Free Lunch (17 page)

Buffalo is a city awash in subsidized projects. Warren Buffett, who owns the
Buffalo News,
got $100 million in government giveaways to open a call center for his GEICO
General Insurance Company, the one that uses cavemen and a talking lizard to pitch its products. A special subsidy zone had to be
created just to lavish the money on Buffett.

The call center cost $40 million. So, basically,
Buffett's company is getting back what it invested and then collecting a $60 million gift from local and state taxpayers. The call
center may eventually create 2,500 jobs. If that happens the subsidy would equal $40,000 per job, which is more than a year's pay
and benefits for each of the call center workers. The GEICO call center was not built in the city, where more than a fourth of the
residents are officially poor. Instead GEICO chose to build in Amherst, one of Buffalo's affluent and overwhelmingly white suburbs.
Buffalo has one of the highest unemployment rates among big cities in America, but there is no bus service that would enable its
inner-city residents to get to the call center, one of many examples across the country of the subtle racism in job
subsidies.

As the GEICO call center opened, another call center, owned by a Canadian firm,
shut down. The net gain in jobs was zilch. Still, the
Buffalo News
wrote story after
story about how the GEICO center was a wonderful economic development, while giving little attention to the one that closed. In
this cheerleading mode, the newspaper even ran a breathless profile of a woman based on the premise that a job at a call center
could be an excellent start on the path to an executive position. (The same paper also ran superb, in-depth looks at the failed
promises of enterprise zones to create jobs in return for subsidies and other examples of taking from the many to enrich the
few.)

James Ostrowski, a hard-line libertarian who has been fighting the subsidy culture of
Buffalo, said it took him a few years to realize why the city, and Erie County, fathers were so eager for these deals. As the
middle-aged lawyer talked to more and more of them, and read the fine print of those subsidy deals not shielded from disclosure,
he began to see a pattern.

“There are about 50 people who make things happen here and they
are all in on the subsidies,” said Ostrowski. “Everybody is on the take in some fashion. We are drowning in high taxes, but if you
are connected or wealthy you make a few phone calls and you get relief. The politicians just get to dole out money to enrich people
and it gets them all sorts of favors. The wealthy give tremendous amounts to the politicians—tremendous amounts to you or me,
but not to them—and then they get all these deals. Give $100,000 to the right politicians over a couple of years and get a $20 million
construction contract or a $500 million deal that guarantees you make out even if the whole thing fails. All these families volunteer
to serve on all these authorities—because they get so much back.”

Buffalo has one of the
lowest-price housing markets in the country. In 2007 the median price for a house in the city was $90,000, significantly lower than it
had been in 1996. Yet one of the city's newest plans is to subsidize waterfront condominiums that would cost as much as $659,000
each. The property tax savings would total more than $100,000 over 10 years for each buyer. The real benefit flows to the
developer, who can charge a higher price as people seek the bounty. The burden will be borne by those not able to buy luxury
housing, including those too poor to afford a car to get a job at GEICO's subsidized call center in the suburbs.

This subsidy culture has so become part of the business and political leadership of Buffalo that the Bass Pro
deal seems a normal part of the economic landscape. So what if, according to the deal sheet, it would get a historic waterfront site
at the mouth of the Erie Canal? So what if its hunting lodge motif clashes with the carefully revived historic district of the city? So
what if Bass Pro insists on freeway signs directing people not to historic downtown, but to its store? So what if Gander Mountain
built its own store, with no subsidies, just a few miles away?

Bass Pro even talked the city into
spending millions to move a light rail station a few blocks, making it harder for residents carrying groceries to their apartments, but
easier for anyone riding the streetcar to pick up a hunting rifle.

Add up all the items on the deal
sheet and the total subsidy comes to about $60 million.

The local government would pick up all
the costs of making sure that site with the nearly two-century-old pilings is suitable for the Bass Pro store. And it would provide a
marina so Bass Pro can display boats and let people take test rides. And Bass Pro would get to use the sales taxes from the store
to pay its construction costs. And Bass Pro would control four parking garages, free to its customers but no one
else.

