So yesterday, in an article headlined Titans Seek New York Mayor in Bloomberg’s Mold, the New York Times reported that leading business executives, including Jerry Speyer (#1 on the Observer’s list of most powerful people in real estate), hope for a mayor who has the luxury of “financial independence, his lack of party affiliation and his corporate, by-the-numbers approach to management,” and, in the words of one interviewee, “not beholden to special interests.”
Amid a general shower of praise for Bloomberg, the Times allowed that his “administration is considered an ally to many corporations, especially developers.”
The Bloomberg contradiction
What the newspaper didn’t do is examine how a by-the-numbers approach to management might be contradicted by a look at Bloomberg’s treatment of developments like Atlantic Yards, where he’s broken promises, failed to scrutinze the development closely, and falsely claimed the free market was at work, even as sports teams benefit enormously from monopoly rules that enforce franchise scarcity and provoke cities and states to bid against each other by offering subsidies, an issue to be discussed in detail below.
Meanwhile, his administration is busy lobbying in Washington to ensure that a “loophole” (in the words of the chief counsel of the Internal Revenue Service) remains to allow tax-exempt financing for the Yankees and Mets stadiums, both under construction, and the Atlantic Yards arena.
In other words, the Bloomberg who imposed the once-politically unpopular smoking ban and pushed for congestion pricing loses track of his principles when it’s time to construct monumental sports structures where, not coincidentally, there are ribbons to cut.
(That latter explanation comes from the 1989 article Holding Government Officials Accountable for Infrastructure Maintenance, by former New York Comptroller Ned Regan, a Republican, as cited by Rep. Dennis Kucinich, D-OH, at a 10/5/07 hearing of the Domestic Policy Subcommittee of the Committee on Oversight and Government Reform.)
Bloomberg’s identification with Ratner
I wrote last year about Bloomberg’s 1/23/04 radio appearance with WABC’s John Gambling, where some key statements were either inaccurate or proven wrong as the project evolved. Bloomberg’s identification with the developer, nearly 18 months before the Metropolitan Transportation Authority’s belated RFP for its Vanderbilt Yard, was clear in this verbal slip:
Then, we’ve got to find a find a ways--Bruce Ratner’s got to find a ways--to build this complex in Brooklyn.
Inaccuracy on subsidies
Bloomberg said that “any city monies of any meaningful size will be [corrected] debt issues financed by the extra tax revenues that come from this,” but he broke his promise: the city later pledged $100 million, and later added $105 million.
The not-so-free market
The most astounding sequence came when Bloomberg and Gambling seemed not to know that sports team owners seek new facilities to maximize luxury boxes and marketing opportunities.
MB: Well, I suppose that--nobody wants to lose a team, everybody wants to gain a team. The Jets used to play at Shea Stadium, moved to New Jersey, New York got hurt, now they want to come back. The Nets--these teams want to go where the audience will support them.
JG: It’s a free market.
MB: It’s a free market; they’re privately owned. The Nets have not done well in New Jersey; their parking lot’s half full. Y’know, they’ve not sold out in a long time. The Jets don’t like sharing a stadium. But these are private ventures.
As economist Arthur Rolnick said at the Congressional hearing last October,
sports entertainment will “exist in this country whether we subsidize it or not,” so if a professional team leaves, people will go to minor league, college, or high school games.
Economic blackmail
Rolnick’s testimony about free market failures (here and here) deserves a longer look. He said:
There is likely no major metropolitan area in this country that has not been held hostage at some point by the owner of a sports franchise who threatened to move the team elsewhere if the owner did not receive a new taxpayer-funded sports complex. Indeed, such economic blackmail even affects many of our smaller communities, as minor league sports teams have also learned to play this rent-seeking game.
Being from Minnesota, I can personally attest to this rent-seeking game, as the Minnesota Twins—after a 10-year campaign—finally persuaded a previously reluctant state Legislature to hand over about $400 million in public financing for a new stadium that is now under construction in downtown Minneapolis. Not to be outdone, the Minnesota Vikings are currently pressing the Legislature for their own share of the public largesse. And who can blame them? As long as governments are willing to hand over limited public resources, these teams would be foolish not to accept them.
But make no mistake, it's not just sports teams that demand public money from cities and states. The state and local funds spent competing for sports franchises, though conspicuous, probably represent only a fraction of the billions of dollars spent by the more than 8,000 state and local economic development agencies competing to retain and attract businesses through the use of preferential taxes and subsidies....
While states spend billions of dollars competing with one another to retain and attract businesses, they struggle to provide such public goods as schools and libraries, police and fire protection, and the roads, bridges and parks that are critical to the success of any community.
The AY perspective
Atlantic Yards would be different, proponents say; the city and state would gain by capturing taxes from New Jersey, at least according to projections by the Empire State Development Corporation and Forest City Ratner consultant Andrew Zimbalist. (The Independent Budget Office confirmed a gain for the AY arena alone, though additional subsidies call that calculation into question.)
However, no analyst looked at the project simply from the national perspective, which fully accounts for the benefits Forest City Ratner would gain. Notably, tax-exempt financing poses relatively little costs to the city and state in terms of foregone tax revenue, but poses significant costs to the federal treasury--hundreds of millions of dollars for the three New York sports facilities. Hence the closer Congressional look and an attempt to close the “loophole.”
(There is a backhanded defense for the unfairness, as Assemblyman Richard Brodsky pointed out at an Assembly hearing last week: New York sends more in taxes to Washington than it gets back.)
The right kind of competition
Rolnick’s prescription is to cut off tax-exempt financing and other such preferential treatment:
It is now time for Congress to exercise its Commerce Clause power to end another economic war among the states. It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes. Economists find that there is a role for competition among states when it takes the form of a general tax-and-spend policy. Such competition leads states to provide a more efficient allocation of public and private goods.
