38 Studios–Type Cronyism Is Not Capitalism
Introduction
Put simply, crony capitalism is the transfer of public money to businesses and organizations through the peddling of influence. Cronyism gives free markets a bad name, since it can be difficult to determine whether true competition exists or the game has been rigged.
A more appropriate term might be “venture socialism” or the more familiar “corporate welfare.” Whatever its name, the concept involves a less efficient economy — making us all poorer and reducing economic opportunity for our citizens.
Download a PDF of the Policy Brief here.
Unfortunately, cronyism has defenders on both sides of the political aisle because its proponents are on the receiving end of the short-term benefits. Politicians reward their “friends” with all kinds of publicly provided treasures, from subsidies to exemptions from regulations to loopholes in the tax code. In 2008, we witnessed hundreds of billions of dollars spent on the bailout of major Wall Street firms. A more-recent example of a half-billion dollar investment gone bad has given a name to politically correct green industry schemes: Solyndra.
Given its insulated political culture, Rhode Island is certainly not exempt from cronyist deals and boondoggles. Beginning in the 1990s, corporate giants CVS Caremark and Fidelity Investments have received a bevy of tax breaks and subsidies to build or expand national or regional headquarters.
During the last decade, debates raged about the $300-million-plus ratepayer-funded Deepwater Wind project, a Twin River casino bailout, and the $75 million loan guarantee to Curt Schilling’s 38 Studios. In the past week, Schilling’s video game company has offered a uniquely clear example of the risk that targeted public investments will never produce a positive return on investment for taxpayers.
Taxpayer or ratepayer dollars should not be randomly put at risk to finance politically connected corporate interests. It’s time to replace corporate welfare programs with a broad-based growth program. It’s time to end the handouts and create a pro-job, pro-business structural environment for economic growth in Rhode Island.
Policy Recommendations
As just one step in reducing the size and scope of government in the Ocean State, the RI Center for Freedom & Prosperity recommends that the State of Rhode Island:
- End the practice of corporate welfare in the General Assembly
- Defund the Economic Development Corp. (EDC), preventing it from spending or putting at risk any taxpayer dollars
One of the great mistakes to which policymakers often fall victim is judging public policy programs by their intent rather than their results. Such an approach minimizes the consideration that serious unintended consequences ought to carry in subsequent policy decisions.
Rhode Island should roll back many of its so-called economic development incentive programs, whether in the form of subsidies on the expenditures side of the ledger or loopholes on the tax side. Any economic development program that cannot be objectively shown to create jobs that generate more in-state revenue than they cost should be repealed.
The savings from the ended programs should be used to enact across-the-board improvements of state competitiveness by reducing the Rhode Island’s stratospheric tax rates to more-competitive figures. For instance, Rhode Island’s corporate income tax rate and sales tax rate are the highest in New England, putting the state at a serious economic disadvantage.
Furthermore, ending the practice of cronyism will reduce the special interest and corporate lobbying that pervades Smith Hill and will send a message that taxpayer dollars can no longer be traded for political support and campaign contributions.
Background/Overview
A key critique of market capitalism often revolves around the undue relationship between powerful corporations and the government, resulting in policies, legislation, and regulations that appear to benefit the well-connected at the expense of the public. This critique — though often labeled an inherent failure of capitalism — is a function of an outsized government.
The relationship is intuitive: A government with more power over the economy creates more opportunities and greater rewards for lobbying. In turn, influence over an entity with the power to regulate, tax, and police brings access to competitive weapons not available in a free market.
Indeed, the lion’s share of blame for the current economic crisis can be laid at the feet of connected business interests’ feeding on the fruits of the public commons while pushing the risk onto the public. National examples are most prominent in our minds.
When the housing bubble popped in 2008, Washington-connected Wall Street firms won taxpayer bailouts and bonus checks while the working Americans who paid the bill received pink slips and empty promises. And by most measures, those same firms are now more profitable than ever; industry data shows that President Barack Obama’s first two and a half years in office have been more profitable for Wall Street than George W. Bush’s entire eight years in office.
This is not simply a crisis of bad banks run amok, but an unsettling symptom of cronyism. Cronyism, by its very definition, implies a situation in which the system (i.e., the government and the institutions it establishes), rather than the choices of consumers, picks the winners and losers.
While Rhode Island’s economic climate is demonstrably bad for business (Rhode Island ranks 45th in the Fraser Institute’s Economic Freedom of North America 2011 index), a number of tax credits, incentive packages, and corporate welfare programs benefit a few chosen firms while the rest are forced to languish within a suffocating structural environment.
Targeted incentives are sometimes viewed as legitimate instruments for economic development, but a genuine program for broader growth would allow the state to close many of these loopholes in favor of broader reforms that ease the economic burden across the board.
The Research
Every day, taxpayer money is being funneled to organizations and enterprises that someone in government has decided are worthy of patronage, whether they need it or not. Worse, this kind of cronyism is not merely limited to a series of one-off deals, but is systematized on every level in the form of grants, tax credits, sweetheart loans, loan guarantees, and other preferential treatment.
According to GoodJobsFirst.org, a left-leaning economic development accountability resource, Rhode Island taxpayers paid out almost $50 million in related costs for fiscal year 2010, including:
- Corporate income tax rate reduction for job creation
- Enterprise zone tax credits
- Job training tax credit
- Manufacturing and high-performance manufacturing investment tax credit
- Motion picture production tax credit
Worse, disclosure and reporting on these programs are well below what anyone would expect in return for $50 million. In a series of transparency benchmarks measuring program outcomes, data availability, and accessibility, the average Rhode Island program produced a woeful score of only 36 out of a possible 100 points.
These are only a few of the higher-priced programs. At present, a startling number of programs are on the books to divert taxpayer money to targeted businesses and industries, accounting for tens of millions in additional handouts with little or no objective standards or accountability. Some of the others include:
- Distressed Areas Economic Revitalization Act and Enterprise Zone Program
- Jobs Development Act
- Rhode Island Public Rail Corporation
- Child Day Care Facilities in Industrial Parks Grant Program
- Jobs Training Tax Credit Act
- Urban Infrastructure Commission
- Mill Building and Economic Revitalization Program and Tax Credits
- Jobs Growth Act
- Petroleum stockpiling program
- Small Business Advocacy Council
- and many, many more.