Add it all up and the subsidy, depending on who does the estimating, would be between
$90 million and $130 million.

The Bass Pro retail store would have 75,000 square feet. That is a
subsidy of up to $1,700 per square foot, eight times construction costs for most such stores. The local government wouldn't get
the sales tax money for years—Bass Pro will pocket the sales tax. But if government did get the sales taxes and applied them to the
subsidy the taxpayers would in time be made whole—in about 60 years.

Crazy as those
numbers are, the leaders of Buffalo keep negotiating and talking and offering more and more to Bass Pro. Subsidy economics
have become so much a part of their DNA that they cannot bring themselves to just say no.

Subsidy economics has also become part of the scaffolding of the national economy. Sometimes you can
benefit from a subsidy by just being in the right place, though seeking a little boost to increase the subsidy
helps.

M
IKE KEISER
ACTED ON HIS OWN WHEN HE BUILT THE FIRST OF
his stunningly beautiful golf
courses on the remote Oregon coast. He did not retain one of the many firms that specialize in site consulting, a profession less
about finding suitable real estate and more about knowing how to extract from the government part or all of the cost of any new
job-creating investment. Keiser just put the word out to some real estate agents that he was looking to buy land by the square
mile.

Keiser did not solicit government economic development agencies to woo him with offers
of money, tax breaks, or other favors, either. That would have offended his libertarian views. Instead, Keiser did business the
old-fashioned way: He put up his own money, in hard cash, and took on all the risk that his venture might be an utter
failure.

Even so, without asking, Keiser ended up collecting a subsidy worth at least $12 million
per year and probably more than twice that much. This subsidy is about to grow by about half. The reason is another subsidy,
which he did seek. That Keiser benefits from a subsidy he did not even ask for shows how deeply embedded are new economic
rules that take from the many to enrich the few.

In 1971, Mike Keiser found a niche in the
greeting-card business and made a fortune growing it. With Phil Friedmann, his business partner, Keiser sold cards printed on
recycled paper, catching the wave of the environmental movement. Recycled Paper Greetings allowed artists to sign their work,
unlike the anonymous illustrators toiling for Hallmark. After a few years of modest success, the firm took the biggest plunge of all,
switching from being one of many vendors represented by commissioned salespeople who supply mom-and-pop businesses to
starting its own sales force. Almost overnight, sales boomed. Keiser became seriously wealthy.

What Keiser wanted was to play “dream golf.” He favored the game in the style of the eighteenth-century
Scotland of Adam Smith, before electric golf carts and narrow, perfectly manicured fairways squeezed into tree-lined country clubs.
He had already built one golf course, on the shore of Lake Michigan near his family's getaway home. But like those who build a
dream home and then realize it isn't what they wanted, that course fell far short of Keiser's ideal.

Fulfilling his desire required mildly rolling land on a coast, windswept, with few or no trees and sandy soil. As
soon as Keiser saw the Pacific Ocean bluffs north of Bandon, thick with gorse, he imagined the shape of the land underneath. The
owners wanted almost $5 million, but years had gone by with no takers. Keiser slept on it and the next day offered half the asking
price. When the owners accepted, Keiser wrote a check.

Just two problems remained. Oregon
has some of the toughest land-use laws in the nation, designed to reduce the gasoline consumption, commute time, and inefficient
use of land that accompany urban sprawl. It took Keiser more than four years to get approvals to create his ideal golf course,
including a hotel and clubhouse complex done in Corporate America Bland, which is to architecture as political correctness is to
speech, sticking to neutral lines and tones that neither offend nor inspire.

The second problem
was that the Bandon site seriously violated all three rules of real estate. The location was as out of the way as it gets in America
without heading to Alaska. The nearest large airport was on the far side of Portland. Reaching Portland requires two plane flights
from many cities, followed by hours behind the wheel to drive almost to the California state line just to play golf.

A few years earlier some fools had proposed a golf course that would have ferried players from Portland to
the southern coast of Oregon in helicopters, ignoring both the enormous cost of those machines and their reputation for suddenly
falling out of the sky. In time, though, a solution to Keiser's location problem would present itself as a free lunch.