But when that competition takes the form of preferential treatment for specific businesses, not only is it not “admirable,” it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods. Moreover, the success of a state in attracting and retaining particular businesses is not a mitigating circumstance.
…The states won't, on their own, stop using subsidies and preferential taxes to attract and retain businesses. There is anecdotal evidence that some state and local governments recognize they are all losing in this economic war. Nevertheless, as long as a single state engages in this practice, others will feel compelled to compete. New York, New Jersey and Connecticut all recognized that they were losing from this competition, and in 1991 they informally agreed to stop competing with each other. It was not long, however, before New Jersey broke the deal.
Competition for public goods
At the October hearing, Rep. Darrell Issa (R-CA), the ranking minority member, questioned Rolnick, attempting to get the economist to acknowledge that sports facility subsidies were just like other carrots.
REP. ISSA: If the state of California has a 10 percent income tax and the state of Florida has no income tax, isn't that every bit as much one state competing against another for a zero-sum game?
MR. ROLNICK: So in my earlier testimony I mentioned there is a form of competition that I'll call -- is a good competition, effective competition. It's when cities and states compete to see who can provide the highest quality public goods at the lowest cost, and then people vote with their feet. So a high state like -- high-tax state like Minnesota provides, on average, pretty good public services. We have, and we've been known to have, terrific educational system, high-quality workers. You, as a citizen, can decide to move to Minnesota and pay higher taxes or move to another state like Florida that has lower taxes and, in turn, the public services aren't going to be as good.
Very difficult for state and local officials to decide how much you should produce. The ability for people to choose where they want to live is one way that the market if you will -- and that's the good competition -- can help local -- state and local officials decide.
So the point of your question's a good one. There is a form of competition. It's non-preferential. It's the type of goods that benefit all society, what economists call "public goods non-rivalist." That is, education, safety, good air quality. These are all things we all benefit from. That's a clear distinction between private goods -- the market works well for private goods. We don't need government interfering there...
Issa asked Rolnick why parks and higher education were any different from sports facilities. The economist said that Minnesota attracted several Fortune 500 companies not because of sports teams but because of investment in education.
Local rights
Issa wasn’t convinced and suggested that Cleveland had a right to “maintain” the baseball Indians, without pointing out that the team was privately owned, with most benefits accruing not to the city but to the owners.
REP. ISSA: So although anecdotally I'll accept that your truism is probably a good one, my question was local rights, the right of a local municipality or states' rights to make these decisions, right or wrong...
So again, why should I take away an equal right in decision-making, that the city of Cleveland thinks that maintaining the league-winning Cleveland Indians is a good idea for a city that otherwise was written off as part of the Rust Belt with no hope decades ago, in addition to have Case Western Reserve, Baldwin-Wallace, Cleveland State and a host of other fine universities, parks, symphonies, and so on? Because I'm a proud former Clevelander who accepts that Cleveland has all the best things in life except weather and, in fact, also maintains these sports teams. Why is that not a legitimate part of the decision of the state and their derivative entities?
MR. ROLNICK: …Your original point with Cleveland, that's entertainment, that's private market. If Cleveland's a good economy, it will attract all kinds of entertainment. You don't have to subsidize entertainment. You're assuming that if you didn't subsidize that entertainment it wouldn't be there. I'm going to argue, at a national level, if we don't allow cities and states to subsidize private companies, the private market will work just fine. They'll figure out the best location decisions.
What the public has to do, what government has to do is public goods, and that's not entertainment. Entertainment is a private market system. It'll work just fine.
A restricted private market
Actually, however, from the perspective of localities, it isn't quite a free market, and it might be exploited, as Steven Maguire (right), Specialist in Public Finance, Congressional Research Service, explained later in the hearing.
MR. MAGUIRE: And it's about the stadiums, and it brings back something that happened in a hearing a couple -- a few months ago. Dennis Zimmermann said that the number of professional sports teams is restricted. And so one could say, on the demand side, a lot of cities want a team but they can't get them.
Some might even say there should be several more teams in New York. And if you had a more free market for sports teams, you'd have a lot more teams out there without the ability to blackmail cities into paying more than what they should have for the team.
And so if you start with the assumption that there's a perfectly competitive market for sports teams, then I think you've started on the wrong path. You have to assume that there's some sort of monopoly restriction on the number of teams that are out there. And then from there you have to wonder, well, what role has the federal government played in that somewhat dysfunctional market? And I think I should stop there and defer to –
REP. KUCINICH: All right, the final question, Dr. Maguire. As a Ph.D. economist who wrote his dissertation on the economics of professional sports stadiums, does it make sense for public officials to spend taxpayer funds on professional sports stadiums? And do stadiums deliver jobs and revenues as their proponents claim?
MR. MAGUIRE: I'll agree with all the economists that have appeared before you in the past -- not found any tangible benefit, and just a shifting of jobs and economic activity. Not a new or net gain.
Not a zero sum for some states
At a 3/29/07 hearing held by Kucinich’s subcommittee (transcript PDF), Issa asked economist Brad Humphreys why it was wrong for cities wanting sports teams to target subsidies.
REP. ISSA: Your testimony was that this is sort of a zero sum game, that if it wasn’t spent in the downtown area in San Diego, Washington, Detroit, Chicago, wherever, it would be spent in the suburbs. Isn’t that the nature of redevelopment though? Isn’t that what center city projects do?
I am a Clevelander, the same as the chairman. Isn’t it, in fact, the problem in Cleveland is my brother in Shaker Heights, he is doing a little better, and by the time you get to Beechwood, they are doing just fine while Cleveland itself, a great city, has a constant problem of converting from the river and lakefront of the steel and coal era into a desirable place?
