Getting in Bed with The Government
The recent deal to keep Carrier jobs in the United States is not at all unusual. It only received so much press because Trump made it a campaign issue and saw an opportunity to record a big early PR victory before he even took office. Government and corporations cooperate, negotiate deals, scratch each others backs, kickback ill-gotten gains, and function as a career advancement funnel for corrupt politicians.
In reality, the intertwining of government and big business meets the definition of fascism. A centralized autocratic government that picks winners and losers, while suppressing un-favored companies or industries, meets the definition of fascism. Fascists let business remain in private hands, but use regulations, laws, tax benefits, and the distribution of goodies to control the economy. Big business serves politicians and government bureaucrats instead of their customers.
Our corporate fascist economic system benefits big businesses who have hundreds of lawyers, lobbyists, tax specialists, and accountants to comply with the tens of thousands of government regulations, indecipherable tax code, and ridiculous laws, while small businesses are driven into the ground. Small businesses have no political influence and no ability to influence the corrupt system. The big connected conglomerates receive the government subsidies, tax breaks, and preferential treatment. Corporate fascism at its finest.
This is the definition of the Deep State. The military industrial complex, sick care complex, and Federal Reserve puppeteers on Wall Street maintain their power by financing the Deep State through their network of political lobbyists, captured journalists, manipulated think tanks, easily controlled bureaucrat lackeys, and congressional staffers who work in the shadows to create government policy favoring their special interests. Examples of this process in action can be seen in the purposely toothless Dodd Frank legislation and an Obamacare plan benefiting insurance, drug and hospital conglomerates.
The hard line libertarian view is all markets should be totally free. The government should only insure property rights are respected, while leaving people and companies to operate free of constraints, regulations and burdensome taxation. This is a childishly simplistic view of the world. Humans are extremely flawed creatures, susceptible to greed, arrogance, hubris, over-confidence, anger, vengeance, pride, envy and wrath. Whenever humans achieve positions of power they tend to become corrupted and seek to further their power and take actions to retain that power.
This is the real world. It is not going to change. The pendulum swings from the right to the left and back again, but smaller less intrusive government is not in the cards. Tax breaks are the carrots, while laws and regulations are the sticks used to keep big business and big government working in concert and reaping the rewards of a corporate fascist system. Do you ever wonder how life long congressmen, who never earned more than $170,000 per year, "retire" from government service as multi-millionaires? Do you ever wonder how one week after "retiring" from government service they land multi-million jobs with the big businesses they were supposed to regulate?
Over the course of my career I've been involved in and witnessed numerous instances of corporate deals with the government - some good, some bad, and some ugly. I'll detail a few and let you decide whether they benefited society as a whole.
IKEA Elizabeth Success Story
I had joined IKEA in 1989. They had entered the U.S. in 1985 with a successful store in Plymouth Meeting, PA. They followed up with another successful store in the Potomac Mills Mall in Virginia. Then there were back to back duds in Baltimore and Pittsburgh. The U.S. operations were losing $30 million per year on revenues of $150 million. The Scandinavian leadership in Denmark were losing confidence in the U.S. as a market.
My boss, the CFO, and the head of the retail division made a huge gamble by negotiating a high risk acquisition of an enormous parcel of land from the Port Authority of New Jersey. The property was on the New Jersey Turnpike, in Elizabeth, across from the Newark Airport. Elizabeth NJ is an absolute pit. It makes West Philly seem upscale. The property we were buying from a governmental agency had been utilized as an illegal dump for decades. It was an EPA Superfund site. IKEA assumed all the risk for what might be uncovered as we proceeded to excavate the site.
As an incentive to take such a large business risk, the city and the Port Authority agreed to make the site an urban development zone. This allowed IKEA to charge only 3% sales tax, when the NJ rate was 6% and the NYC rate was 8%. For a high ticket retailer this tax advantage was huge. At the same time we received a 10 year property tax abatement, paying 50% of the going rate. IKEA agreed to hire a certain percentage of people from Elizabeth. At the same time, our high priced tax lawyers -McDermott, Will and Emory - arranged for us to utilize a tax financing loophole called a REMIC to finance the project at an extremely low interest rate.
The project became significantly behind schedule and over-budget, as our construction company kept digging up toxic waste. We spent approximately $10 million having toxic waste removed and shipped to a toxic landfill down south. The store was built with a methane gas alarm system and the light posts in the parking lot doubled as a methane venting system. The Swedes at corporate headquarters in Humlabaek, Denmark told our management that if this store failed, they would pull the plug on their U.S. experiment.
Would customers pay to go on the NJ Turnpike, fight massive traffic jams into a one lane access road, on a former toxic waste site, to buy do it yourself flat packed Scandinavian furniture? My job and a thousand or so other jobs depended on the answer. My wife and I worked the opening week that answered the question. Thousands upon thousands of customers swarmed to the store. The store quickly became the best selling IKEA store in the entire world, with annual sales exceeding $160 million. IKEA U.S. began to make profits and now, 25 years later, has U.S. revenue in excess of $5 billion.
It's tough to find a negative aspect in this deal between the government and private business. This land was dormant and useless. The government didn't have $10 million to clean the site. The city and state were receiving $0 in property and sales tax. The deal resulted in 500 new jobs (income and payroll taxes), $5 million of sales tax per year, a few million in property tax per year, and a cleaned up Superfund site. IKEA generated several million dollars per year in profits, providing the resources to build more stores.
New Rochelle Debacle
As controller of the IKEA real estate division from 1998 through 2004, I was responsible for estimating sales, project costs and expected ROIs for the various sites brought forward by our real estate guys. It was 1999 when we identified a fantastic location in New Rochelle, NY overlooking I-95. The sales expectations for this site were $120 million. There was just one problem with this 17 acre parcel. It was occupied by 31 homes, 33 businesses, and two churches. New Rochelle was an extremely depressed city, with a declining tax base and no new businesses.
