For economic stimulus, pensions beat stadiums and server farms

By David Sirota , written on December 10, 2013

From The News Desk

Yesterday in San Francisco, activists surrounded a Google shuttle bus in protest of the city's tax-subsidized gentrification and its widening gap between rich and poor. Two years after Occupy Wall Street captivated the nation, this kind of righteous economic angst is now the defining political emotion of the moment, with no less than President Obama and the Pope both recently inveighing against economic inequality.

All of this means we will probably soon be seeing protests like yesterday's in San Francisco in other parts of the country. And, as I wrote last week, all of those protests will likely channel the zeitgeist of Detroit -- a place that has become the most iconic symbol in the economic debate. There, as if proudly advertising its reverse-Robin Hood class war, the city is simultaneously seeking bankruptcy to avoid pensions payments, while pledging $400 million to build a new hockey stadium.

Whether or not Detroit's bankruptcy survives an expected legal challenge lead by the city's largest union, events in the Motor City are already reverberating throughout the country. Cities and states are now looking to the Motor City as a potential pension-slashing precedent setter. In fact, in the same week as the Detroit bankruptcy ruling, Illinois gutted its public employee pensions. Meanwhile, most opportunistically of all, Libertarian Sen. Rand Paul (R) has proposed using the Detroit as a laboratory for a grand experiment with disaster capitalism.

The moral argument against all of this should be obvious, but it is also worth repeating: reducing the average municipal retiree's $19,000-a-year subsistence stipend to preserve corporate subsidies and to give sports teams gleaming new palaces is grotesque. The problem, though, is that today's politicians aren't as brazen as Marie Antoinette and so their "let them eat hockey tickets" agenda is rarely promoted in such honest terms. Instead, those decisions -- whether in Detroit or elsewhere -- are most often presented by politicians like Michigan Gov. Rick Snyder (R) as pragmatic, dispassionate and apolitical choices aiming to prioritize the venerated concept of "economic development."

This line of reasoning is supposed to end the conversation because, hey, who's against economic development, right? But such seemingly airtight talking points should actually raise an as-yet-unasked question -- one that has nothing to do with morals and everything to do with dollars and cents.

The question is: are all the much-ballyhooed subsidies to corporations truly a better way to support a local economy than paying out promised retirement benefits to public employees?

If this particular query seems jarring, that's because in the increasingly demagogic discussion about public budgets, usually only corporate subsidies -- and not pensions -- are viewed in economic-development terms. Indeed, in the argot of today's skewed political conversation, pensions tend to be depicted only as drags on local economies that help nobody except for supposedly greedy police officers, firefighters, teachers, sanitation workers and other municipal employees. Meanwhile, the $80 billion in annual subsidies that states, counties and cities hand out to corporations are depicted as sacrosanct instruments of job creation and rising-tide-lifts-all-boats development.

But in purely cost-benefit analysis terms, is that a fair or even vaguely accurate way to assess economic development decisions? The short answer is: no.

The lesson from sports and tech

The best way to detect the problem with the economic development mythology surrounding subsidies is to look at the sports and tech worlds.

In the former, the fact that the capital and maintenance costs of more and more private stadiums are paid for with public dollars is rarely portrayed as an ongoing bailout of the Sports-Industrial Complex. Instead, the subsidies are typically presented by boosters like Snyder as "public-private partnership(s) that will lead to a number of construction jobs and more tax revenue" -- endeavors that he says aim "to do as much as possible to grow” the local economy.

Yet, as the Brookings Institution documented in its exhaustive study, sports facilities have "an extremely small (perhaps even negative) effect on overall economic activity and employment...No recent facility appears to have earned anything approaching a reasonable return on investment (and) no recent facility has been self-financing in terms of its impact on net tax revenues."

It's the same thing in various parts of the tech universe.

When it comes to data storage, for example, behemoths like Apple, Google, Facebook, and Verizon (among others) have secured massive taxpayer subsidies from states and municipalities on the promise that new server farms will generate jobs and boost local economies. Yet, there is mounting evidence that these subsidies do not meet those promises. Likewise, when it comes to software developers and online services, ballooning taxpayer subsidies are all the rage, even though many of the attendant promises of job growth and economic stimulus haven't been met.

Of course, those are just two prominent and well-documented examples that we know about -- but there's an entire universe of corporate subsidies that happen in an information vacuum. As the New York Times reports, many governments do not even know if the subsidies they enacted were "worth it, because they rarely track how many jobs are created." The Times adds that "even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid."