Why in the world, economically, wouldn’t you consider that shifting from, if you will, the place where there is plenty of money to the place where there isn’t enough money and as a result not enough money to run the Cleveland City Schools as an economic benefit and give full credit to that, not saying that it changes your model in any way except how can you not give credit for that shift?
MR. HUMPHREYS: Well, I don’t understand why we should spend hundreds of millions of dollars to subsidize a downtown business to attract entertainment spending. Why is it that a business owner somewhere in the suburbs, who is losing customers, shouldn’t be extremely upset at us using public dollars to subsidize a competitor for him to move that business elsewhere? I mean I think that long run economic growth is related to fundamental factors like worker productivity and education and things like that.
REP. ISSA: OK, I get it. You like the macro, and I like the micro. It is tomato-tomato. I guess I have a difference of opinion, having been to Jacobs Field, having been to the Rock and Roll Hall of Fame and so on, that it is worth for the overall benefit of the city not to have a blighted area, crime-ridden, with kids who don’t have enough money to go to school, but maybe I am wrong on some of these counts.
The "blighted area, crime-ridden" description does not, of course, apply to the Atlantic Yards site, as I've written.
Why the feds should care
Dennis Zimmerman, Director of Projects at the American Tax Policy Institute, explained to Issa why Congress should be concerned.
MR. ZIMMERMAN: OK, the one other aspect of this, of the question is I can see why one can conceive of that as being a benefit for the local and maybe the State taxpayers. It is not clear to me why that is a benefit to the Federal taxpayers.
REP. ISSA: No, no. I understand.
MR. ZIMMERMAN: And therefore why the interest in subsidies.
Is the symphony the same?
REP. ISSA: Thank you, and that follows up on what I was going to ask you. You have held this opinion since at least 1986 when you testified before Congress. So this opinion that you gave us here today is not new...
But I have to get back to in your opinion, spreading it beyond baseball, I figured we would take on apple pie, baseball and mother. We should shift to a broader arena. Museums or how about the Cleveland Symphony, should it enjoy any tax benefits such as the fact that contributions to the symphony are tax-exempt or tax free?
...Isn’t there, in fact, to a certain extent, when you look at the economic hierarchy, if you are going to take away stadiums—and I use stadiums as a euphemism for baseball or football or sports in general—then don’t you have to treat equally by taking away the symphony, the museums, the opera?
Is one culture more valuable to another and isn’t your stand against stadiums, which are necessary if you are going to have professional baseball, inconsistent unless you are also calling on elimination of similar treatment for any and all redevelopments but particularly if they involve the other alternatives to what people would like to do with maybe less limited resources?
MR. ZIMMERMAN: All these things, of course, have some value in terms of intangible benefits. But, no, I don’t think they are comparable, and they are not comparable because these stadiums are private, privately owned business operations... Whereas museums and cultural opportunities are non-profit organizations.
Owning the stadium
REP. ISSA: What if a city wants to build a stadium and own it like they build a symphony facility and they build museums and own them? Now, first of all, a lot of symphonies and museums are not publicly owned, but notwithstanding that, is your point public ownership versus private or, in fact, when we build facilities for other cultural and athletic and other activities, don’t they all fit into the same gambit?
If we are going to take on baseball, motherhood and apple pie, and I am happy to do it, don’t we have to take on all levels of these kinds of activities?
MR. ZIMMERMAN: No. Again, I think the distinction is in the instance where these things are privately owned, then essentially what is happening is you are providing windfall gains to the owners.
That is the example of the Texas Rangers stadium. Most of the benefits of the Federal tax subsidy ended up increasing the capital value and went into the pockets of the owners whereas whether it is a publicly owned symphony or a non-profit owned symphony, there are non-distribution constraints and unless there is corruption present, the value of these Federal tax benefits are not being absorbed into a higher rate of return for the private owners.
REP. ISSA. I guess I missed something at the Who concert the other day, but please, Mr. Chairman.
Issa’s sarcastic remark suggested he didn’t understand Zimmerman’s jargon. Simply put, a non-distribution constraint means that a nonprofit organization can’t distribute its net earnings among those who oversee it.
With such constraints, and the absence of corruption, the leaders of nonprofit organizations don’t rake in much from the benefits of support for their institutions (other than somewhat higher salaries and a chance to move to a better job).
The Bush example
Yes, President George W. Bush got rich off his small stake in the Texas Rangers. As New York Times columnist Nicholas Kristof explained, in a 7/16/02 column headlined Bush and The Texas Land Grab:
Essentially, Mr. Bush and the owners' group he led bullied and misled the city into raising taxes to build a $200 million stadium that in effect would be handed over to the Rangers. As part of the deal, the city would even confiscate land from private owners so that the Rangers owners could engage in real estate speculation.
More from Kucinich's statement at the October hearing:
Economic benefit to the team's owners was certainly the case for President Bush, who in 1989 spent about $600,000 to buy a small stake in the Texas Rangers Baseball Team. During his ownership, Mr. Bush and his co-investors were able to get voters to approve a sales tax increase to pay more than two-thirds of the cost of a new $191 million stadium for the Rangers, as well as the surrounding development. Mr. Bush and his partners also received a loan from the public authority charged with financing the stadium to cover their private share of construction costs.
By 1994 the Rangers, in their new publicly-financed stadium, were sold for $250 million, a threefold increase in value in merely five years, and when it was largely attributable to the new taxpayer- subsidized stadium. Mr. Bush personally came away with a profit of fourteen nine million -- $14.9 million. In this case, the tax-exempt financing indisputably benefited the owners of the Texas Rangers.