While each carries a plausible justification and positive intended outcome (who could be against child care?), they are all simply variations on the crony-capitalism theme.
Discussion
John Stossel, the libertarian journalist of 20/20 fame and program host on Fox Business News, penned a provocative and compelling piece for Reason magazine in March 2004 titled “Confessions of a Welfare Queen.” Rather than documenting now-familiar stories of individual welfare abuse, as the allusion to Ronald Reagan’s famous “welfare queen” quip suggests, Stossel turned his sights on the multilayered fabric of lavish subsidies for the rich and cronyism.
From bizarre payouts to beachfront homeowners to abuses of eminent domain to unfair subsidies for agro-corporations, Stossel explains how these programs are not examples of market failure, but simply the symptoms of the increasing investiture of power into government, especially over ever-greater swaths of the economy.
Americans who decry cronyism as a betrayal of the social contract are correct: The iron triangle linking lobbyist-rich companies and organizations, campaign contributions, and government policy is a burden on our economy and a drag on our democracy. Too often missed, however, is that regulatory solutions just hand over new car keys and more drinkable money to the hooligans who repeatedly steer the economy into a ditch.
The only solution that can work is to limit the government’s ability to mismanage taxpayer funds; that means cutting back on the size, scope, and domain of government. The most vocal opponents of ending cronyism are, predictably, those who benefit most from the system. They, along with well-meaning but misguided allies, will generally contend that targeted systems of tax breaks and incentive programs are useful for directing policy mechanisms toward specific, concerted ends and that Rhode Island needs these incentive programs to be nationally competitive.
Two fallacious premises support these arguments: first, that public policy instruments are the best available means of achieving common ends and, second, that a labyrinth of programs is a suitable way to attract and develop economic activity. These fallacies, in tandem with the frenetic and sound-bite oriented nature of contemporary media, contribute to the idea that most problems have public sector solutions. This is particularly common in the realm of economics, precisely the area over which a market capitalist system would give the government the least control.
Again and again purported plans for “economic development” have been used to justify programs and incentives that ultimately do little to boost economic growth. But because spending and special-project support create the illusion of forward movement, beneficiaries can brand the efforts as “doing something.” What corporate welfare actually does, however, is to tip the scales toward the already rich at the direct expense of the poor and middle class.
Ultimately, government remains wedded to the language and practice of inputs — what it gives and does — because it has very little competence generating or measuring outcomes. Advocates tend to point to inputs as measures of success — the dollars spent, the teachers hired, the police stations built. Then they trumpet or downplay economic trends, educational accomplishment, and as suits their needs.
Tax breaks and incentives may seem like positives from the input side, but their non-anecdotal outcomes show them to be generally a waste of money.
Conclusion
It’s hard to argue against economic development. Who doesn’t want the economy to “develop”? But the sad truth is that sending public money to politically-connected organizations, interest groups, and companies on the basis of poorly measured and ill-defined goals is more of a handout than a strategy. If Rhode Island is serious about promoting economic growth, this kind of piecemeal approach should be seen as expensive and insufficient.
Instead of using targeted tax breaks, incentive grants, and other wizards’ tools to trade away taxpayer funds, Rhode Island should focus on creating a growth-oriented structural environment. That means replacing isolated pockets of preferential treatment with an across-the-board slate of policies to support growth:
- Reduced tax rates
- A more nimble and versatile education system to produce a highly trained workforce
- Eliminated regulations, streamlined when they are absolutely necessary
Any economic development program that cannot be objectively shown to create jobs and generate more in-state revenue than they cost should be repealed. The savings should be allocated to more general improvements, especially lowering taxes.
Rhode Island’s corporate tax rate remains the highest in New England and is tied for third highest in the country, after Washington, D.C. and Illinois.
|
Rank in New England
|
Corporate Tax Rate (%)
|
| Rhode Island |
1
|
9.0
|
| Maine |
2
|
3.5–8.93
|
| New Hampshire |
3
|
8.5
|
| Vermont |
4
|
6.5–8.5
|
| Massachusetts |
5
|
8.25
|
| Connecticut |
6
|
7.5
|
Another area in which Rhode Island is uncompetitive is its state sales tax, which is the highest in the region and tied for second in the country. A study to be released shortly by the RI Center for Freedom & Prosperity will demonstrate that eliminating the sales tax would have the highest “bang for buck” of any reform, creating tens of thousands of jobs and paying for over half of its cost with the increased tax receipts of a larger economy.
|
Rank in New England
|
State Sales Tax Rate (%)
|
| Rhode Island |
1
|
7
|
| Connecticut |
2
|
6.35
|
| Massachusetts |
3
|
6.25
|
| Vermont |
4
|
6
|
| Maine |
5
|
5
|
| New Hampshire |
6
|
0
|
These are just a few of the low-threshold starting points for reform. If Rhode Island seeks to distinguish itself as a pro-growth state, it should depart from crony capitalism and unleash the true capitalistic forces in the state. Fortunately, much of the government cost of the necessary policy changes can be borne by elimination of the special deals and crony-capitalism style programs that infest our state with false promises of a better tomorrow.
To the population more broadly — to the people of Rhode Island — there will be no cost, but rather the benefits of a thriving economy.
Progress Report: 2013 Budget Does Not Improve Failing Report Card
/in Blog, Recent Posts, Taxes/by Justin KatzQuick Links: go to Report Card home page; 2013 budget fails to be bold
Download a PDF of this Progress Report here …
When the RI Center for Freedom & Prosperity released its “Report Card on Rhode Island ‘Competitiveness,'” in February, Rhode Islanders had reason to believe that the General Assembly would do something to address the state’s most pressing issue: jobs. The last time the unemployment rate was below 11% was in June 2009.
Since February, almost two thousand more Rhode Islanders are out of work, and even more than that gave up and left the labor force. Perhaps the worst news, though, is that the legislature and its enacted budget did nothing to improve the economic climate of the state and arguably made things worse.
