The Real Life Plutocracy blog will feature stories from the news that demonstrates how some business people use political machinery to gain competitive or monetary advantages. As with the game itself, the underlying theory is Public Choice.
The New York Times had an article detailing cushy appointments going to friends and family members of Cuomo’s sponsors. (Many Openings at State Agency Go To Those With Ties to Cuomo, April 27, 2013).
[…] an investigation by The New York Times into hiring by the agency, the Empire State Development Corporation, shows how Mr. Cuomo’s administration has engaged in some of the same patronage practices that have often prevailed here. The investigation was based on personnel records obtained through a Freedom of Information request, as well as campaign finance and other state records. Numerous interviews were conducted with state officials, employees and outside experts. While some of the new employees at Empire State had experience in economic development, others did not. Some of the jobs were not open to competition, and were filled with little input from the agency itself.
Below are names of specific beneficiaries mentioned in the article, along with the Cuomo sponsor related to them.
|Willard Younger||Special Projects Associate||$45,000||Stephen P. Younger||Son|
|Andrew Moelis||Strategic Planning Associate||$75,000||Ron Moelis||Son|
|James P. Rubin||Counselor on Competitiveness and Foreign Affairs||$150,000||*|
|Rachel Adler||Social Marketing||$35,000||Paul Adler||Daughter|
|Rhoda Glickman||Vice President of Arts and Cultural Development||$150,000||Dan Glickman||Wife|
|Sam Hoyt||Regional President||$139,000||*|
|Ross D. Levi||Vice President of Marketing||$130,000||*|
*: these have a direct association with Mr. Cuomo
If it was just an employee or two, we could have ascribed it to normal chance, but the number of beneficiaries, with the timing of their employment, is too large to ignore. The agency is only 300 employees total, so the list above represents 3% of their workforce. These are just the ties that The New York Times unearthed.
PS: The Spoils System is generally traced back to the Andrew Jackson administration.
Forest Road in the Pacific Northwest
One of the first real-world examples of Public Choice I heard was government building logging roads for timber companies. Superficially, it sounds like a clear-cut example of corporate welfare (excuse the pun). To document and quantify this special-interest handout, I looked into the statute and the budget for the forestry service. This is focusing on the national policies, since in this case, these are the most difficult to defend from a Public Interest perspective.
The statute authorizing the forest service to build logging roads is Public Law 88-657. The first paragraph reads as follows:
[…] the Congress hereby finds and declares that the construction and maintenance of an adequate system of roads and trails within and near the national forests and other lands administered by the Forest Service is essential if increasing demands for timber, recreation, and other uses of such lands are to be met; that the existence of such a system would have the effect, among other things, of increasing the value of timber and other resources tributary to such roads; and that such a system is essential to enable the Secretary of Agriculture (hereinafter called the Secretary) to provide for intensive use, protection, development, and management of these lands under principles of multiple use and sustained yield of products and services.
In the National Forest budget, I find the line-item for road construction and maintenance. In 2019, this came out to $218 million. One note defending an increase in road costs (for 2021) says:
This critical increase […] will enable the Forest Service to manage, protect, and provide safe public access to National Forest System lands, and to meet the agency’s goal of offering 4.0 billion board feet of timber in FY 2021.
Forest Roads are each used for multiple purposes, and it is not possible to quantify to what extent the road network as a whole – or, say, an average mile of forest road – is used for logging, vs personnel access, recreational uses, emergency responses, etc. Still, given the language in the statute and the budget, it is clear one of the main purposes of the roads is access to timber. In the context of the huge Federal budget as a whole, $218 million is nothing, but I find it interesting that the Federal government runs such blatant corporate handouts.
In the meantime, in 2019, Weyrhaeuser alone made $165 million out of a $6.5 billion in revenue.
The above is not taking into account the advantageous prices for the timber itself.