The effect of monopoly
During the March hearing, Rep. John Tierney (D-MA) wondered if the government could affect the sports monopolies.
REP. TIERNEY: Would each of you expound a little bit on the monopoly issue here, how that affects the situation because both of you mentioned it in the course of your remarks?
What I think is important to note is what about the anti-trust issue on this, how would that change things? Do you think it is wise to continue the anti-trust exemptions and how might we change them and what would be the effect if we did?
MR. HUMPHREYS: Well, the effect of the anti-trust ruling is that leagues restrict the number of franchises that there are. I mean ask [Rep. Diane] Watson [D-CA] why there is no NFL franchise in Los Angeles. The reason is that they are operating as a monopoly or a cartel and they want to keep that market open so that if another team wants to threaten to move if they don’t get a new stadium built, then they have that option to move. So that is restriction. Why are they allowed to do that? Well, because they enjoy some anti-trust protection.
If that was removed, there would be an NFL franchise in Los Angeles instantaneously almost because it is clearly going to support an NFL franchise. So this just gives. As team owners and local politicians bargain over subsidies, it gives the owners the ultimate threat and the ultimate power in the process, and that is how they get the subsidies as I see it. So I don’t know.
The fruits of monopoly: subsidies
MR. ZIMMERMAN: Effectively, when you have a monopoly, you maintain excess demand, and it is that excess demand which creates the need for local governments to compete to get franchises....
And how do they compete? They compete with larger and larger subsidies of the capital costs of the franchises.
Well, here are some AY subsidy figures estimated in the New York Post.
As the Independent Budget Office said in its September 2005 Fiscal Brief, there are several special benefits not available as-of-right to development projects: capital contributions from the city and state, low-cost financing for the arena, extra property tax savings, a low-cost lease, and property obtained using the state’s power of eminent domain.
I don't think that describes a mayoral administration “not beholden to special interests.”
Amid a general shower of praise for Bloomberg, the Times allowed that his “administration is considered an ally to many corporations, especially developers.”
The Bloomberg contradiction
What the newspaper didn’t do is examine how a by-the-numbers approach to management might be contradicted by a look at Bloomberg’s treatment of developments like Atlantic Yards, where he’s broken promises, failed to scrutinze the development closely, and falsely claimed the free market was at work, even as sports teams benefit enormously from monopoly rules that enforce franchise scarcity and provoke cities and states to bid against each other by offering subsidies, an issue to be discussed in detail below.Meanwhile, his administration is busy lobbying in Washington to ensure that a “loophole” (in the words of the chief counsel of the Internal Revenue Service) remains to allow tax-exempt financing for the Yankees and Mets stadiums, both under construction, and the Atlantic Yards arena.
In other words, the Bloomberg who imposed the once-politically unpopular smoking ban and pushed for congestion pricing loses track of his principles when it’s time to construct monumental sports structures where, not coincidentally, there are ribbons to cut.
(That latter explanation comes from the 1989 article Holding Government Officials Accountable for Infrastructure Maintenance, by former New York Comptroller Ned Regan, a Republican, as cited by Rep. Dennis Kucinich, D-OH, at a 10/5/07 hearing of the Domestic Policy Subcommittee of the Committee on Oversight and Government Reform.)Bloomberg’s identification with Ratner
I wrote last year about Bloomberg’s 1/23/04 radio appearance with WABC’s John Gambling, where some key statements were either inaccurate or proven wrong as the project evolved. Bloomberg’s identification with the developer, nearly 18 months before the Metropolitan Transportation Authority’s belated RFP for its Vanderbilt Yard, was clear in this verbal slip:
Then, we’ve got to find a find a ways--Bruce Ratner’s got to find a ways--to build this complex in Brooklyn.
Inaccuracy on subsidies
Bloomberg said that “any city monies of any meaningful size will be [corrected] debt issues financed by the extra tax revenues that come from this,” but he broke his promise: the city later pledged $100 million, and later added $105 million.
The not-so-free market
The most astounding sequence came when Bloomberg and Gambling seemed not to know that sports team owners seek new facilities to maximize luxury boxes and marketing opportunities.
MB: Well, I suppose that--nobody wants to lose a team, everybody wants to gain a team. The Jets used to play at Shea Stadium, moved to New Jersey, New York got hurt, now they want to come back. The Nets--these teams want to go where the audience will support them.
JG: It’s a free market.
MB: It’s a free market; they’re privately owned. The Nets have not done well in New Jersey; their parking lot’s half full. Y’know, they’ve not sold out in a long time. The Jets don’t like sharing a stadium. But these are private ventures.
As economist Arthur Rolnick said at the Congressional hearing last October,
sports entertainment will “exist in this country whether we subsidize it or not,” so if a professional team leaves, people will go to minor league, college, or high school games.
Economic blackmail
Rolnick’s testimony about free market failures (here and here) deserves a longer look. He said:There is likely no major metropolitan area in this country that has not been held hostage at some point by the owner of a sports franchise who threatened to move the team elsewhere if the owner did not receive a new taxpayer-funded sports complex. Indeed, such economic blackmail even affects many of our smaller communities, as minor league sports teams have also learned to play this rent-seeking game.
Being from Minnesota, I can personally attest to this rent-seeking game, as the Minnesota Twins—after a 10-year campaign—finally persuaded a previously reluctant state Legislature to hand over about $400 million in public financing for a new stadium that is now under construction in downtown Minneapolis. Not to be outdone, the Minnesota Vikings are currently pressing the Legislature for their own share of the public largesse. And who can blame them? As long as governments are willing to hand over limited public resources, these teams would be foolish not to accept them.
