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State Financing Of Refinery Versus Food Production Is No Simple Decision

Jim Prevor’s Perishable Pundit, October 15, 2012

Alan Siger over at Consumers Produce Co. in Pittsburgh, Pennsylvania, sent over an opinion piece in a local newspaper, the Pittsburgh Post-Gazette, titled, “Food for all our neighbors: We should invest as much in Western Pennsylvania agriculture as we do in a ‘cracker’ plant”:

"We take care of our own" goes the popular Bruce Springsteen song that gets played at political rallies everywhere, regardless of political party. But here in Western Pennsylvania, this is simply not true -- at least when it comes to making sure that our neighbors don't go hungry during these hard economic times.

A front-page headline in the Post-Gazette Sept. 15 read "Rural Food Banks Struggle to Meet Need." The article reported that food pantries all over Western Pennsylvania — but particularly in our rural communities — cannot provide enough nutritional food for struggling families. Does anyone find this more than ironic?

Our region is a cornucopia of agriculture. We have well over 14,000 operating farms and more than 1.2 million acres under cultivation. We have good and stable sources of water, even during droughts. We have an extended northern growing season due to relatively mild early winters. We produce a wide variety of fruits, vegetables, poultry, beef and pork. We have a rich history in food production and processing — we are, after all, the home of H.J. Heinz, one of the largest food companies in the world.

Yet we seem incapable of addressing the most fundamental need of our community — indeed, of any community — and this is to see that everyone is well fed.

We are so rich agriculturally that we are considered a national treasure. From Lake Erie to West Virginia, ours is one of the finest growing regions in America. Due to our water resources, climate stability and strong farming culture, the U.S. Department of Homeland Security considers our "food shed" a strategic asset, not unlike how we now view the natural gas resources in the Marcellus and Utica shale deposits.

However, as recently as 2010, the USDA estimated that Western Pennsylvania farmers and producers devoted nearly 99 percent of their capacity to commodities like corn and soybeans — the overwhelming share of which are exported from our region and into the agri-industrial system for conversion to ethanol, processed food and non-food additives.

This was not always the case. Our region boasted some of the largest orchards, for example, being the home of Johnny Appleseed. Dairies dotted the landscape. Our farms earned a well-deserved reputation for variety and quality. Over the last 50 years, this has changed.

Urban sprawl has overtaken many farms, to be sure, but even more have been lost because it is so difficult for farm families to run financially sustainable operations — especially if they produce goods for local markets. In recent years, we have seen a decline in dairies due to low prices for milk and dairy products, for instance. Our farms, the people they employ and the businesses that support them are all at risk.

Also at risk is our community's ability to directly meet the nutritional needs of our neighbors — even though we know from recent university studies and research that our region has plenty of capacity to produce food for all of our residents. If we provide the financial and market infrastructure, there might never be another story about an empty food pantry in Western Pennsylvania.

This is a problem with a solution. All it requires is the shared commitment of the public and private sectors and a bipartisan effort to do what is in the best interests of the citizens of our commonwealth.

I would modestly propose that the state invest as much in food-system development in Western Pennsylvania as it is offering in subsidies to Shell Oil for the gas cracking plant in Aliquippa. No more, no less: some $1.7 billion over the next five years.

In exchange, the region would start a local-food initiative to direct subsidies and tax benefits to farmers and producers who agree to shift at least 10 percent of their capacity away from commodity agriculture for industrial reprocessing and into the production of vegetables, fruits, beef, poultry, pork and dairy. This five-year, 10-percent commitment would fill a regional anti-hunger and nutrition resource pool managed by the Greater Pittsburgh Food Bank and our regional pantry network.

Beyond providing fresh, in-season produce and protein, this state investment also would be used to create regional food aggregation and processing centers so that we could capture more locally grown food and make shelf-stable, value-added food products. From tomato sauces to apple sauces to ready-to-eat meals full of nutrition, we could reinvent a regional processing and production industry that has been all but eliminated with agri-industrialization.