The Report Card
The “Report Card on Competitiveness” ranked Rhode Island nationally and regionally in ten categories: tax burden, business climate, spending & debt, employment & income, K-12 education, energy, infrastructure, public sector, health care, and living & retiring in RI. For half of those categories, Rhode Island received Fs, meaning that the state ranks very poorly in New England and in the United States.
In no category was Rhode Island’s grade higher than D+, which the state achieved only in K-12 education.
Areas Outside the Economy
Because the report card addresses a variety of aspects of life in Rhode Island, it would be possible for the General Assembly to make improvements in one category at the expense of another. A worsening score in the energy category, for example, might correspond with improvements in overall business climate. With its scores so consistently low, however, Rhode Island has no areas of strength to compromise for the sake of improving weaknesses.
The two notable areas in which lawmakers would likely assert positive action, during this legislative session, are education and infrastructure.
With respect to education, the budget made three substantial changes that legislative leaders present as improvements:
Despite grand assertions made by House Finance Chairman Helio Melo (D, East Providence) during the budget debate, however, bureaucratic restructuring is not obviously a route toward improved results. Indeed, if a combined board of education creates the opportunity to stifle the forces of reform, it could be a step backwards for the state.
As for the funding formula, while it may represent a more equitable means of allocating resources where they are most needed, the change represents little more than a reshuffling of dollars. Moreover, money is arguably not the critical area in need of reconsideration.
Even the one provision that looks likely to provide true advancement of the state’s education system, investment in IT, is not clearly a net improvement. The IT Investment Fund will receive land-sale proceeds, but the budget gets the ball rolling with an authorization for $45.3 million in new borrowing.
Debt plagues the state’s infrastructure advancements, as well. Between T.F. Green Airport and central landfill improvements, the General Assembly authorized an additional $214 million in debt. That is in addition to $209 million of bond authorizations that will appear on the ballot in November.
Rhode Island is already 47th in the nation and fifth (of six) in New England for state and local debt per capita, according to the report card. During the House budget debate, Melo informed the representatives that state government’s total debt currently stands at $1.7 billion, requiring annual debt service of $299 million.
This could be the year that the state breaks $2 billion in total direct debt owed. (Additional obligations, such as pensions and other post-employment benefits [OPEB] are exponentially larger.)
Asphyxiating the Private Sector
Perhaps the most notable example of infrastructure improvement at the expense of other areas of competitive weakness is the authorization of tolls on the Sakonnet River and Jamestown Verrazano Bridges.
It is true that Rhode Island’s bridges are the most deficient in the nation, but tolls are not a clear answer for two reasons. First, Rhode Island is also worst in the nation for highway cost effectiveness, meaning that a focus on funding will contribute to, rather than alleviate, the problem. Second, the tolls will place an exorbitant burden on a region that’s already suffering.
An analysis by the Ocean State Current found that the island and lower bay communities dominated the lists of population and employment loss, over the last decade. Juxtaposing those trends with median income suggests that the people who’ve been struggling the most are those least able to afford hundreds or thousands of dollars in new transportation expenses.
The imposition of regional tolls is not the only area in which the General Assembly constricted Rhode Island’s private sector. Under the guise of cleaning up licensing laws, the budget added an estimated $1.8 million to the direct cost of doing business in the state. Whether it’s $25 license renewal fees for hairdressers and manicurists, a $550 fee for in-state wholesalers of frozen desserts, or a $1,090 re-examination fee for physicians, the burden falls most heavily on individuals and small-business owners who are simply trying to participate in the Rhode Island economy.
The same is true of the $11 million in new sales taxes being levied against taxicab drivers, pet groomers, and high-end clothiers, among others. Last year, hairdressers across the state successfully lobbied to avoid taxes on the services that they provide. This legislative session, the restaurants successfully quashed Governor Lincoln Chafee’s move to impose a dramatic increase of the meals tax.
It appears that the state government is intent on probing the various segments of Rhode Island’s economy to find areas of lobbying weakness. Industries able to mount strong public defenses will be spared while others won’t. The first test is taxes; the second is fees.
Government Self-Preservation
It is true that the General Assembly’s budget for fiscal year 2013 (FY13) represents a slight decrease from its revised budget for FY12 — down to $8.10 billion from $8.12 billion. However, the budget that the General Assembly enacted one year ago was supposed to hold FY12 spending at $7.70 billion. In FY11, the final number was $7.72 billion.
In other words, new revenue and debt is translating directly into government expenditures, with a two-year jump of approximately $400 million.
The growth in full-time equivalent (FTE) employees that the budget authorizes is another indication. During the second term of Governor Donald Carcieri, the number of authorized FTEs declined 2,077, from 16,417 in 2006 to 14,341 in 2010 (numbers differ due to rounding). Consequently, the ratio of public workers to private-sector workers brought Rhode Island its only grade above a C on the Center’s report card: an A-.
With the FY13 budget, the total FTEs authorized has returned to 15,026, making up approximately one-third of the reduction. At the same time, the state’s economy has continued to erode, so the number of FTEs per 100 employed Rhode Islanders has returned to its pre-reduction level. There is a clear disconnect between the public and private sectors.
A specific example may be found in seemingly innocuous government restructuring. In order to process the millions of dollars in federal stimulus money earmarked for Rhode Island, Governor Carcieri created an Office of Economic Recovery and Reinvestment (OERR), currently with a staff of seven. For FY13, OERR will be transformed into the permanent, state-funded Office of Management and Budget, with an initial staff of eleven.
Yet another example of government’s preservation of its own interests at the expense of the overall economy can be found in article 22, which allocated $2.6 million as a partial bailout of the locally administered Central Falls pension plan. During the restructuring of the city’s finances through the receivership and bankruptcy processes, police and fire retirees experienced benefit reductions up to 55%. With state funds, the maximum reduction will now be 25% through FY16, for most retirees.
In effect, a year and a half of revenue from increased professional licensing fees are going to mitigate the harm that Central Falls’ mismanagement did to its personnel. Alternately, the Central Falls bailout could have been funded through the elimination of the OERR now that federal stimulus dollars are drying up.
Competitiveness Is About Priorities and Decisions
On the night it was unveiled, House Minority Leader Brian Newberry (R, Burillville, North Smithfield) referred to the General Assembly’s revision as a “status quo budget.” But the status quo for the state of Rhode Island is characterized by economic decline, and continuing on that path is a choice.
