Tag Archives: Virginia

The Hunger Games: Amazon Edition

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photo by SounderBruce

The New York Law Journal published commentary of mine, The Hunger Games: Amazon Edition. It opens,

Last week Amazon finally announced that New York and Northern Virginia would be the sites of its planned major expansion. While many are caught up in the excitement of Amazon bringing 25,000 high-paid jobs to both metropolitan areas, it is worth thinking through the costs that beauty contests like this one impose on state and local governments. Amazon extracted billions of dollars in concessions from the winners and could have extracted even more from some of the other cities courting them.

It is economically rational for companies to create such Hunger Games-type competitions among communities. These competitions reduce their costs and improve their bottom lines. But is it economically rational for the cities? As long as governments are acting independently, yes, it is rational for them to race to the bottom to secure a win. So long as they are a bit better off by snagging the prize than they would have been otherwise, they come out ahead. But the metrics that politicians use are unlikely to be limited to a hard-nosed accounting of costs and increased tax revenues. Positive buzz may be enough to satisfy them.

Consider Wisconsin Governor Scott Walker’s deal with Foxconn. Just over a year ago, he was touting the $3 billion state subsidy for FoxConn’s manufacturing plant. This was the year leading up to his hard fought election fight, a fight he ultimately lost. His public statements focused on Foxconn’s promise to create 13,000 jobs. While that was a lot of jobs, it was a hell of a lot of subsidy—more than $230,000 per job, more than six times the largest amount Wisconsin had ever paid to subsidize a promised job. Walker got his campaign issue, FoxConn got its $3 billion and Wisconsin residents got … had. The $3 billion dollar subsidy has grown to over $4 billion at the same time that Foxconn is slowing down its investment in Wisconsin. So now taxpayers are subsidizing each job by well over $300,000 each. Nonpartisan analysts have determined that it will take decades, at the earliest, for Wisconsin to recoup its “investment.”

Likewise, hundreds of millions of dollars are thrown at stadiums and arenas even though economists have clearly demonstrated that those investments do not generate a positive financial return for the governments that provide these subsidies. Fancy consultants set forth all of the supposed benefits: job creation, direct spending by all of the people drawn to the facility, indirect spending by those who service the direct spenders. This last metric is meant to capture the increase in restaurant staff, Uber drivers and others who will cater to the new employees, residents and visitors to the facility. But as has been shown time and time again, these metrics are vastly overstated and willingly accepted at face value by politicians eager to generate some good headlines. They also ignore the opportunity cost of the direct subsidies—monies spent on attracting a company is money that can’t be spent on anything else. While we don’t know what it would have been spent on, it is likely to have been public schools, mass transit, roads or affordable housing in many communities.

 

Regulating Fannie and Freddie With The Deal

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Steven Davidoff Solomon and David T. Zaring have posted After the Deal: Fannie, Freddie and the Financial Crisis Aftermath to SSRN. The abstract reads,

The dramatic events of the financial crisis led the government to respond with a new form of regulation. Regulation by deal bent the rule of law to rescue financial institutions through transactions and forced investments; it may have helped to save the economy, but it failed to observe a laundry list of basic principles of corporate and administrative law. We examine the aftermath of this kind of regulation through the lens of the current litigation between shareholders and the government over the future of Fannie Mae and Freddie Mac. We conclude that while regulation by deal has a place in the government’s financial crisis toolkit, there must come a time when the law again takes firm hold. The shareholders of Fannie Mae and Freddie Mac, who have sought damages from the government because its decision to eliminate dividends paid by the institutions, should be entitled to review of their claims for entire fairness under the Administrative Procedure Act – a solution that blends corporate law and administrative law. Our approach will discipline the government’s use of regulation by deal in future economic crises, and provide some ground rules for its exercise at the end of this one – without providing activist investors, whom we contend are becoming increasingly important players in regulation, with an unwarranted windfall.

Reading the briefs in the various GSE lawsuits, one feels lost in the details of the legal arguments and one thinks that the judges hearing these matters might feel the same way.  This article is an attempt to see the big picture, encompassing the administrative, corporate and takings law aspects of the dispute. However the judges decide these cases, one would assume that they will need to do something similar to come up with a result that they find just.

I also found plenty to argue with in this article.  For instance, it characterizes the Federal Housing Finance Administration as the lapdog of Treasury. (26) But there is a lot of evidence that the FHFA charted its own course away from the Executive Branch on many occasions, for instance when it rejected calls by various government officials for principal reductions for homeowners with Fannie and Freddie mortgages. Notwithstanding these disagreements, I think the article makes a real contribution in its attempt to make sense of an extraordinarily muddled situation.