But make no mistake, it's not just sports teams that demand public money from cities and states. The state and local funds spent competing for sports franchises, though conspicuous, probably represent only a fraction of the billions of dollars spent by the more than 8,000 state and local economic development agencies competing to retain and attract businesses through the use of preferential taxes and subsidies....
While states spend billions of dollars competing with one another to retain and attract businesses, they struggle to provide such public goods as schools and libraries, police and fire protection, and the roads, bridges and parks that are critical to the success of any community.
The AY perspective
Atlantic Yards would be different, proponents say; the city and state would gain by capturing taxes from New Jersey, at least according to projections by the Empire State Development Corporation and Forest City Ratner consultant Andrew Zimbalist. (The Independent Budget Office confirmed a gain for the AY arena alone, though additional subsidies call that calculation into question.)
However, no analyst looked at the project simply from the national perspective, which fully accounts for the benefits Forest City Ratner would gain. Notably, tax-exempt financing poses relatively little costs to the city and state in terms of foregone tax revenue, but poses significant costs to the federal treasury--hundreds of millions of dollars for the three New York sports facilities. Hence the closer Congressional look and an attempt to close the “loophole.”
(There is a backhanded defense for the unfairness, as Assemblyman Richard Brodsky pointed out at an Assembly hearing last week: New York sends more in taxes to Washington than it gets back.)
The right kind of competition
Rolnick’s prescription is to cut off tax-exempt financing and other such preferential treatment:
It is now time for Congress to exercise its Commerce Clause power to end another economic war among the states. It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes. Economists find that there is a role for competition among states when it takes the form of a general tax-and-spend policy. Such competition leads states to provide a more efficient allocation of public and private goods.
But when that competition takes the form of preferential treatment for specific businesses, not only is it not “admirable,” it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods. Moreover, the success of a state in attracting and retaining particular businesses is not a mitigating circumstance.
…The states won't, on their own, stop using subsidies and preferential taxes to attract and retain businesses. There is anecdotal evidence that some state and local governments recognize they are all losing in this economic war. Nevertheless, as long as a single state engages in this practice, others will feel compelled to compete. New York, New Jersey and Connecticut all recognized that they were losing from this competition, and in 1991 they informally agreed to stop competing with each other. It was not long, however, before New Jersey broke the deal.
Competition for public goods
At the October hearing, Rep. Darrell Issa (R-CA), the ranking minority member, questioned Rolnick, attempting to get the economist to acknowledge that sports facility subsidies were just like other carrots.REP. ISSA: If the state of California has a 10 percent income tax and the state of Florida has no income tax, isn't that every bit as much one state competing against another for a zero-sum game?
MR. ROLNICK: So in my earlier testimony I mentioned there is a form of competition that I'll call -- is a good competition, effective competition. It's when cities and states compete to see who can provide the highest quality public goods at the lowest cost, and then people vote with their feet. So a high state like -- high-tax state like Minnesota provides, on average, pretty good public services. We have, and we've been known to have, terrific educational system, high-quality workers. You, as a citizen, can decide to move to Minnesota and pay higher taxes or move to another state like Florida that has lower taxes and, in turn, the public services aren't going to be as good.
Very difficult for state and local officials to decide how much you should produce. The ability for people to choose where they want to live is one way that the market if you will -- and that's the good competition -- can help local -- state and local officials decide.
So the point of your question's a good one. There is a form of competition. It's non-preferential. It's the type of goods that benefit all society, what economists call "public goods non-rivalist." That is, education, safety, good air quality. These are all things we all benefit from. That's a clear distinction between private goods -- the market works well for private goods. We don't need government interfering there...
Issa asked Rolnick why parks and higher education were any different from sports facilities. The economist said that Minnesota attracted several Fortune 500 companies not because of sports teams but because of investment in education.
Local rights
Issa wasn’t convinced and suggested that Cleveland had a right to “maintain” the baseball Indians, without pointing out that the team was privately owned, with most benefits accruing not to the city but to the owners.
REP. ISSA: So although anecdotally I'll accept that your truism is probably a good one, my question was local rights, the right of a local municipality or states' rights to make these decisions, right or wrong...
So again, why should I take away an equal right in decision-making, that the city of Cleveland thinks that maintaining the league-winning Cleveland Indians is a good idea for a city that otherwise was written off as part of the Rust Belt with no hope decades ago, in addition to have Case Western Reserve, Baldwin-Wallace, Cleveland State and a host of other fine universities, parks, symphonies, and so on? Because I'm a proud former Clevelander who accepts that Cleveland has all the best things in life except weather and, in fact, also maintains these sports teams. Why is that not a legitimate part of the decision of the state and their derivative entities?
MR. ROLNICK: …Your original point with Cleveland, that's entertainment, that's private market. If Cleveland's a good economy, it will attract all kinds of entertainment. You don't have to subsidize entertainment. You're assuming that if you didn't subsidize that entertainment it wouldn't be there. I'm going to argue, at a national level, if we don't allow cities and states to subsidize private companies, the private market will work just fine. They'll figure out the best location decisions.
What the public has to do, what government has to do is public goods, and that's not entertainment. Entertainment is a private market system. It'll work just fine.
A restricted private market
Actually, however, from the perspective of localities, it isn't quite a free market, and it might be exploited, as Steven Maguire (right), Specialist in Public Finance, Congressional Research Service, explained later in the hearing.MR. MAGUIRE: And it's about the stadiums, and it brings back something that happened in a hearing a couple -- a few months ago. Dennis Zimmermann said that the number of professional sports teams is restricted. And so one could say, on the demand side, a lot of cities want a team but they can't get them.
Some might even say there should be several more teams in New York. And if you had a more free market for sports teams, you'd have a lot more teams out there without the ability to blackmail cities into paying more than what they should have for the team.