Between the February release of the Center’s report card and the final passage of the budget, the General Assembly chose to bolster government at the expense of private citizens struggling to build a life in one of the harshest economic environments in the United States. Between now and the legislators’ return to their chambers, the next round of choices will be voters’.
2013 Budget Fails: Who’s Really Running our Lives?
/in Blog, Recent Posts, Taxes/by Mike StenhouseQuick Links: further analysis of 2013 budget; Report Card on RI Competitiveness
2013 Budget Fails to be Bold
I don’t know about you, but the spectacle of General Assembly members congratulating each other for passing a self-proclaimed “bold” 2013 Budget for Rhode Island and outwardly celebrating by pointing out the tax hikes that they didn’t impose on our citizens and businesses might make you think that our state’s economy is “just fine”.
The measure of a good budget should not be mild improvements to a bad budget proposed by the governor. A few legislators, who understood the shortcomings and economic harm the budget would inflict on some, saw their common sense amendments systematically shot down, one after another.
The whole charade is disturbing to me and should be troubling to all citizens; it is indicative of the tax and spend culture that has become so firmly ensconced on Smith Hill
For example, with regard to the new tax on taxi services, consider cab drivers, who, on average, earn pay near the poverty level. All they want is the freedom to earn a living of their choice. Instead, because of the new sales tax on their industry, they will now see their business, their tips and their profits reduced; they will have to jump through hoops to collect and remit the sales tax to the government; and they will suffer the professional ignominy of having their service trade singled-out as one that must help fund the state’s voracious spending habit. Do you think that today … taxi drivers feel that they are in full control of their own lives?
The Political Class calls this tax an “investment” that is necessary for what they deem are more important programs. Most of us just call it more “wasteful spending” to feed their never-ending appetite for government dependency.
How long will it be before they come after your business sector? After all, in the past few years, a number of industries have been threatened with new tax increases, and regrettably, not all were able to escape the assault.
When I speak with pro business groups, even they consider it a “victory” when certain industries, who have good lobbyists, somehow managed to elude taxation – at least for now. What is the matter with our state? These are not victories. These are symptoms of a culture of failure. What Rhode Island needs is a new “winning” culture.
What our state needs is a new, pro business tax policy that will lead to economic growth and more jobs. The 2013 budget fails in this regard.
What our state needs is to upgrade our standing in all those national categories where we rank last or near the bottom. The 2013 budget fails in this regard.
What our state needs is real relief for the massive pension and health benefits liabilities facing our cities and towns. The 2013 budget also fails in this regard.
What our state needs is freedom of choice for disadvantaged students and families who are condemned to a failed school. The 2013 budget fails in this regard, as well.
And yet, they celebrate. And no one else steps forward to lead.
I am left wonder how many Rhode Islanders are wondering themselves about who’s running their lives. Do we each really still own that sacred freedom? Or is the State now our boss? One that dictates and manages more and more parts of our individual lives by herding us into more and more collective, politically-created buckets?
Do not be fooled by all the self-aggrandized back-slapping. Unless you can afford a strong lobbying group, they are likely scheming to manage you and your business next.
Read our Zero.Zero Sales Tax Executive Summary here …
Nationally Recognized Investigative Reporter Joins The Ocean State Current
/in Blog, News, Recent Posts/by Mike StenhouseKevin Mooney has appeared on Breitbart and Glenn Beck
FOR IMMEDIATE RELEASE: June 12, 2012
Providence, RI — The Ocean State Current, the news division of the Rhode Island Center for Freedom and Prosperity, announced today that Kevin Mooney will join its staff as Investigative Bureau Chief.
“Accountability and transparency are vital to our democracy,” said Mooney, an investigative journalist who reports on the public sector with an eye toward taxpayer interests. “Unfortunately, we see government at the local, state and national level operating at odds with long-standing American principles rooted in the idea of constitutional limited government.”
Most recently,Mooney served as the Capitol Bureau Reporter for the Pelican Post, the news division of the Pelican Institute for Public Policy in Louisiana. Mooney’s work also appears in the Daily Caller, The American Spectator, The Washington Times, the Washington Examiner and Breitbart.com. A contributor to Fox News, Mooney previously appeared on the Glenn Beck program to discuss the connection between The Service Employees International Union (SEIU) and the Association of Community Organizers for Reform Now (ACORN). Mooney was also the first to report on the $53 million in federal funding ACORN has received since 1994.
Mooney will join Justin Katz, managing editor, on The Current’s staff.
“Our Center is thrilled to have Kevin partner with Justin in growing The Ocean State Current into a prominent news source for concerned citizens,” said Mike Stenhouse, CEO for the Center. “Kevin’s proven ability to follow the money and uncover instances of undue special interest influence and cronyism will add a new dimension to our news bureau.”
RI Needs a Criminal Intent Rule to Protect Innocent Citizens
/in Blog, Recent Posts, Regulatory Environment/by RI Center for FreedomCriminal Penalties Should be Levied only on those with a Guilty Mind
Download the full Policy Brief here …
No person should be convicted of a crime without the government proving that he or she intended to violate a law or knew that his or her conduct was unlawful. Generally, criminal offenses under Rhode Island law include such specific standards, but if they don’t, then a default requirement should apply. The Rhode Island Center for Freedom & Prosperity supports state efforts to protect citizens from unjust punishment because of ambiguous and poorly-drafted criminal offenses.
There are myriad factors required to ensure a fair and just criminal justice system: both the United States’ and Rhode Island’s Constitutions protect the rights of the accused to counsel, speedy trials, and due process, among other guarantees. But those constitutional protections exclude one notable aspect of a fair criminal justice system, which may be so fundamental that it escaped constitutional inclusion in the heady days of constitution writing.
Our full Policy Brief discusses these issues in greater detail.
According the Report Card on Rhode Island Competitiveness, our state grades out at an “F” in the categories of State Lawsuit Climate and in Domestic Migration. Passage of the protections recommended in this Policy Brief would help ensure that a high profile legal case based on some obscure law might not further deter people and businesses from remaining in or moving to the Ocean State.
