Privatization Tue Apr 24 2012

Capital Strikes, Capital Flight, and the Wholly Privatized City

By Ramsin Canon

In approving with no modifications Mayor Emanuel's infrastructure trust plan today, the City Council took another step towards ensuring their own irrelevance and wholly privatizing the operations of Chicago. It also took another step towards building up the Mayor's 30-second campaign commercial for whatever higher office he's envisioning (so far, he's got "won the longest school day in the country" and "made the tough decisions to balance the budget"; of course, "took on the special interests (workers)" is a given). They can't be wholly blamed, though. There's little room for them, or any local (and even state) legislatures to maneuver. The corporate tactics of capital strikes and threats of flight have proven their worth. Cities and states have been starved for well over a decade, and now we're reduced to auctioning off what we own to meet our obligations.

In a piece on the Infrastructure Trust last week, I said that it wasn't an inherently terrible idea, in part because there's really no other feasible way to raise the money. Issuing general obligation bonds wouldn't be terrible different, the federal government doesn't spend money on infrastructure any more (at least not in a direct way not routed through private pockets) and the city's wealthiest institutions and individuals are unwilling to pay higher taxes--in fact, are unwilling to pay any taxes that aren't offset by massive welfare entitlements, as the ongoing tax increment financing boondoggle demonstrates.

Taking a step back and considering the broad view, this is an astounding progression of events. Over the last 25 years, Chicago's corporate and political leadership has drained the city of revenue through creation of TIFs as a condition to invest capital in neighborhoods--the whole point of a TIF is that available capital is being withheld until the public provides better incentives for its investment. The billions of dollars diverted into these funds contribute to not only to budget shortfalls but, amazingly, increase taxes on middle class taxpayers, as the school district and other bodies have to raise their tax levy to meet their obligations.

At the same time, the city's corporate powerhouses not only withhold investing capital without generous givebacks, but also threaten to leave if their taxes (euphemistically called the "business climate") are not satisfactory.

The result is a public sector starved of revenue which must then turn to selling off (or "long-term leasing-off") its assets. This in turn, by the way, reduces a city's credit-worthiness even more, making it more difficult to issue bonds in the future and narrowing the city's tax base.

This isn't just random dot connecting; it's actually how investors view Infrastructure Trust vehicles. Consider this bit of finance news from last year:

Earlier this month AMP Capital Investors was appointed by Irish Life Investment Managers to advise on its $1.5bn Irish Infrastructure Trust. The fund is expected to acquire key assets such as airports when the Irish government begins selling down assets to meet its obligations.

And this:

[The Irish trust] will provide crucial liquidity to a sector which has, and will continue to be, squeezed of capital. At the same time valuations for infrastructure assets should be low, given the weak macroeconomic outlook, with BMI anticipating a double dip recession to hit in 2012.

Investors in infrastructure trusts are not interested in helping communities (we, a community, are leasing the assets) getting to a place of healthy revenue capable of meeting obligations and investing in long-term projects. To the contrary; the more a community is starved of revenue, the more it'll have to auction off assets. The more it has to auction off assets, the fewer options it has to raise revenue. And on and on.

But again, it's not just token concession to say there aren't a range of available options when it comes to infrastructure funding. The capital strike and threat of flight (a species of strike) has been wildly successful. Workers can't shake loose the capital because they have no bargaining power in a high-unemployment economy. Government can't (or won't) shake this capital loose because of the threat of capital flight. This centralizes investment decision making in the holder of that liquid cash--which is at astronomically high nominal rates; as of Q3 last year, corporate profits were up to about $2 trillion.

Capital striking is a wildly successful form of collective action. It's true that CEOs and shareholders aren't holding strike votes; but it is also true that the most powerful players in the economy are funding the think tanks and political operations that push policies like TIFs, privatization schemes, and "business climate" rhetoric and stoke the anti-tax hysteria that starves communities of revenue. The threat of flight as a form of strike, and the deliberate withholding of investment as a bargaining position is no different from what strikers do during a collective bargaining negotiation. Ironically, the collusion of government and capital, greased by political contributions, in this "negotiation" is precisely what the Scott Walkers, Rahm Emanuels, and Koch Brothers complain about public employees doing--with the major difference that public employees provide inherently valuable services for a reasonable income.

The Infrastructure Trust, in isolation, is not hare-brained and may actually in some instances work splendidly. If some group of investors wants to upgrade the city's sewer system for a user fee not significantly more than what it would cost to issue the bonds to fix those sewers, fine. But it is part of a trend wherein the city is little more than a symbolic affixer-of-seals for large corporations who own--sorry, "long-term lease"--the city's assets as a safe place to stash their capital and raise cash through periodic rate and fee hikes.

Money, like sadness, accrues.