When Keiser's plans became known, many in Coos County saw him as an economic savior. The area had
fallen on hard times starting about 1980, ending more than a century of prosperity. Jobs vanished. Home-cooked
methamphetamine ruined many lives. The schools provided the only escape from chaos for a small but significant minority of
children. William G. Robbins, the Oregon State University historian, titled his book on the changing fortunes of the area
Hard Times in Paradise
.

So many families moved on that
the median age in Coos County rose from 28 in 1970 to more than 40 today. Half of the children who remain qualify for free lunches.
The state says uncertainty about where the next meal will come from is a major local problem, one reason the local food bank helps
4,600 people a month in a county with 64,000 residents. More than 7,000 people are on a waiting list for 14 public housing
units.

Local leaders seek grants to revive the old economy, hoping for subsidies to improve
the little-used port at Coos Bay. They see an opportunity to offload shipping containers from China, if only the taxpayers will give
Union Pacific more than $200 million to rebuild a spur line so antiquated that lumber trains must creak along at 10 miles per hour
through Coast Range tunnels to the main rail line. But that dream began a quarter century ago, and the elusive dawn is still at least
a decade into the future.

It was not always so.

For
thousands of years the Coo, the Coquille, and other Native Americans prospered off the land and the sea. The climate was
moderate; the forests thick with game sheltered by fir, hemlock, and myrtle wood; while the free-running streams and rivers made
the sea flush with salmon. When the first Europeans arrived, right after the California gold rush in 1849, they found Coos Bay, the
only natural deepwater harbor between San Francisco and Puget Sound. They cut down trees, some of which had sprouted before
Columbus set sail for the New World, for bracing in mines and planks for housing in San Francisco. One of the 300-foot-long
lumber ships of that era, the
Balclutha,
still lies at anchor in San Francisco, a reminder
of when the winds alone powered cargo ships.

The newcomers also found coal, though the
seams quickly ran out. Still, the discovery prompted some to call the area the “Appalachia of the West,” a name that would take on
new meaning after 1980 when the timber industry collapsed and the runs of salmon dwindled. The forests were rich enough to
sustain a small population forever. But the owners of the timber companies wanted more profits now and so they cut faster and
faster while the trees continued to grow back at rates set by nature. To hasten the harvest, new forests were planted like corn, with
one kind of tree, not the diversity of nature. But still the cutting went on faster than the growing, until there was no more tomorrow
to harvest.

Automation played a role, too, wiping out thousands of well-paying jobs in the mills.
Today one mill at Coos Bay turns a baker's-dozen logs into finished lumber every minute. Monitoring the operation requires just
eight people. The old Weyerhaeuser mill on the main drag in Coos Bay, where crews worked steadily, has been converted into a
casino aptly named The Mill. Dealing cards and changing bedsheets, however, pays far less than slicing logs into
lumber.

Like Keiser, Bandon area native Scott Cook is a born entrepreneur who sees
opportunity all around. Cook finished high school in 1976, one of the last years of prosperity on the Oregon coast.

“When I grew up there was a job on every corner, there were family-wage jobs that paid $18 an hour, and if
you were an entrepreneur there was opportunity here, you just had to pick it,” Cook recalled.

His first summer out of school, Cook made the equivalent of $200,000 in today's currency. He fished for
salmon, cut down trees, and drove a logging truck, even though he had only one arm, the result of an industrial accident when he
was a hardworking lad of six. Two decades later, without a single accident or even a ticket on his record, the state took his
commercial driver's license away, saying it was unsafe for a man with only one arm to drive a logging truck.

Cook and Keiser differ mostly in their choice of work and in luck. Cook took on blue-collar risks, like a tree
falling at the wrong angle or a piece of machinery ripping off a limb. He lost most of the small fortune he had built after one almost
perfect fishing trip. His 51-foot steel ship was full of fish and ice when a storm hit. The 40-foot waves beat a bulkhead with a bad
weld into submission. Cook and his helper put on survival suits. That night, just before they jumped into the salty void, Cook told
his helper, “I'm sorry I killed you.” Somehow they both survived.