Our Policy Brief was published on the RIGHT ON CRIME website …
Crosstown E-Battle of Ideas Takes Stage in Providence
/in Blog, News, Recent Posts/by RI Center for FreedomOcean State Current joins Breitbart, Heritage, and Franklin in “Future Of Journalism Summit”
Click here to see national news stories about what people are saying about the Summit …
The Ocean State Current, the news wing of the Rhode Island Center for Freedom and Prosperity, will participate with the Heritage Foundation and the Franklin Center for Government & Public Integrity at this weekend’s events, which will include a tribute to the monumental journalistic achievements of Andrew Breitbart at the “Breitbart Awards Dinner” on Friday, June 8, at 7:00 p.m. The dinner is the main event of the “Future of Journalism Summit” – establishing a center-right beachhead north of the State House, opposite the left-wing Netroots Nation summit to its south – on Friday and Saturday.
Andrew Breitbart pioneered a new media revolution that transformed journalism and the political landscape. As his tragic passing is mourned, many seek to ensure that his legacy is honored and that the movement he spawned continues with the army of citizen activists that he cultivated and inspired to carry the torch for freedom and truth.
The spirit of that movement is represented locally by the RI Center for Freedom & Prosperity, which worked with the Franklin Center in the development of the Ocean State Current, its online news bureau. CEO Mike Stenhouse says, “In terms of both inspiration and practical example, the trail that Andrew Breitbart and these organizations have blazed – to uncover the truth and to provide greater government transparency – has been a guide as we’ve made our own way, here in the Ocean State.”
“Interacting with other journalists in the Franklin network around the country these past few months has been very encouraging,” says the Current’s managing editor, Justin Katz. “It’s easy to feel like the Netroots crowd controls the conversation in this state, so it’s great to have some friends from the other side mingling in the shadow of the Independent Man,” he says, referring to the statue on top of the State House dome.
The first annual Breitbart Awards Dinner will honor three individuals from the realms of 1) professional journalism; 2) blogging; and 3) citizen activism-whose efforts advance the spirit of Andrew Breitbart’s work, which was driven by an indomitable pursuit for truth and accountability that advances those causes on behalf of the public good.
The winners of the 2012 Breitbart Awards:
Professional Journalism: Phillip Klein, The Washington Examiner Blogger: Ace of Spades, Ace of Spades HQ Citizen: Andrew Marcus
Breitbart Awards Dinner Details:
Keynote Addresses by John Fund and Sonnie Johnson, Breitbart Award winners
Breitbart Awards Dinner
Friday, June 8th at 7:00 p.m. EST
Providence Marriott Downtown-1 Orms Street, Providence, Rhode Island
The Franklin Center for Government & Public Integrity supports transparency, accountability, and fiscal responsibility. It trains reporters, produces investigative news content, and holds government officials accountable.
The Heritage Foundation is the nation’s most broadly supported public policy research institute. Its mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.
Schilling’s Rookie Mistake
/in Blog, Commentary, Recent Posts/by Mike StenhouseOped by Mike Stenhouse published by the Providence Journal on June 3, 2012
See the ABC-6 interview on this OpEd here …
When All-Star, world champion and potential Hall Of Fame pitcher Curt Schilling stepped from the dugout into the corporate board room, and then into the public-policy arena, he did what most of us did when we first put on our uniforms: He made a rookie mistake.
With the job security of his employees and the investment value of his stakeholders in play, Schilling also took on the public trust of Rhode Islanders when he accepted a $75 million state loan guarantee for funding for his new company, 38 Studios.
While it is now good sport to openly deride Schilling as a hypocrite — or worse — I have a different take on where I think that he may stand to gain a valuable life lesson.
At many points along their athletic journey, most athletes learn the hard way that they must forgo certain activities to be successful in achieving their professional-sports ambitions. At each step along the way, more and more of our energy must be dedicated to our sport if we are to continue to achieve at a higher and higher echelon. This means that such activities as partying, skiing, off-season leisure and hobbies must be curtailed or eliminated to maintain a high level of physical conditioning and emotional focus.
As a rookie in the Major Leagues, I tried to have it all initially: the uniform, on-field success, the night life and the offseason leisure. This formula does not work for most, and it certainly didn’t work for me.
Having experience myself in professional baseball and in the dot-com world as an executive with a $50 million start-up venture, I understand what it takes to succeed. And now, with my experience in public policy, I understand the responsibilities of public officials and publicly financed organizations to taxpayers, it strikes me that Schilling may, likewise, have lost focus and spread himself too thin.
Over the past year, when I saw Schilling regularly at the ESPN studios as a baseball analyst, I kept wondering to myself how he was maintaining focus on growing his company and if he was truly committed to its success. Whether his ESPN gig had anything to do with the problems that 38 Studios now faces we’ll probably never know.
However, when Curt Schilling accepted the loan guarantee by Rhode Island’s taxpayers, he truly stepped into the big leagues. I’m not sure that he understood the commitment required to maintain the public trust. Putting everything that we have into starting a business is the type of entrepreneurship that Americans admire, even if the venture fails. But taking things for granted, especially when that includes acceptance of taxpayers’ hard-earned money, is entirely different.
I disagree with all of those who paint Curt Schilling as some kind of evil or dishonest person. I simply think that he made a rookie mistake and I don’t think he’ll make it again. In the same way that Curt Schilling worked hard to achieve success as a pitcher, I expect that he will re-dedicate himself to making 38 Studios a successful enterprise.
Mike Stenhouse is a former Major League baseball player, a former executive with Myteam.com and now chief executive of the Rhode Island Center for Freedom & Prosperity, a conservative think tank.
©2012, Published by The Providence Journal Co.
Task Force Stirs Controversy in Warwick
/in Blog, Pension Reform/by RI Center for FreedomAre local governments unknowingly or purposely hiding the truth from their residents?
How do you solve a problem if some don’t think there is a problem?
An debate is underway, and the sides are taking shape. On one side are the City of Warwick, its local newspaper, and state officials. On the other side are current and former Warwick city council members, a scholar from a nationally recognized think tank, National Review, and our own Center for Freedom & Prosperity.
