Broken Promises

Costco and Kemper

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Kelley Williams, Chair Bigger Pie Forum, September 16, 2015

What do Costco and Mississippi Power’s Kemper lignite plant have in common?  Say what?   Costco is a popular successful big box retailer.  It is known for quality and fair prices.   It’s welcome wherever it goes (well almost).  Customers love it.   Kemper is an unpopular unsuccessful experimental power plant.   It’s known for design and  broken_promises_by_herrfousthumbconstruction mistakes, cost overruns, and broken promises.   It’s higher electric rates are an unwelcome disaster.   Customers hate it.   How could Costco and Kemper have anything in common?   Well, try this.

Secret deals.  Costco is coming (or trying to come) to a location in Ridgeland that was determined by secret deals between private investors and elected officials.   Kemper is the result of secret deals between private investors and elected officials.   Elected officials won’t tell citizens hurt by the secret deals about the deals because they told the private investors they wouldn’t.   So that would be a breach of confidence that might embarrass everyone.  Honor among, you know?   Not to worry about the harm to neighborhood property values in the case of Costco or to customers captive to a monopoly’s higher rates in the case of Kemper.

The private investors in the Costco scheme are the real estate developers and promoters who will profit from the sale or lease of the site to Costco.  The elected officials are the mayor and aldermen of Ridgeland who facilitated the deal and tweaked the zoning ordinances to make the location legal.  The Mississippi Development Authority is also teed up to provide some bait to develop the site.  It’s possible this was encouraged by other elected officials.   The bait is $30 million of sales tax rebates authorized under a “cultural” incentive bill that gave MDA a slush fund to promote worthy projects.   Costco is defined as a worthy cultural project even though it redefines culture.   Some skeptics suspect campaign contributions really define worthy projects.

Worthy projects.  Other worthy projects include Kior, Stion, the Outlet Mall in Pearl, and other sweetheart deals with MDA.  It’s not just private investors in worthy projects who appreciate elected officials who declare them worthy.   Contractors, and lawyers, and engineers, and consultants, who work on worthy projects are also appreciative.   According to Mississippi Power’s most recent 8K there are 524 companies and firms and individuals in Mississippi that have provided $1.6 billion of goods and service to Kemper.   Since the company was spending or thought it was spending other people’s money (i.e.,customers), it’s reasonable to assume it was generous with its suppliers (e.g., no bid contracts) who in turn were happy advocates for Kemper.   And appreciative for elected officials who declared it worthy.

There are problems with politically worthy projects.  It’s not just that secret insider deals benefit insiders.   It’s the broader harm they do.   This harm can dwarf the petty or not so petty political favors.  It can hurt hundreds of existing businesses and hundreds of thousands of taxpayers, customers, and citizens.   Economists say these deals misallocate capital and send perverse signals throughout the economy.   They encourage investments that pay off for insiders instead of creating better and cheaper products and services that boost our economy and improve the quality of life for our people.   And perversely, they don’t boost tax revenues either.

Tax breaks.  Tax breaks are a favorite tool of legislators and the MDA.   They are supposed to encourage investments to grow the economy and boost tax revenues to offset the tax breaks.   Many don’t.  They are just give aways.  Consider these questions about the tax break for Costco’s developer:  One, will Costco increase retail sales in Mississippi or just rob sales from other retailers?   Like the Outlet Mall that got $22 million in tax breaks.   Two, would Costco come to Mississippi without developer tax breaks?   Three, is the contentious Renaissance location the only site acceptable to Costco?   And four, how is Costco a cultural attraction?

Mississippi’s politically worthy projects may due more to bad judgement than to corruption.   A recent Wall Street Journal article about the New Jersey Port Authority says corruption is “…when bureaucrats abuse power for personal gain.”   There seems to be a lot of corruption there.   There seems to be a lot of bad judgement here.   Especially at the Mississippi Development Authority.   A leading presidential candidate might say it’s stupid.

Lost trust.  And he might have a point.  If you want to encourage real investments in Mississippi vs political investments, it’s probably stupid to lose the trust of real investors.   Breaking promises is a good way to do that.   Investors in homes and properties in Ridgeland relied on the promise of zoning laws and codes to protect their investments.  They think they have been betrayed.  They seem to have a point.  Word gets around.  It’s true: capital goes where it is welcome.  It doesn’t go where it’s abused and confiscated.  At least it doesn’t go there again.

Another way to lose the trust of real investors is to give MDA bureaucrats money to invest in the name of jobs.   They don’t try to pick losers.  They just do it a lot.  Why?  No skin in the game?  Never played themselves?   Suggestions from the governor?   Whatever.   Their investments are often loans that don’t get repaid.  Kior’s $69 million is an example.  This experimental plant to make diesel from pine trees was a 1000:1 long shot.   Not surprisingly it didn’t work.  Its promised thousand jobs is just another broken promise.  But hey, it was other people’s money (taxpayers).   We are big on experimental plants paid for with other people’s money.  Kemper is the $6.3 billion all time biggest broken promise ever.   But dollar-for-dollar Costco may be more contentious.

We must be really slow learners in Mississippi.  We keep doing the same stupid things over and over while expecting different results.  It really is insanity.

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