Much of what is needed is already under development here and around the nation in the creation of food hubs. Hubs are, by the USDA's definition, centers for value-added processing which are intended to leverage the economic benefits of local farming. In much the way that Shell wants to leverage the presence of natural gas and byproducts in Western Pennsylvania, we should leverage the presence of fertile land and a farming culture through our commitment to grow and buy local.

Our leading food-based corporations also should increase the share of locally produced food products they buy by a minimum of 10 percent. This purchasing commitment would help drive the development of more and higher-volume processing centers in the region. Local growers and producers would have the value chain they need to move fresh products into our marketplace on a year-round basis. Our end markets would create demand and the market would become efficient and robust over time.

Our region is blessed with dedicated organizations that focus on local foods and food-system development. Let's give them the resources and support they need to build intelligent networks, market-based strategies and the infrastructure we need to grow our oldest industry — agriculture. We are subsidizing and investing in our energy sector, why not do the same for the most basic sector of all — food?

The recent regional planning effort called the Power of 32 hardly mentioned food and farming as part Western Pennsylvania's economy, evidence of how blind we have become to the importance and significance of this incredible resource and opportunity.

Leadership is key. We need our entire food-producing and consuming industry and our public officials to commit to building a sustainable local food system that ensures no Western Pennsylvanian is ever left without access to nutritional, high-quality food.

The author of the piece is Joseph Bute, the president of Hollymead Capital, a Gibsonia, Pennsylvania-based company that supports the creation of sustainable enterprises in low- and moderate-income communities. He makes an interesting argument, but we don’t think the solution is as obvious to us as it is to him.

First, he explains that the government is giving subsidies of $1.7 billion over the next five years to Shell to have a ‘cracker’ refinery built and suggests that the same amount be spent on developing and diversifying the local agricultural and food production community.

It is a little unclear as to whether he is saying that there would be a better return on investment for the community in investing in local food than investing in bringing the refinery there, so the government should not do the refinery and, instead, do the food or if he is just arguing the government should spend twice as much money and do both.

In either case, the argument is weak. These are major financial investments, and to suggest them one really has to show a return. He never quantifies the return on an investment in the food and ag industry — how many jobs created, how much tax revenue paid, etc. — in any way that could justify an expenditure. He certainly doesn’t take on the burden of demonstrating that this investment in food would pay off more than an investment in a refinery.

He also has some of his facts wrong. He talks about the state making a $1.7 billion dollar subsidy over five years. In reality, the proposal — and it is just that, a proposal that has not been passed — is to provide an incentive of $67 million each year, or $1.7 billion over 25 years, not five years. That reduces the present value calculation very substantially.

Besides, the word he uses — “subsidies” in referring to the Shell Oil project — is somewhat questionable. Although the details of the proposal haven’t been published, typically these incentives offered by states and localities involve tax credits. So if a new refinery is not built, then, obviously, the tax that will be paid on the profits of the non-existent refinery is zero.

In contrast, the owner of a new refinery might pay $100 million a year in taxes. If Pennsylvania woos the refinery from, say, Ohio, and the price is a tax credit of $67 million a year, that scenario would produce an increase in taxes paid to Pennsylvania of $33 million a year. So to call giving up some money you might not have had anyway a “subsidy” isn’t really fully explanatory. And it is not at all clear that Mr. Bute is proposing a similar credit on the marginal increase in taxes that a newly robust local food industry would pay.

Now we don’t think states and localities should even be permitted to give out these types of incentives — to oil plants or food companies. It encourages politicians to allow the business climate to deteriorate in general – high taxes, regulatory obstinacy, etc. — then to play the hero by offering incentives to individual companies.

We would be much better off if politicians knew that if they didn’t create an environment in which business would naturally be attracted to a state or locality, they would have to explain to the citizenry why plant after plant went to neighboring state. Besides, the whole process is unfair to competitors who don’t get deals, and it is corrupting as it gives politicians too much leverage against particular industries and individual companies.

Still, if we are going to allow states to incentivize certain industries, certainly Mr. Bute doesn’t provide any particularly compelling analysis as to why the local food industry would be a profitable place to invest state funds.