A locally published interview with a member of the national pension task force, assembled by the RI Center for Freedom & Prosperity, has caused a stir in Warwick, puzzling the Mayor, confusing the local paper, and leading to an online rebuttal. Even the Providence Journal has covered the action.
On May 24, the Warwick Beacon published an article from an interview with Eileen Norcross, senior research fellow and lead researcher on the State and Local Policy Project with the Mercatus Center at George Mason University, attempting to refute her warnings that the City of Warwick is not accurately representing the true scope of the liabilities in its locally administered pension plans. Norcross published a pie-chart depicting what she calculates as the true budget snapshot for the city. See the pie-chart here.
In citing Mayor Avedisian’s puzzlement by Norcross’s figures, and in misstating facts itself, the article is an example of the complexities involved in this important issue for cities and towns in Rhode Island. A point-by-point clarification, “Wake Up Warwick,” was subsequently posted by Norcross as a rebuttal to the Warwick Beacon article.
Further, National Review Online has also published an article in support of Norcross’ perspective.
At question is the “discount rate,” or “rate of return,” utilized by most government agencies to value long-term pension liabilities. Many economists believe that government actuaries use higher rates than they should, which ends up understating the scope of the liability. If rates that are commonly used in private industry were to be utilized, the pension liability would be 2-3 times larger in many cases. What politician would want that kind of information to come out?
Is this arbitrary accounting practice done out of habit, or ignorance or, worse, is it done to purposefully deceive the public by kicking the can down the road and forcing future administrations to deal with the true scope of the problem?
The Center for Freedom & Prosperity takes the position that this debate — and this level of transparency — should take place in every city and town in Rhode Island. We strongly urge concerned citizens to publish or otherwise distribute the Open Letter to Municipalities: Tell Us The Truth previously published by our Center.
NY Times Echos Pension Task Force Warnings
/in Blog, Pension Reform, Recent Posts/by Mike StenhouseThe article below reinforces the concept that our Center’s pension task force has been saying for many months … that state and municipal entities are dramatically understating the true scope of their unfunded pension liabilities.
FROM THE NEW YORK TIMES, May 27, 2012
Public Pensions Faulted for Bets on Rosy Returns
By MARY WILLIAMS WALSH and DANNY HAKIM
Few investors are more bullish these days than public pension funds.
While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”
Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes.
In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.
But to many observers, even 7 percent is too high in today’s market conditions.
“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”
Public retirement systems from Alaska to Maine are running into the same dilemma as they struggle to lower their assumed rates of return in light of very low interest rates and unpredictable stock prices.
They are facing opposition from public-sector unions, which fear that increased pension costs to taxpayers will further feed the push to cut retirement benefits for public workers. In New York, the Legislature this year cut pensions for public workers who are hired in the future, and around the country governors and mayors are citing high pension costs as a reason for requiring workers to contribute more, or work longer, to earn retirement benefits.
In addition to lowering the projected rate of return, Mr. North has also recommended that the New York City trustees acknowledge that city workers are living longer and reporting more disabilities — changes that would cost the city an additional $2.8 billion in pension contributions this year. Mr. North has called for the city to soften the blow to the budget by pushing much of the increased pension cost into the future, by spreading the increased liability out over 22 years.
Ailing pension systems have been among the factors that have recently driven struggling cities into Chapter 9 bankruptcy. Such bankruptcies are rare, but economists warn that more are likely in the coming years. Faulty assumptions can mask problems, and municipal pension funds are often so big that if they run into a crisis their home cities cannot afford to bail them out.
The typical public pension plan assumes its investments will earn average annual returns of 8 percent over the long term, according to the Center for Retirement Research at Boston College. Actual experience since 2000 has been much less, 5.7 percent over the last 10 years, according to the National Association of State Retirement Administrators. (New York State announced last week that it had earned 5.96 percent last year, compared with the 7.5 percent it had projected.)
Worse, many economists say, is that states and cities have special accounting rules that have been criticized for greatly understating pension costs. Governments do not just use their investment assumptions to project future asset growth. They also use them to measure what they will owe retirees in the future in today’s dollars, something companies have not been permitted to do since 1993.
As a result, companies now use an average interest rate of 4.8 percent to calculate their pension costs in today’s dollars, according to Milliman, an actuarial firm.
In New York City, the proposed 7 percent rate faces resistance from union trustees who sit on the funds’ boards. The trustees have the power to make the change; their decision must also be approved by the State Legislature.
“The continued risk here is that even 7 is too high,” said Edmund J. McMahon, a senior fellow at the Empire Center for New York State Policy, a research group for fiscal issues.
And Jeremy Gold, an actuary and economist who has been an outspoken critic of public pension disclosures, said, “If you’re using 7 percent in a 3 percent world, then you’re still continuing to borrow from the pension fund.”
The city’s union leaders disagree. Harry Nespoli, the chairman of the Municipal Labor Committee, the umbrella group for the city’s public employee unions, said that lowering the rate to 7 percent was unnecessary.
“They don’t have to turn around and lower it a whole point,” he said.
When asked if his union was more bullish on the markets than the city’s actuary, Mr. Nespoli said, “All we can do is what the actuary is doing. He’s guessing. We’re guessing.”
Vermont has lowered its rate by 2 percentage points, but for only one year. The state recently adopted an unusual new approach calling for a sharp initial reduction in its investment assumptions, followed by gradual yearly increases. Vermont has also required public workers to pay more into the pension system.
Union leaders see hidden agendas behind the rising calls for lower pension assumptions. When Rhode Island’s state treasurer, Gina M. Raimondo, persuaded her state’s pension board to lower its rate to 7.5 percent last year, from 8.25 percent, the president of a firemen’s union accused her of “cooking the books.”
Lowering the rate to 7.5 percent meant Rhode Island’s taxpayers would have to contribute an additional $300 million to the fund in the first year, and more after that. Lawmakers were convinced that the state could not afford that, and instead reduced public pension benefits, including the yearly cost-of-living adjustments that retirees now receive. State officials expect the unions to sue over the benefits cuts.
When the mayor of San Jose, Calif., Chuck Reed, warned that the city’s reliance on 7.5 percent returns was too risky, three public employees’ unions filed a complaint against him and the city with the Securities and Exchange Commission. They told the regulators that San Jose had not included such warnings in its bond prospectus, and asked the regulators to look into whether the omission amounted to securities fraud. A spokesman for the mayor said the complaint was without merit.