And so if you start with the assumption that there's a perfectly competitive market for sports teams, then I think you've started on the wrong path. You have to assume that there's some sort of monopoly restriction on the number of teams that are out there. And then from there you have to wonder, well, what role has the federal government played in that somewhat dysfunctional market? And I think I should stop there and defer to –
REP. KUCINICH: All right, the final question, Dr. Maguire. As a Ph.D. economist who wrote his dissertation on the economics of professional sports stadiums, does it make sense for public officials to spend taxpayer funds on professional sports stadiums? And do stadiums deliver jobs and revenues as their proponents claim?
MR. MAGUIRE: I'll agree with all the economists that have appeared before you in the past -- not found any tangible benefit, and just a shifting of jobs and economic activity. Not a new or net gain.
Not a zero sum for some states
At a 3/29/07 hearing held by Kucinich’s subcommittee (transcript PDF), Issa asked economist Brad Humphreys why it was wrong for cities wanting sports teams to target subsidies.
REP. ISSA: Your testimony was that this is sort of a zero sum game, that if it wasn’t spent in the downtown area in San Diego, Washington, Detroit, Chicago, wherever, it would be spent in the suburbs. Isn’t that the nature of redevelopment though? Isn’t that what center city projects do?
I am a Clevelander, the same as the chairman. Isn’t it, in fact, the problem in Cleveland is my brother in Shaker Heights, he is doing a little better, and by the time you get to Beechwood, they are doing just fine while Cleveland itself, a great city, has a constant problem of converting from the river and lakefront of the steel and coal era into a desirable place?
Why in the world, economically, wouldn’t you consider that shifting from, if you will, the place where there is plenty of money to the place where there isn’t enough money and as a result not enough money to run the Cleveland City Schools as an economic benefit and give full credit to that, not saying that it changes your model in any way except how can you not give credit for that shift?
MR. HUMPHREYS: Well, I don’t understand why we should spend hundreds of millions of dollars to subsidize a downtown business to attract entertainment spending. Why is it that a business owner somewhere in the suburbs, who is losing customers, shouldn’t be extremely upset at us using public dollars to subsidize a competitor for him to move that business elsewhere? I mean I think that long run economic growth is related to fundamental factors like worker productivity and education and things like that.
REP. ISSA: OK, I get it. You like the macro, and I like the micro. It is tomato-tomato. I guess I have a difference of opinion, having been to Jacobs Field, having been to the Rock and Roll Hall of Fame and so on, that it is worth for the overall benefit of the city not to have a blighted area, crime-ridden, with kids who don’t have enough money to go to school, but maybe I am wrong on some of these counts.
The "blighted area, crime-ridden" description does not, of course, apply to the Atlantic Yards site, as I've written.
Why the feds should care
Dennis Zimmerman, Director of Projects at the American Tax Policy Institute, explained to Issa why Congress should be concerned.MR. ZIMMERMAN: OK, the one other aspect of this, of the question is I can see why one can conceive of that as being a benefit for the local and maybe the State taxpayers. It is not clear to me why that is a benefit to the Federal taxpayers.
REP. ISSA: No, no. I understand.
MR. ZIMMERMAN: And therefore why the interest in subsidies.
Is the symphony the same?
REP. ISSA: Thank you, and that follows up on what I was going to ask you. You have held this opinion since at least 1986 when you testified before Congress. So this opinion that you gave us here today is not new...
But I have to get back to in your opinion, spreading it beyond baseball, I figured we would take on apple pie, baseball and mother. We should shift to a broader arena. Museums or how about the Cleveland Symphony, should it enjoy any tax benefits such as the fact that contributions to the symphony are tax-exempt or tax free?
...Isn’t there, in fact, to a certain extent, when you look at the economic hierarchy, if you are going to take away stadiums—and I use stadiums as a euphemism for baseball or football or sports in general—then don’t you have to treat equally by taking away the symphony, the museums, the opera?
Is one culture more valuable to another and isn’t your stand against stadiums, which are necessary if you are going to have professional baseball, inconsistent unless you are also calling on elimination of similar treatment for any and all redevelopments but particularly if they involve the other alternatives to what people would like to do with maybe less limited resources?
MR. ZIMMERMAN: All these things, of course, have some value in terms of intangible benefits. But, no, I don’t think they are comparable, and they are not comparable because these stadiums are private, privately owned business operations... Whereas museums and cultural opportunities are non-profit organizations.
Owning the stadium
REP. ISSA: What if a city wants to build a stadium and own it like they build a symphony facility and they build museums and own them? Now, first of all, a lot of symphonies and museums are not publicly owned, but notwithstanding that, is your point public ownership versus private or, in fact, when we build facilities for other cultural and athletic and other activities, don’t they all fit into the same gambit?
If we are going to take on baseball, motherhood and apple pie, and I am happy to do it, don’t we have to take on all levels of these kinds of activities?
MR. ZIMMERMAN: No. Again, I think the distinction is in the instance where these things are privately owned, then essentially what is happening is you are providing windfall gains to the owners.
That is the example of the Texas Rangers stadium. Most of the benefits of the Federal tax subsidy ended up increasing the capital value and went into the pockets of the owners whereas whether it is a publicly owned symphony or a non-profit owned symphony, there are non-distribution constraints and unless there is corruption present, the value of these Federal tax benefits are not being absorbed into a higher rate of return for the private owners.
REP. ISSA. I guess I missed something at the Who concert the other day, but please, Mr. Chairman.
Issa’s sarcastic remark suggested he didn’t understand Zimmerman’s jargon. Simply put, a non-distribution constraint means that a nonprofit organization can’t distribute its net earnings among those who oversee it.