For the salmon fishermen of
Coos Bay, times grew ever harder thanks to a host of government policies. The rules for commercial fishing ban barbed hooks and
set a minimum length for fish. Having a single snapped-off barb on deck, even if every hook is clean, brings a stiff fine. So can a
single fish just an eighth of an inch short of specifications. The government spends millions on ships and inspectors, and the
fishermen believe the elaborate enforcement is how the inspectors justify their pay. Their zero-tolerance approach to law
enforcement is far from the white-collar world of stock manipulators, pension thieves, and legalized loan sharking.

Further, decades of damming rivers for electricity and water storage have cut into nature's bounty of salmon.
For years the government mitigated this by running hatcheries, turning loose the young salmon known as smolts to make their
way as ocean predators. Now many salmon are raised in floating cages, where the fish need no skill to hunt for their dinner.
Because of salmon farming, the government is starting to talk about shutting down the hatcheries. This is part of what it means to
reduce so-called discretionary spending in Washington and the state capitals. The theory is that the market has provided a
substitute for government-run hatcheries, although that overlooks the fact that farmed salmon are not nearly as healthful to eat as
wild fish, even those that began their lives in hatcheries.

The salmon runs in Oregon dwindled
until, in 2006, there was no commercial season. Don Yost, the harbormaster at Coos Bay for 18 years, was ordered to seize the
boats of seven salmon fishermen who had not paid their dock fees. He refused, which cost him his job despite local uproar in
support of this small act of heroism.

Cook laments these changes. “It's gone from family-wage
jobs to service industry; it's gone to just above minimum-wage jobs,” he said. “We are in a scenario now where our families, my
children, can't afford to live here anymore.”

Meanwhile, Bandon has drawn economic refugees
from Los Angeles, Orange County, and Silicon Valley. The locals call them Californicators, people who sold their houses for a profit
of a half-million dollars or more and bought new homes on the Oregon coast to get away from the stresses of suburban life. With
few homes on the market in little towns like Bandon, population about 3,000, prices soared. Matt Winkle, the Bandon city manager,
said if he came to town today he could not afford to buy any home.

To Cook, the movement
away from harvesting nature's bounty to an economy built on golf is folly. “Our nation was built with timber, it was built with
fishing, it was built with natural resources,” he said. “We've been a natural-resource economy on the West Coast for generation
after generation and, in just a short period of time, that's all gone away. I think as a country we need that…. If we don't have that and
we stay strictly a service industry, I think we're going to fall apart.”

Cook's family owns more
than 300 acres of forest, enough land to sustain them forever if they harvest it carefully. The land is up along Johnson Creek, which
flows freely and sustains salmon runs. Mike Keiser wants to dam that creek. So does the city, which wants a reservoir for the
population growth it anticipates as more people retire there from California to live off their investments, pensions, and Social
Security.

Building the earth-fill dam would mean Cook and his wife would lose their forest. Part
of the site would be submerged and the rest would be cut off. And while they would be compensated, the Cooks have no
expectation that they would be made whole. They fear they may get just pennies on the dollar. After being paid off they would be
left at the mercy of the stock and bond markets, which are unfamiliar to them, instead of living off the land they know.

Keiser would pay his share of the cost for 200 acre-feet of water each year, a little more than 10 percent of the
total. He needs the water for golf courses he wants to build south of town, miles from the Bandon Dunes Golf Resort on the north
side, which already has enough water.

In joining the dam project, Keiser is seeking the very
kind of government benefit that runs counter to his libertarian philosophy. The Cooks say they do not want to sell. Without eminent
domain, Keiser would have to pay market price for the land he covets. Cook might well agree to a land swap, giving him 300 other
acres of forest that he could harvest at the same rate the trees grow back. But with the market subverted, Cook will get the lowest
price the government can justify if the dam project comes to fruition.

Government's power to
condemn land, as Kim Blankenship learned when Jeep built its new factory in Toledo and took her garage for a bit of lawn,
inherently means getting a fraction of the market price for real estate. As George Bush and George Steinbrenner and so many other
wealthy Americans have learned, getting government to seize the land you want saves time and makes you richer.