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Wednesday, September 26, 2012

Some problems cannot be solved, they must be managed: a case against taxpayer subsidized amenities

2006: State of MN promises $393 million in public subsidy
2007: State promises 138.48 million for the new TCF Gopher’s stadium
2012: Vikings awarded $1 billion for a new stadium
2012: Saint Paul Saint’s promised $25 million to move the stadium from it’s current location in Midway to Lowertown

This semester I’m taking a class with former research director at the Federal Reserve Bank of Minneapolis, Art Rolnick. Dr. Rolnick is also a Senior Fellow at the University of MN’s Humphrey School of Public Policy and one of the leading experts in the economics of investing in early childhood education. I’m fortunate enough to listen to his insights on investing in early childhood development twice a week, and I wanted to take a minute to share some of his views with my readers.

Before taking this class, I was a big supporter of a Lowertown Ball Park. I live a few blocks away and I believe the stadium will generate a lot of revenue within the city of Saint Paul. I think it will be a cherished amenity, and I’d even go as far as calling it a public good for the city.

But Dr. Rolnick has convinced me that these stadiums represent a serious problem for the overall economy. He often uses stadiums as an example simply because budget deals for stadiums are so highly publicized. The unfortunate reality is, states are offering subsidies to expand and retain private businesses all the time. 

Retaining and “attracting” businesses makes sense at the state level, but it makes no sense for the national economy. If a company has a greater comparative advantage with headquarters in Atlanta, GA, then it would be in the best interest of the national economy for that company to base its headquarters there.

However, that is not how the scenario is typically played out. Competition for businesses among the states is a zero-sum game, or even a negative-sum game, in which private businesses are the benefactor and taxpayers are the losers.

The root of this problem is that cities and states competing for businesses cannot afford to ignore one another. For example, if MN had decided not to participate in competitive behavior, the Vikings would have left for LA; they in fact, used that very argument to put pressure on the state. Herein lies the problem, while it is rational for individual states to compete for specific businesses, the overall economy is worse off from their efforts because taxpayers lose important tax revenue to support public goods, such as funding for education, and businesses suffer because subsidies encourage a misallocation of resources.  

Some people have another word for the act of forcing somebody to pay for something by threatening to do something harmful to him/or, and that word is blackmail. The problem is, the rules of the game are set up to encourage this type of behavior. I don’t blame private businesses or states for participating in this game, because the incentives of the game encourage participation.

Understanding this issue can be clearly illustrated using game theory. The matrix for this game is presented in the following chart. Imagine the figures in the boxes represent the amount of revenue (in millions of dollars) each state has to win or lose by choosing to cooperate or compete.



(5, 5)
(-2.5, 7.5)

(7.5, -2.5)
(-2.5, -2.5)

The two strategies available to each state are (1) to cooperate by refusing to participate in competitive behavior with other states, or (2) to compete with the other state by offering subsidies and tax incentives for businesses to relocate to their state.

What should these states do? Consider first California. If Minnesota cooperates (doesn’t offer a subsidy to build a new stadium), the best thing  for California to do is compete. California would enjoy additional tax revenue from the Vikings relocating from Minnesota to California.  However, if Minnesota competes (offers the subsidy), again the best option for California to do is to compete (offer an even greater subsidy) because failing to compete would result in a substantial loss in tax revenue.

The strategy pair compete-compete is a dominated strategy equilibrium. Unless a strong incentive to cooperate exists, such as a federal mandate required by Congress, both states will compete. If both parties were rational, the equilibrium would obviously be for both states to cooperate. One of the most important roles of government is to implement policies where market failures exist; competition among the states is a prime example of a market failure demanding Federal attention.

Unfortunately, under the current political climate where cooperation is practically a curse word and the perception of losing state revenue is political suicide, it is unlikely that such a mandate or bill will ever reach fruition.

Dr. Rolnick has become a highly sought after expert in this field. The evidence is overwhelming; investing in early education provides substantially higher returns than investing in so-called public goods such as stadiums. Some studies suggest that in metropolitan areas the returns to preschool are $16-$1, a huge return on the initial investment. For more information, read this article, "Early Childhood Development: Economic Development with a high public return."

I'll leave you with the concluding paragraph from the article linked above:

"The conventional view of economic development typically includes company headquarters, office towers, entertainment centers, and professional sports stadiums and arenas.[...] The return on investment from early childhood development is extraordinary, resulting in better working public schools, more educated workers and less crime." - Art Rolnick, Rob Grunewald


Monday, September 17, 2012

Meet Bosco

Meet my dog, Bosco.

Bosco is very photogenic.

See what I mean?

He loves to sleep.

Bosco can't really swim without a life jacket. (Pathetic but adorable)

The only thing Bosco likes better than sleeping is playing with balls.

Sometimes Bosco thinks rocks are balls... the beach tends to make him a bit frantic. BALLS EVERYWHERE
Bosco is a good sport when we occasionally dress him up. 

Rockin some booties and a muscle tee.

Hot Dog!

When we camp... he gets carted around behind the bikes.

When Bosco goes for walks, he tends to get overheated. He always pulls this move when we come across vents. 
He also wallows in every puddle and fountain we come across.

It's possible that we love our dog too much... Drew carved this pumpkin last year.

Sunday, September 16, 2012

Meghan's Bridal Shower and Bachelorette Party

 This weekend we celebrated the upcoming  wedding of my cousin Meghan. We kicked off the festivities with mimosas and a bloody mary bar accompanied with some delicious breakfast her friend (and chef) prepared for us! He also made us dinner at Meghan's house before the bachelorette party and it was five-star quality! 

 After breakfast we had fun playing everyone's favorite shower game, the "make-a-dress-out-of- toilet paper-game". Katrina's avaunt-guard, gaga inspired dress won!

While Meg opened gifts, this little entrepreneur 
set up a mini-farmer's market, so cute. 

Every year the Luker's decorate one of the trails in my grandparents woods for Halloween. It's become a tradition to take a haywagon ride out to the trail with some adult beverages and walk along the path without flashlights. It's a tradition we all love. Bonnie and I try to get there to make a giant spider web, but this year with several helpers we made two giant webs and a webbed archway over the trail, as well as a little canopy of webs! It's sort of hard to see in the pictures, but trust us, it is pretty cool!

I love Meg's dogs! Meet Jack.

Mary, McCayla, Merrill and Gabrielle 
                                                  Until next time, Happy Trails Oshkosh!

Wednesday, September 12, 2012


So... I've been meaning to start a diet. Drew and I have so been enjoying the throes of newlywed bliss, partaking in wine, cheese platters and whatnot, that we've sort of let diet and exercise go to the wayside.

We just keep finding reasons to celebrate...our one month anniversary, the beginning of the semester, the premiere of Parenthood, and the list goes on.

This week I decided to really buckle down. I bought lemons and made lemon water. I bought chicken breasts, yogurt and egg whites. I was really ready to get back to a sense of normalcy.

On Monday I ran about four blocks, decided I wasn't really feeling it, turned around and walked home. I went back home, did about three crunches then laid on my yoga mat while I watched The View.

Yesterday, I pulled into the parking lot of Corepower Yoga with every intention of going in. My phone rang and I decided I'd rather chat with Keeley than put my body through contortion in a hot room.

While on the phone with her, I decided to pick up a little mini container of ice cream.

This morning, I decided to write thank you notes instead of attending yoga.

Maybe I'll start the diet tomorrow....