With such constraints, and the absence of corruption, the leaders of nonprofit organizations don’t rake in much from the benefits of support for their institutions (other than somewhat higher salaries and a chance to move to a better job).
The Bush example
Yes, President George W. Bush got rich off his small stake in the Texas Rangers. As New York Times columnist Nicholas Kristof explained, in a 7/16/02 column headlined Bush and The Texas Land Grab:
Essentially, Mr. Bush and the owners' group he led bullied and misled the city into raising taxes to build a $200 million stadium that in effect would be handed over to the Rangers. As part of the deal, the city would even confiscate land from private owners so that the Rangers owners could engage in real estate speculation.
More from Kucinich's statement at the October hearing:
Economic benefit to the team's owners was certainly the case for President Bush, who in 1989 spent about $600,000 to buy a small stake in the Texas Rangers Baseball Team. During his ownership, Mr. Bush and his co-investors were able to get voters to approve a sales tax increase to pay more than two-thirds of the cost of a new $191 million stadium for the Rangers, as well as the surrounding development. Mr. Bush and his partners also received a loan from the public authority charged with financing the stadium to cover their private share of construction costs.
By 1994 the Rangers, in their new publicly-financed stadium, were sold for $250 million, a threefold increase in value in merely five years, and when it was largely attributable to the new taxpayer- subsidized stadium. Mr. Bush personally came away with a profit of fourteen nine million -- $14.9 million. In this case, the tax-exempt financing indisputably benefited the owners of the Texas Rangers.
The effect of monopoly
During the March hearing, Rep. John Tierney (D-MA) wondered if the government could affect the sports monopolies.REP. TIERNEY: Would each of you expound a little bit on the monopoly issue here, how that affects the situation because both of you mentioned it in the course of your remarks?
What I think is important to note is what about the anti-trust issue on this, how would that change things? Do you think it is wise to continue the anti-trust exemptions and how might we change them and what would be the effect if we did?
MR. HUMPHREYS: Well, the effect of the anti-trust ruling is that leagues restrict the number of franchises that there are. I mean ask [Rep. Diane] Watson [D-CA] why there is no NFL franchise in Los Angeles. The reason is that they are operating as a monopoly or a cartel and they want to keep that market open so that if another team wants to threaten to move if they don’t get a new stadium built, then they have that option to move. So that is restriction. Why are they allowed to do that? Well, because they enjoy some anti-trust protection.
If that was removed, there would be an NFL franchise in Los Angeles instantaneously almost because it is clearly going to support an NFL franchise. So this just gives. As team owners and local politicians bargain over subsidies, it gives the owners the ultimate threat and the ultimate power in the process, and that is how they get the subsidies as I see it. So I don’t know.
The fruits of monopoly: subsidies
MR. ZIMMERMAN: Effectively, when you have a monopoly, you maintain excess demand, and it is that excess demand which creates the need for local governments to compete to get franchises....
And how do they compete? They compete with larger and larger subsidies of the capital costs of the franchises.
Well, here are some AY subsidy figures estimated in the New York Post.
As the Independent Budget Office said in its September 2005 Fiscal Brief, there are several special benefits not available as-of-right to development projects: capital contributions from the city and state, low-cost financing for the arena, extra property tax savings, a low-cost lease, and property obtained using the state’s power of eminent domain.
I don't think that describes a mayoral administration “not beholden to special interests.”
There is an implicit comfort to think that we have a “business mayor” with a “by the numbers” approach.- But don’t relax just yet.
ReplyDeleteThe following is what separates Mayor Michael Bloomberg from being a true “by the numbers” fellow and prevents the citizens of New York from getting all the benefits you might hope for or infer were possible from having a “business mayor.”
1. MISHANDLING SUBSIDY: Bloomberg does not understand how to use subsides. A good business mayor should appreciate the importance of the way private markets work. Anyone who considers using subsidies should build upon a fundamental appreciation of the way underlying private markets work. Subsidies should only be for tweaks that adjust the ways in which pure private enterprise may go astray in delivering desired results.- For instance, to compensate for the undesired results of “commutative advantage” (part of the disequilibrium whereby the “rich keep getting richer”). Subsidies can be extremely dangerous, so dangerous that the greater wisdom may be to avoid their use altogether. Carelessly used, subsidies can result in startlingly absurd results- Most of us probably know, for example, that by subsidizing corn ethanol to make it an alternative to petroleum we actually use more petroleum manufacturing the ethanol than is saved by substituting the ethanol produced. While subsidies may be intended to be a minor fix that keeps you on the path toward desired results, subsides can readily become the mechanism by which we entirely leave any sensible path and become untethered from reality. Subsidies intended to ensure that lower income families are affordably housed (essentially a goal of redistributing income to the less wealthy) get commandeered by a connected and wealthy developer mainly to aggregate a greater concentration of wealth. Subsidies are the reason that Atlantic Yards is not an environmentally green project. Subsides are the reason Atlantic Yards involves the unnecessary and environmentally unsound destruction of worthwhile buildings and neighborhoods which normal economics would recognize the value of retaining. One indicator of whether subsidies are on or off track is how deep they are. A good subsidy that is working with market forces should leverage its effect well and a little money should go a long way. In the case of Atlantic Yards you see the opposite; it will be a $4.4 billion mega-project and over half of that will be paid for with tax-payer dollars. Not only is the $2-3 billion in subsidy going to Atlantic Yards an indication of how out of kilter and estranged from desirability the project is, it is also the reason why those funds will go so much further as and when they may be redistributed to pay for other better-leveraged endeavors. The bottom line is that if you want to use subsidies you had better use them carefully, knowledgeably, and with respect for the private markets. Atlantic Yards is an example of the fact that this is not something that Bloomberg knows how to do.