In Sacramento this year, Alan Milligan, the actuary for the California Public Employees’ Retirement System, or Calpers, recommended that the trustees lower their assumption to 7.25 percent from 7.75 percent. Last year, the trustees rejected Mr. Milligan’s previous proposal, to lower the rate to 7.5 percent.
This time, one trustee, Dan Dunmoyer, asked the actuary if he had calculated the probability that the pension fund could even hit those targets.
Yes, Mr. Milligan said: There was a 50-50 chance of getting 7.5 percent returns, on average, over the next two decades. The odds of hitting a 7.25 percent target were a little better, he added, 54 to 46.
Mr. Dunmoyer, who represents the insurance industry on the board, sounded shocked. “To me, as a fiduciary, you want to have more than a 50 percent chance of success.”
If Calpers kept setting high targets and missing them, “the impact on the counties won’t be bigger numbers,” he said. “It will be bankruptcy.”
In the end, a majority decided it was worth the risk, and voted against Mr. Dunmoyer, lowering the rate to 7.5 percent.
Center for Freedom Calls for End to Corporate Welfare in RI
/in Blog, Policy, Political Philosophy, Recent Posts, Regulatory Environment, Taxes/by RI Center for Freedom38 Studios–Type Cronyism Is Not Capitalism
Introduction
Put simply, crony capitalism is the transfer of public money to businesses and organizations through the peddling of influence. Cronyism gives free markets a bad name, since it can be difficult to determine whether true competition exists or the game has been rigged.
A more appropriate term might be “venture socialism” or the more familiar “corporate welfare.” Whatever its name, the concept involves a less efficient economy — making us all poorer and reducing economic opportunity for our citizens.
Download a PDF of the Policy Brief here.
Unfortunately, cronyism has defenders on both sides of the political aisle because its proponents are on the receiving end of the short-term benefits. Politicians reward their “friends” with all kinds of publicly provided treasures, from subsidies to exemptions from regulations to loopholes in the tax code. In 2008, we witnessed hundreds of billions of dollars spent on the bailout of major Wall Street firms. A more-recent example of a half-billion dollar investment gone bad has given a name to politically correct green industry schemes: Solyndra.
Given its insulated political culture, Rhode Island is certainly not exempt from cronyist deals and boondoggles. Beginning in the 1990s, corporate giants CVS Caremark and Fidelity Investments have received a bevy of tax breaks and subsidies to build or expand national or regional headquarters.
During the last decade, debates raged about the $300-million-plus ratepayer-funded Deepwater Wind project, a Twin River casino bailout, and the $75 million loan guarantee to Curt Schilling’s 38 Studios. In the past week, Schilling’s video game company has offered a uniquely clear example of the risk that targeted public investments will never produce a positive return on investment for taxpayers.
Taxpayer or ratepayer dollars should not be randomly put at risk to finance politically connected corporate interests. It’s time to replace corporate welfare programs with a broad-based growth program. It’s time to end the handouts and create a pro-job, pro-business structural environment for economic growth in Rhode Island.
Policy Recommendations
As just one step in reducing the size and scope of government in the Ocean State, the RI Center for Freedom & Prosperity recommends that the State of Rhode Island:
One of the great mistakes to which policymakers often fall victim is judging public policy programs by their intent rather than their results. Such an approach minimizes the consideration that serious unintended consequences ought to carry in subsequent policy decisions.
Rhode Island should roll back many of its so-called economic development incentive programs, whether in the form of subsidies on the expenditures side of the ledger or loopholes on the tax side. Any economic development program that cannot be objectively shown to create jobs that generate more in-state revenue than they cost should be repealed.
The savings from the ended programs should be used to enact across-the-board improvements of state competitiveness by reducing the Rhode Island’s stratospheric tax rates to more-competitive figures. For instance, Rhode Island’s corporate income tax rate and sales tax rate are the highest in New England, putting the state at a serious economic disadvantage.
Furthermore, ending the practice of cronyism will reduce the special interest and corporate lobbying that pervades Smith Hill and will send a message that taxpayer dollars can no longer be traded for political support and campaign contributions.
Background/Overview
A key critique of market capitalism often revolves around the undue relationship between powerful corporations and the government, resulting in policies, legislation, and regulations that appear to benefit the well-connected at the expense of the public. This critique — though often labeled an inherent failure of capitalism — is a function of an outsized government.
The relationship is intuitive: A government with more power over the economy creates more opportunities and greater rewards for lobbying. In turn, influence over an entity with the power to regulate, tax, and police brings access to competitive weapons not available in a free market.
Indeed, the lion’s share of blame for the current economic crisis can be laid at the feet of connected business interests’ feeding on the fruits of the public commons while pushing the risk onto the public. National examples are most prominent in our minds.
When the housing bubble popped in 2008, Washington-connected Wall Street firms won taxpayer bailouts and bonus checks while the working Americans who paid the bill received pink slips and empty promises. And by most measures, those same firms are now more profitable than ever; industry data shows that President Barack Obama’s first two and a half years in office have been more profitable for Wall Street than George W. Bush’s entire eight years in office.
This is not simply a crisis of bad banks run amok, but an unsettling symptom of cronyism. Cronyism, by its very definition, implies a situation in which the system (i.e., the government and the institutions it establishes), rather than the choices of consumers, picks the winners and losers.
While Rhode Island’s economic climate is demonstrably bad for business (Rhode Island ranks 45th in the Fraser Institute’s Economic Freedom of North America 2011 index), a number of tax credits, incentive packages, and corporate welfare programs benefit a few chosen firms while the rest are forced to languish within a suffocating structural environment.
Targeted incentives are sometimes viewed as legitimate instruments for economic development, but a genuine program for broader growth would allow the state to close many of these loopholes in favor of broader reforms that ease the economic burden across the board.
The Research
Every day, taxpayer money is being funneled to organizations and enterprises that someone in government has decided are worthy of patronage, whether they need it or not. Worse, this kind of cronyism is not merely limited to a series of one-off deals, but is systematized on every level in the form of grants, tax credits, sweetheart loans, loan guarantees, and other preferential treatment.