Second, Mr. Bute seems to conflate local food production with alleviating local poverty. These are really issues that are not particularly related. If a local population needs help, increasing local wealth is what increases the ability of the community to help them out. Whether the community makes jet fuel or cabbage is not really key — after all, if those farms are going to be profitable, they have to sell their products for a good return, not donate them to the poor. In other words, the reason food banks don’t have enough food to distribute in rural areas is not a shortage of food — there are plenty of places to buy food. The problem is a shortage of money. 

Mr. Bute doesn’t explain how taxing the local community $1.7 billion and then putting the $1.7 billion back into the community through this program would actually increase wealth. If it does not — and it seems unlikely to do so – the program might well make poverty worse.

Third, diversifying agriculture away from corn and soybeans sounds pretty good, but then again, neither Mr. Bute nor the Pundit has to do the work. We’ve mentioned other efforts to consciously move farmers to different crops — as in this piece we wrote when Dole was opening a new fresh-cut facility in Bessemer City, North Carolina, and was collaborating with the state department of agriculture to persuade local farmers to switch from tobacco to vegetables.

Turns out these efforts are most difficult. Different products present different degrees of difficulty, and different farmers have different levels of expertise. It is also a business that operates on a different scale. In fact, one reason we never had a President Dukakis was because during an Iowa caucus debate he suggested that Iowa farmers could benefit by diversifying from corn and growing things such as Belgian Endive. Of course, if even 1% of Iowa’s farmland was shifted to Belgian Endive, the one absolutely certain thing is that Belgian Endive would sell for less than corn and Mr. Bute, not being an expert on the various products he thinks should be produced, has simply no idea of the impact on prices of such dramatic increases in production.

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In the end, Mr. Bute’s approach is questionable. First, what makes him think that politicians will be good at selecting certain industries — picking winners and losers — to invest in? Politicians have no special expertise in this area and, if anything, they are likely to make decisions on a political basis — nee Solyndra. Second, a focus on feeding the poor may distract from the key question: Why are all these people poor to begin with, and what can we do about that? Third, it is important to keep a focus that expenditures have costs as well as benefits, and those who propose expenditures thus have to argue not only that their proposals will do good, but whether they will do more good than the money would do elsewhere or if left with the people who made the money to begin with.

In fact, there is substantial evidence that Pennsylvania ought to look to improve general economic conditions by adopting pro-growth policies. Stephen Moore has been kind enough to comment on some of our work as we mentioned here. Recently, he collaborated on a piece for The Wall Street Journal: Laffer and Moore: A 50-State Tax Lesson for the President

In our new report, "Rich States, Poor States," prepared for the American Legislative Exchange Council, we compare the economic performance of states with no income tax to that of states with high rates. It's like comparing Hong Kong with Greece or King Kong with fleas.

Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Then there's the question of in-migration from state to state — or how people vote with their feet. As common sense would dictate, people try to move from anti-growth states and cities to more welcoming climates. There are relevant factors other than tax policy, of course (as in North Dakota today, where the oil boom has brought about the lowest unemployment rate in the nation), but in general the most popular destination states don't have income taxes. That's as true recently as it was 40 years ago.

Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. Such interstate migration left Texas with four new congressional seats this year and spanked New York and Ohio with a loss of two seats each.

The transfer of economic power and political influence from high-tax states toward low-tax, right-to-work ones is one of America's most momentous demographic changes in decades. Liberal utopias are losing the race for capital. The rich, the middle-class, the ambitious and others are leaving workers' paradises such as Hartford, Buffalo and Providence for Jacksonville, San Antonio and Knoxville.

Sustaining America depends not only on making sure people are fed, but also on making sure people are free. Focusing on changing policy to insure more food for food banks detracts from the important work of making sure there are fewer people needing food banks.

Instead of finding new ways to spend money, maybe Pennsylvania should become a Right to Work state and eliminate its state income tax. Then come the 2020 Census, we might be reading about some additional congressional districts being allocated for the Keystone state.

We would love to have an expansion of diversified food production in western Pennsylvania and other areas — but it shouldn’t come by taxing the people of the region to the tune of $1.7 billion.

Many thanks to Alan Siger and Consumers Produce Co. for leading us to think over such issues.

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