In February of 1999, IKEA obtained an Exclusivity Agreement with the City of New Rochelle, which bound the City to deal exclusively with IKEA in redeveloping the City Park neighborhood. In April of 1999, the City designated the City Park site "blighted" based on a study by Ferrandino & Associates. This designation made the site eligible as an urban renewal area in which the City can assemble parcels of land into a development site using eminent domain.
Even though the city had the ability to use eminent domain, IKEA decided to overpay the occupants for their properties, negotiating deals with each owner. In most cases we paid 50% more than the occupants would have received during the eminent domain process. IKEA even obligated to relocating the businesses and building new churches. By 2001, 70% of the properties were under contract. The store would have generated $2 million of property taxes and $8 million of sales tax, while creating at least 350 jobs.
The city and the majority of residents in City Park were on board. One problem. The rich people in the two towns next to New Rochelle, Larchmont and Mamaroneck, had a number of NYC public relations executives who were experts at creating a false narrative and selling it to the public. They didn't want increased traffic in their community, so they created a PR campaign to defeat the big bad corporation. They even flooded the email accounts of IKEA executives in Europe with anti-IKEA New Rochelle messages. It worked. We pulled out in early 2001, sold off all the properties at a big loss, and found an alternative site in Paramus, NJ.
The people won against a government misusing eminent domain to benefit an international corporation. The badly depressed city of New Rochelle lost out on a significant amount of taxes into their coffers and hundreds of jobs for their citizens. They lost out on these benefits because their rich neighboring communities fought a battle for their own selfish interests. IKEA's executives didn't have the fire in their belly for the fight. Wal-Mart would have won the same battle. You can judge whether this attempt to work with government would have been beneficial to society as a whole.
IKEA spent three years trying to get a store built in the city of Chicago, but the corrupt dictatorial mayor of Chicago - Daley II, tried to force us into his hand picked slum site on the south side of Chicago. We didn't think our white college educated customers would want to dodge drive by shootings in the parking lot. Daley and his councilmen lackeys blocked our effort to build a store on North Elston Avenue which wouldn't have affected residents or the city in a negative way.
We didn't ask for any tax benefits and would have funded significant traffic improvements. But Daley was a bully and he thought he could force us into one of his slums to rejuvenate the south side. We said no. We then tried a very expensive mixed use development south of downtown on Roosevelt Road. Again, Daley and his cronies tried to extract massive concessions and changes to our concept. We finally threw up our hands and gave Daley the middle finger.
We built a store in Bolingbrook, outside of the city and Cook County. Daley's hubris cost the city millions in tax revenue and at least 400 jobs. The city store would have generated sales of $120 million. The Bolingbrook store was definitely a downgrade and only generated sales of $80 million. It was a lose lose proposition. The failure of government and private industry to come to an agreement ended up hurting both parties.
The corrupt Democrat controlled city of Philadelphia provides my final example of government intervention and corruption of the free market. We identified a preferred site in South Philadelphia for our second store in the market. It was along the Delaware River waterfront, but the Federal Corp of Engineers had jurisdiction over the underwater portion of the site and created such a bureaucratic nightmare to get a store constructed, we moved to option two at the intersection of Snyder Ave. and Columbus Boulevard.
Again, we had to negotiate with the Phila Port Authority, CSX, and a bunch of criminal Philly politicians. Every party needed to extract their pound of flesh before approving a project that would generate millions in sales taxes, property taxes, payroll taxes, and income taxes. Economically benefiting a depressed area wasn't enough for the corrupt Democrat politicians. Vince Fumo, the state senator for South Philly, requested that we deposit $500,000 in a little slush fund as our contribution for his blessing. We declined. The project then got held up for months in city council.
Eventually we agreed to "contribute" $200,000 to councilman DiCicco's Jefferson Square Development Project, $100,000 to Whitman Council, $100,000 to Pennsport Civic Association and $50,000 to Our Lady of Mount Carmel and Sacred Heart of Jesus schools. IKEA ended up with a good performing store and the city got a tax boost and 500 new jobs. Of course the construction cost was 30% higher than necessary because we were forced to use union construction labor. Fumo was eventually convicted of 137 Federal corruption charges and spent five years in Federal prison. The prison needs an entire wing just for Philadelphia politicians.
As this Fourth Turning progresses those of a libertarian mindset will likely become more disappointed and despondent. Based on Trump's pre-inauguration actions, cabinet selections, and his business background, government interventionism in markets is going to increase dramatically. He is going to use his bully pulpit, governmental authority, tax legislation, and twitter to bully, prod, threaten and reward big business for doing what he wants them to do.
Trump's selection of a former Goldman Sachs banker as his Treasury Secretary, the COO of Goldman Sachs as his chief economic advisor, and the CEO of Exxon Mobil as his Secretary of State should give you an inkling that Wall Street and big business will not face any decrease in influence or reduction in their well bought benefits. The narrative for their selection is they know how to get things done in the real world. That's true. They know how to get things done benefiting their self interest.
Nothing has fundamentally changed in this game, except our team has the ball. Millions of Americans have put their faith in Trump to undo the tyranny inflicted on the country by Obama in the last eight years. They are putting their faith in Trump's ability to use the government to solve problems created by giving the government too much power. Maybe he'll succeed, but I wouldn't bet on it.
"The idea that the government has services or goods that they can pass on is a complete farce. Governments have nothing. They can't create anything, they never have. All they can do is steal from one group and give it to another at the destruction of the principles of freedom, and we ought to challenge that concept." ? Ron Paul