2. INORDINATE LOVE OF THE DEAL: There is disease among transactional professionals which some of us have been known to refer to as “dealitis.” Deals have their own innate attraction whether or not you make money at them- They are fun to understand, fun to construct, fun to negotiate.- Add to this the fact that, whatever their inherent worth, people are going to get paid at the end of the day for consummating them. But one thing you will surely understand if you sit through a few hundred presentations by investment bankers is that investment bankers cannot be counted upon to have their eye on the ball. For them, if they can sell a client a deal that is enough. The deal does not have to be in their client’s interest. They will make money anyway. This is the art of the churn. Bloomberg hired Dan Doctoroff out of the investment banking community and it is clear that in situations like Atlantic Yards Bloomberg had people running the development show who did not have their eye on the ball. What became more important was the deal for the sake of the deal. Deals, good or bad, have their own momentum. One would have hoped that a true business mayor would have been sufficiently inoculated not to be swept up in the Wall Street style of churning deals.
3. SEEING THINGS THROUGH THE FILTER OF BIG DEVELOPERS: In order for something to be appreciated there must be someone who speaks up for it, and in order for it to be appreciated by the Mayor that person must have his ear. The intelligence and comprehension of single individuals is limited. The city is grand and diverse, dynamic and changing, impossible for any one person to fully appreciate in all its intricacy. And yet there is the urge to try to understand and interact with it on a grand scale. Jane Jacobs would tell you that the city is best understood collectively through all its people. Development is best understood through all the small developers who are active and renovating buildings and apartments all over the city. Those are not the people explaining the city and its potential development to a wealthy Mayor: They do not travel in his orbit; they are not attending the same functions; they won’t be consulted via efforts at outreach. The bias will be to see the city in the stripped-down terms of what the big developers would like to be working on. Those developers want only to do big projects because they are geared up for nothing else and though they will see a big picture of sorts they will give short shrift to the small and intricate details that animate life of the street. They will also forget how much desirable development happens via the accretion of efforts by a multitude of others. Just as Jane Jacobs complains, big developers will have a tendency to plan from on high, filling in at the micro level with blandly repetitive and monotonous replications of elements. All of this may look good in models viewed from helicopter heights or the blurred impressionistic wash of watercolor renderings, but there will be a lack of imaginative richness and real detail. There will be little possibility for the natural vitality that comes from the ground up. The comparatively greater value of shops, restaurants, gardens, stoops and bars in Fort Green and Prospect Heights will be unappreciated, and recede in their consciousness and that of the Mayor they talk to.
4. EDIFICE COMPLEX: Bloomberg, like so many mayors do, would like to leave a physical mark on the city- for better or worse. And that is part of the problem. It may matter less to him whether it is for better worse so long as it is a physical mark and is big enough to command attention. It probably reflects the same impulse that causes people to donate to get their names on big buildings on college campuses. Partly it is how you wish to be remembered but the ribbon cuttings have an additional attraction if you have future political ambitions.
5. SHORT-TERM HORIZONS: People have always complained that businesses have decision-making horizons that are far too short-term. Perhaps in this we are getting what we ought to expect from Bloomberg as a business mayor. However long or short decision-making horizons ought to be in a business environment, they ought to be reasonably long-term when one is engaged in city building and infrastructure development. If this were adequately understood, Moynihan Station would have been made a priority and would be much further along today than it is. Atlantic Yards, which represented the short-term glitz of an announcement about a basketball team, is overall a huge squandering. The central feature of its non-planning is to unjustifiably and on a no-bid basis bestow upon a single developer a theoretical monopoly for 22 acres of sites to build 17 buildings. This theoretical monopoly is supposed to take effect even before negotiating either the public benefit or the 50% subsidization. This kind of squandering would make George W. Bush proud. It took a while after 9/11 for the public to fully catch up with the implications of Bush’s various squanderings (good will, the surplus, credit and credibility, opportunity to get a jump on global warming, etc.) even though they were vast and unprecedented. Bloomberg (who endorsed Bush at the New York Republican convention) has in many ways been a much better mayor than Bush has been a chief of state and Bloomberg’s approval rating is still good. Nevertheless, we must consider the time frames. The question about Bloomberg is not whether he is a good administrator or whether the 311 phone line gets potholes fixed. What is of most concern about Bloomberg involves concessions that have been made to those in the real estate development industry. This is an area where the time lines needed to witness cause and effect are extended. Though, as the Times writes, “Rezoning projects under his watch have opened large swaths of the city to new construction,” it will be years before properties are financed and built and the public can evaluate in concrete terms which concessions to the real estate industry made sense and which did not. At least, in terms of potential squanderings, it is good news that one did not happen: the Jets stadium on Manhattan’s West Side was never built- But how will we experience the overall legacy when we experience the results of the concessions that have been made?
The New York Times article “Titans Seek New York Mayor in Bloomberg’s Mold” seems to presuppose Bloomberg is not “beholden to special interests” (though it describes him as an “ally to many corporations, especially developers”). Conversely, in the final comment of this AYP post, Norman Oder points out that Bloomberg’s mayoral administration does not seem to act as if it is “not beholden to special interests.” Which is it? Does the Bloomberg administration act as if it is beholden? I am aware that what I have written above, by providing possible alternative interpretations, seems to argue in the vein that Bloomberg is “not beholden to special interests.” Still, Bloomberg is obviously a very smart man. Should we presume about this very smart man that he is not sufficiently smart and self-aware to be able to course correct for everything I have observed and laid out above? And if he is sufficiently smart and self-aware but has not made adequate adjustments then what conclusion is there except that he IS “beholden to special interests?”
Michael D. D. White
Noticing New York