According to GoodJobsFirst.org, a left-leaning economic development accountability resource, Rhode Island taxpayers paid out almost $50 million in related costs for fiscal year 2010, including:
Worse, disclosure and reporting on these programs are well below what anyone would expect in return for $50 million. In a series of transparency benchmarks measuring program outcomes, data availability, and accessibility, the average Rhode Island program produced a woeful score of only 36 out of a possible 100 points.
These are only a few of the higher-priced programs. At present, a startling number of programs are on the books to divert taxpayer money to targeted businesses and industries, accounting for tens of millions in additional handouts with little or no objective standards or accountability. Some of the others include:
While each carries a plausible justification and positive intended outcome (who could be against child care?), they are all simply variations on the crony-capitalism theme.
Discussion
John Stossel, the libertarian journalist of 20/20 fame and program host on Fox Business News, penned a provocative and compelling piece for Reason magazine in March 2004 titled “Confessions of a Welfare Queen.” Rather than documenting now-familiar stories of individual welfare abuse, as the allusion to Ronald Reagan’s famous “welfare queen” quip suggests, Stossel turned his sights on the multilayered fabric of lavish subsidies for the rich and cronyism.
From bizarre payouts to beachfront homeowners to abuses of eminent domain to unfair subsidies for agro-corporations, Stossel explains how these programs are not examples of market failure, but simply the symptoms of the increasing investiture of power into government, especially over ever-greater swaths of the economy.
Americans who decry cronyism as a betrayal of the social contract are correct: The iron triangle linking lobbyist-rich companies and organizations, campaign contributions, and government policy is a burden on our economy and a drag on our democracy. Too often missed, however, is that regulatory solutions just hand over new car keys and more drinkable money to the hooligans who repeatedly steer the economy into a ditch.
The only solution that can work is to limit the government’s ability to mismanage taxpayer funds; that means cutting back on the size, scope, and domain of government. The most vocal opponents of ending cronyism are, predictably, those who benefit most from the system. They, along with well-meaning but misguided allies, will generally contend that targeted systems of tax breaks and incentive programs are useful for directing policy mechanisms toward specific, concerted ends and that Rhode Island needs these incentive programs to be nationally competitive.
Two fallacious premises support these arguments: first, that public policy instruments are the best available means of achieving common ends and, second, that a labyrinth of programs is a suitable way to attract and develop economic activity. These fallacies, in tandem with the frenetic and sound-bite oriented nature of contemporary media, contribute to the idea that most problems have public sector solutions. This is particularly common in the realm of economics, precisely the area over which a market capitalist system would give the government the least control.
Again and again purported plans for “economic development” have been used to justify programs and incentives that ultimately do little to boost economic growth. But because spending and special-project support create the illusion of forward movement, beneficiaries can brand the efforts as “doing something.” What corporate welfare actually does, however, is to tip the scales toward the already rich at the direct expense of the poor and middle class.
Ultimately, government remains wedded to the language and practice of inputs — what it gives and does — because it has very little competence generating or measuring outcomes. Advocates tend to point to inputs as measures of success — the dollars spent, the teachers hired, the police stations built. Then they trumpet or downplay economic trends, educational accomplishment, and as suits their needs.
Tax breaks and incentives may seem like positives from the input side, but their non-anecdotal outcomes show them to be generally a waste of money.
Conclusion
It’s hard to argue against economic development. Who doesn’t want the economy to “develop”? But the sad truth is that sending public money to politically-connected organizations, interest groups, and companies on the basis of poorly measured and ill-defined goals is more of a handout than a strategy. If Rhode Island is serious about promoting economic growth, this kind of piecemeal approach should be seen as expensive and insufficient.
Instead of using targeted tax breaks, incentive grants, and other wizards’ tools to trade away taxpayer funds, Rhode Island should focus on creating a growth-oriented structural environment. That means replacing isolated pockets of preferential treatment with an across-the-board slate of policies to support growth:
Any economic development program that cannot be objectively shown to create jobs and generate more in-state revenue than they cost should be repealed. The savings should be allocated to more general improvements, especially lowering taxes.
Rhode Island’s corporate tax rate remains the highest in New England and is tied for third highest in the country, after Washington, D.C. and Illinois.
Rank in New England
Corporate Tax Rate (%)
1
9.0
2
3.5–8.93
3
8.5
4
6.5–8.5
5
8.25
6
7.5
Another area in which Rhode Island is uncompetitive is its state sales tax, which is the highest in the region and tied for second in the country. A study to be released shortly by the RI Center for Freedom & Prosperity will demonstrate that eliminating the sales tax would have the highest “bang for buck” of any reform, creating tens of thousands of jobs and paying for over half of its cost with the increased tax receipts of a larger economy.
Rank in New England
State Sales Tax Rate (%)
1
7
2
6.35
3
6.25
4
6
5
5
6
0
These are just a few of the low-threshold starting points for reform. If Rhode Island seeks to distinguish itself as a pro-growth state, it should depart from crony capitalism and unleash the true capitalistic forces in the state. Fortunately, much of the government cost of the necessary policy changes can be borne by elimination of the special deals and crony-capitalism style programs that infest our state with false promises of a better tomorrow.
To the population more broadly — to the people of Rhode Island — there will be no cost, but rather the benefits of a thriving economy.
Stenhouse joins Scott Rasmussen at NYC Pension Symposium
/in Blog, News/by RI Center for FreedomAdvancing Liberty, Creating Change
Mike Stenhouse, CEO for the RI Center for Freedom and Prosperity served as a panelist at a public employee pension symposium on May 18, 2102 at the Harvard Club of New York.
“Advancing Liberty, Creating Change” is a City Symposium co-sponsored by the Mercatus Center and the Institute for Humane Studies.
Stenhouse served on a panel, discussing the true scope of state and local pension plans, the politics involved, and the coalitions formed to promote the need for reform.
The keynote speaker was Scott Rasmussen, founder and president of Rasmussen Reports. He is a political analyst, author, speaker and, since 1994, an independent public opinion pollster.
Scott Rasmussen and Mike Stenhouse