevent new entrants and innovators from competing for custom. Sometimes they use governments to provide subsidies from taxpayers, or to prohibit cheaper imports.
Sometimes they do deals with governments that provide taxpayer funds to cushion losses derived from incompetence or recklessness. These forms of crony capitalism detract from capitalism’s real benefits and achievements.
What capitalism should now do is to free itself from these rent-seeking perversions and spread its benefits as widely as possible.
It should act against anti-competitive practices to give people instead the power of free choices between competing goods and services. It should spread ownership of capital and investment as widely as possible through such things as personal pensions and individual savings accounts.
It should lower the barriers to entry so that everyone can aspire to start up a business to bring goods and services to others. It should seek a tax system that rewards success rather than punishing it.
Capitalism should become inclusive, making it as easy and as attractive as possible for as many as possible to set aside some part of present consumption in order to invest some of their resources and their time in providing goods and services that others will want. It should become true capitalism.
Dr. Madsen Pirie, contributing to “Viewpoints: What should capitalism do?”, BBC News, 2014-05-26.
May 25, 2014
Strategy Page looks at the knock-on effects of the Russian government banning the export of rocket engines to the United States:
The U.S. government is being forced to use satellite launchers developed without government financing because the usual methods of obtaining these launchers is falling apart and currently is unable to supply enough rockets to get all American military satellites into orbit. The immediate cause of this problem is the recent (since earlier this year) Russian aggression against Ukraine. The U.S. responded to this aggression by placing sanctions on some Russian officials and firms. Russia responded to that by halting RD-180 shipments to the United States. That’s breach of contract and it will do enormous damage to Russian exports in the future because now many countries and firms realize that a contract with a Russian firm can be cancelled by the Russian government for any reason. This was always seen as a risk when doing business with Russia and many Western firms declined to do so or have pulled out of Russia in the last decade because of the growing unreliability of Russia as a business partner. The RD-180 affair got a lot of publicity, all of it bad with regard to future Russian exports of high-end industrial items. Europe, which gets about a third of its natural gas from Russia, is already looking for alternate sources and investors are fleeing Russia (and taking their money with them).
This is good news for the new private firms that are developing rockets for launching stuff into orbit. One such firm is SpaceX (Space Exploration Technologies Corporation) and is has been trying to break the current cartel controlling U.S. government satellite launch services. Since 2006 all this business has gone to a government-approved monopoly called the ULA (United Launch Alliance) which is composed of Lockheed Martin (Atlas 5 rocket) and Boeing (Delta 4). These two firms have dominated U.S. space launches for over half a century. Because of the RD-180 the Atlas 5 is more attractive (in terms of performance and price) than the Delta 4. Meanwhile SpaceX expects to have Atlas 5 competitor ready in a few years.
In 2012 SpaceX obtained its first contract to launch U.S. military cargo into space. SpaceX had earlier obtained a NASA contract which included 12 deliveries to the International Space Station (at $134 million each). What makes all this so noteworthy is that SpaceX developed its own launch rockets without any government help. SpaceX also developed the Dragon space vehicle, for delivering personnel and supplies to the International Space Station.
SpaceX has since proved that its rockets work and is pointing out that the SpaceX rockets can do the job cheaper that ULA. Currently ULA gets a billion dollar a year subsidy from the government that SpaceX would not require. SpaceX still has to get all the paperwork and approvals done so that they can handle classified missions. SpaceX does not see this as a problem, it’s simply going to take another year to satisfy all the bureaucrats and regulations.