In 2017, Nestlé moved its headquarters from Glendale, CA to Arlington, VA. Cynics claim that it was mostly due to local subsidies and access to the Federal Capitol that prompted the move. The announcement from the company itself seems to agree at least with the latter assertion:
With a majority of key regulatory groups and non-government organizations pertinent to the business located in or near the Washington, D.C. area, the move will further facilitate important conversations about bringing the best foods and beverages to U.S. consumers
If we expect Nestle to use its new location to increase its influence with the Federal regulators, we would expect that to show up in the lobbying activities. I checked on opensecrets.org. What I found was that total spending went down quite a bit after the move, but overall lobbying activity did go up. Below is a small chart showing the changes.
Total spending on lobbying groups went down from over $3 million to $1.5 million, a drop of 50%, after the move in 2018. However, full-time Nestlé lobbyists went from 3 to 5, and the company was able to increase the number of issues it lobbied.
It is hard to draw any firm conclusions from this, but it remains at least plausible that proximity to Capitol Hill increases the opportunities for rent-seeking.
Here you can see who the beneficiaries are. As the biggest beneficiary, we would expect Boeing to lobby for the bank’s survival. Their lobbying did indeed bump in 2015. On the particular re-authorization bill, the three largest beneficiaries to loan guarantees, Boeing, Caterpillar and General Electric are all in the top-ten list of contributors. Bechtel, the largest beneficiary of direct loans, lobbies less and did not provide reports or testimony to the re-authorization bill, but then they are also a much smaller company, with about $20 billion in annual revenue.
As the articles above point out, there are several mechanisms in place for Mylan to support the high price of the Epipen. One thing about the case that I wanted to find out is why the FDA keeps rejecting competitors. The rejection that stands out is that of Teva Pharmaceuticals’ application, which was rejected February 23, 2016. The only thing that were reported as the cause was “major deficiencies.” There is little visibility into FDA rejections.
Mylan spent $1.5 million on lobbying in 2015. Much as I the am against the costly FDA approval process and lament the distasteful (yet successful) lobbying by Mylan, I don’t really see how their influence could reach inside the FDA. The rejection of Teva’s application is unfortunate, and the process should be more transparent, but there is no discernible link between Mylan and FDA.
Nevertheless, I have filed a FOIA request with the FDA. I will report again if I get any information regarding the rejection.
The Federal Government has a tax credit for the construction of low-income housing. Whatever its intentions, it is mostly used to transfer wealth into construction businesses and developers.
This NPR Report documents cases of outright fraud in Miami. Michael Cox, a repentant developer, calls it a kick-back scheme. Businesses would inflate their costs in order to maximize the tax credits. As far as we know, this is still going on.
Even with cleaner projects, the tax credit mostly gives wealthy developers a monetary benefit for projects they would have undertaken anyway. A study by Michael Eriksen and Stuart Rosenthal (2008) finds that nearly all financing using the tax credit displaces private investments.
Notice this direct contradiction of Eriksen’s and Rosenthal’s finding: “Eliminating the LIHTC would bring production and rehabilitation of affordable rental housing to a standstill.” I found this statement on the pages of the National Association of Home Builders. NAHB is a lobbying group.
Central Pacific Financial (CPF) is a troubled bank. The last year it was profitable was 2007. Its stock is worth a fortieth (1/40) of its peak. It is over-exposed to troubled assets, in the form of sub-prime mortgages. In late 2008, when the Federal Government started the Trouble Asset Relief Program (TARP), CPF applied.
Central Pacific was not a likely candidate. TARP was meant to save healthy banks and companies. The Treasury Department, which runs TARP, had initially rejected the bank’s application, with a stated concern that the bank had too few capital reserves to be viable. The bank had already been chastised by the FDIC for being low on reserves.
In late 2008, the TARP application was sitting in review council. According the the Huffington Post: “The internal e-mails show that the application had been forwarded to an inter-agency council headed by the Treasury Department that reviews cases in which a bank did not meet the criteria for a federal investment. Those criteria require banks to demonstrate their viability without the benefit of federal funding.”
Then, suddenly in December 2008, the bank received $135 million in TARP funds.
In November of that year, the Treasury Department received a call from the staff of Daniel Inouye, inquiring about the status of the application. News of this phone-call travelled by email from San Francisco to Washington, DC. The application was approved two weeks later.
In 2007, Inouye represented Hawaii in the senate. At the end of 2007, a year before these events, he owned about half a million dollars worth of shares in CPF.