The New York Times is running an amazing series of articles about how corporate America has played city and state governments like a fiddle to extract generous subsidies for locating plants in their areas.
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
Game theory names this a collective action problem. Let’s say BMW wants to build a new plant in the United States, so it travels around to lots of different states trying to get a region that will give it the most subsidies (free land, tax breaks, employment incentives, etc). The rational move would be for mayors and governors to cooperate with eachother and not engage in a race to the bottom, bidding against eachother. After all, BMW has to build a plant somewhere in the States. But of course some region always “defects” and makes an uneconomic bid that BMW can’t refuse.The city makes a calculation that all the incentives will pay off in increased employment after 25 years. But BMW makes no guarantee they will be there in 25 years.As the Times articles make clear, many of these promises are broken long before they pay off for the local region.
In California we have begun to resist the siren call of the race to the bottom, but that doesn’t keep individual cites from rolling over like San Francisco did when Twitter threatened to move out of the city. It occurs to me that these collective action problems are really hard to solve, but unless we try they will wreak havoc with our economy.
One of the ones that is relatively easy to solve is High Speed Trading of stocks. Obviously big firms have been in an arms race in the High Frequency Trading game.
A top government economist has concluded that the high-speed trading firms that have come to dominate the nation’s financial markets are taking significant profits from traditional investors. The chief economist at the Commodity Futures Trading Commission, Andrei Kirilenko, reports in a coming study that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts.
As over 70% of the daily volume is made up of these automated trades, it is obviously making it impossible for the ordinary investor to have confidence in the market. But unlike the city subsidy problem, this one is relatively easy to solve. Senators Harkin, Brown and Saunders have introduced S.1787 — Wall Street Trading and Speculators Tax Act , which would levy a small tax on stock trading. It would make the trading in and out of a security three or four times a day (what is happening with HFT) uneconomic. Warren Buffett talked about this with Andrew Sorkin this morning.
“If somebody bought Berkshire Hathaway in 1965 and they held it, they made a great investment — and their broker would have starved to death.”
Warren E. Buffett was sitting across from me over lunch at a private club in Midtown Manhattan last week, lamenting the current state of Wall Street, which promotes a trading culture over an investing culture and offers incentives for brokers and traders to generate fees and fast profits.
“The emphasis on trading has increased. Just look at the turnover in all of the stocks,” he said, adding with a smile: “Sales people have forever gotten paid by selling people something. Generally, you pay a doctor for how often he gets you to change prescriptions.”
We have a lot of collective action problems (air pollution, the arms race, campaign finance, etc) in the world. Some are easier to handle than others. We need to tackle those ones that respond to incentives.