In Rumsfeldian terms, the combination of these known knowns (many subsidies rip off taxpayers) and known unknowns (many governments don't collect subsidy performance data) should at minimum inform America's economic development conversation. More specifically, these facts probably should deter lawmakers and reporters from pretending that corporate subsidies are tried and true ways to successfully support local economies.

However, the opposite is happening. In the name of economic development, states and cities simultaneously cutting pensions and preserving these subsidies are effectively implying that the subsidies are somehow more crucial to local economies than paying out retirement benefits -- even though data suggests otherwise.

Pensionomics 101

There's plenty of evidence proving that funding programs like food stamps, unemployment insurance, and Social Security is one of the best ways to quickly stimulate an economy -- and certainly a more reliable way to do so than giving rich people and huge corporations more money. This shouldn't be particularly surprising. After all, safety-net and retirement income programs deliver resources not to cash-hoarding corporations that have been letting money sit idle but instead to the particular populations that are most likely to quickly spend the money on basic necessities.

That truism applies to pensions. As the National Institute on Retirement Security reports, "For each dollar paid out in pension benefits, $2.36 in total economic output was supported (and) for every dollar contributed by taxpayers to state and local pension funds, $11.45 in total output is supported in the national economy."

Such benefits are at least as effective a tool of local economic development as any corporate handout. After all, as the National Conference of State Legislatures documents, "More than 90 percent retire in the same jurisdiction where they worked," which means that "over $175 billion in annual benefit distributions from pension trusts are a critical source of economic stimulus to communities (and) act as an economic stabilizer in difficult financial times."

The choice for budget-strapped states and cities, then, isn't what we are led to believe it is by the political and media class -- it isn't between job-boosting corporate subsidies and economy-draining pensions. It is between preserving corporate subsidies that often create few jobs and preserving pensions that are all but guaranteed to pump money into a local economy.

A question of political incentives

Questions beget more questions, and so there's one more: If it is really true that paying out pension benefits rather than preserving business subsidies is a more reliable way to stabilize and support a local economy, then why are lawmakers in Detroit and elsewhere considering simultaneously slashing public pensions and preserving the corporate subsidies?

One answer is wealthy campaign donors (sports franchise owners, CEOs, corporate shareholders, industry titans, etc.) who disproportionately benefit from governments' corporate subsidies. These oligarchs spend far more on bankrolling political campaigns than, say, $19,000-a-year pensioners do. And so in the face of budget crises, donation-seeking politicians are prone to preserve their donors' business subsidies and balance budgets through cuts to pensioners' stipends - even though that may be terrible macroeconomic policy (this pay-to-play dynamic, by the way, is only intensified by Wall Street, which also makes big campaign contributions and stands to gain when states and cities cite budget pressures as a rationale to convert traditional pensions into 401(k) style systems).

Another answer is a bread-and-circuses political culture. To put it bluntly, in an America that fetishizes shiny things, voters have rewarded politicians who prioritize "public-private" projects that result in ostentatious bling -- stuff like big new stadiums, supermodern server farms and sleek office towers. That bling may be a monument to waste, fraud, cronyism and destructive economic policy, but it at least looks like progress -- especially when it obscures or geographically displaces outright blight. By contrast, politicians proposing to simply preserve or -- gasp! -- expand stuff like pensions or Social Security expose themselves to nasty charges of welfare queen-ism.

The good news is that for all the efforts to make the "Robocop" franchise's satirical vision of Detroit a reality, there is at least some evidence that a competing dynamic may emerge -- one that casts subsidies as waste and the social safety net as stimulus.

On the subsidy side, for instance, in California, as the political class pushes to both cut public employee pensions but preserve the profligate state's corporate subsidies, voters in the state capital are mounting a ballot initiative to reject a quarter-billion-dollar subsidy for a new NBA stadium. Similarly, in the politically conservative Atlanta suburbs, Tea Party groups, progressives activists and a Democratic county commissioner are together fighting a plan by Republican politicians and the business lobby to spend $300 million of taxpayer money on a new professional baseball stadium.

At the same time, on the social safety net side, the Democratic Party's rising star Sen. Elizabeth Warren (D-Mass.) is using her platform to not only oppose the White House's possible cuts to Social Security but also make an economic-stimulus case for expanding Social Security.

The bad news, though, is that the old political incentives and vernacular still dominate. Yes, it is still easier for a politician to raise big money by supporting subsidies even when those subsidies do not create jobs, and it is still easier to cast pensions as another set of "entitlements" rather than admit they are critical pillars of economic development. Until those incentives and that language changes, "let them eat hockey tickets" will be the rule -- not the exception.

[Illustration by Hallie Bateman for PandoDaily]