Category: business

The Portland Seed Fund: Lots of Fertilizer, Little Growth

By Joel Grey

The Portland Seed Fund (PSF) started in 2011 as a joint public-private venture intended to close a funding gap for entrepreneurs attempting to start a business. It invests $25,000 in each selected startup and reserves money for follow-up investments. The City of Portland, the City of Hillsboro, and the State of Oregon diverted tax dollars to underwrite the majority of the cost for the first Seed Fund and a significant portion of the second Seed Fund. This totaled $3.4 million through 2014.

Another $100,000 was proposed in the requested budget for the Portland Development Commission (PDC) this year. The 2014-2015 budget has been adopted but does not specify whether funding for the PSF is included. The PDC has ignored multiple requests for comment. The City of Portland and the Oregon Growth Account are the two biggest sponsors, both putting in $1.5 million or more.

Portland obtains its money from taxpayers directly; the Oregon Growth Account is a state-run venture capital fund using dollars appropriated from the Oregon Lottery.

The Seed Fund was promoted as a way for public entities to help private companies get started, with the expectation that the Fund would eventually earn money. However, it is not possible to determine whether the Seed Fund is earning a positive rate of return, or even what is being done with its money, despite the fact that it utilizes public funds.

The Seed Fund does not publicize which businesses are still open, and even when contacted did not respond to requests for its return on investment (ROI). The public entities were unable to provide the Fund’s ROI as well. The City of Hillsboro communicated that it was not able to invest directly, but had used an intermediary that would also receive any ROI. Various people at the City of Portland, including several at the City Budget Office and the PDC, were also unable to supply an ROI; some did not know what the ROI was and others have simply not responded to information requests.

Out of the 46 companies funded, most appear to still be open; but one has closed, another has moved to California, and two more appear to have closed, lacking corporation status, websites, and offices.

Regarding the funds spent by Hillsboro and Portland, Article XI Section 9 of the Oregon Constitution states: “[n]o county, city, town or other municipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association.” Portland and Hillsboro got around this provision by giving their initial offerings to the Oregon Entrepreneurs Network, which then gave the money to the Seed Fund.

For the second Seed Fund, the City of Portland created its own intermediary, the Portland Economic Investment Corporation, which will be the group that handles the investment.

When asked, the City of Hillsboro said that it is not an investor; but by any standard of common sense it is. The city appropriated money for the Seed Fund, and the intermediary is just a screen. The money was always intended for the Seed Fund.

The managers of the Fund have admitted “[t]he Seed Fund could exist without public money.” This begs the obvious question: Then why is public money involved? If a private enterprise can exist without public money, for what reason is the public money involved?

The Portland Seed Fund is an example of “mission creep” in government. The three jurisdictions that launched this Fund have important work to do in such areas as law enforcement and protection of property. There is no reason to spend public money on non-essential and highly risky tasks such as equity investing in new private companies. The Portland Seed Fund should be shut down, and a full accounting of its spending should be provided to taxpayers.

Joel Grey is a research associate at Cascade Policy Institute, Oregon’s free market public policy research organization.

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Can Government Be Run Like a Business?

We’ve all heard the adage that government should run like a business. The problem is that it really can’t. Briefly, here are some of the reasons why:

  1. By its very nature, government is often a monopoly provider of whatever services it performs. Business, on the other hand, is subject to intense competition in a free marketplace.
  2. Government can afford to deliver sub-par service because it prohibits others from entering its market. This doesn’t mean that government employees want to deliver poor service, just that there is often no penalty when they do so.
  3. Government leaders have less incentive to eliminate waste in their operations because they have a captive revenue stream. Business leaders know that customers can pick up and leave, reducing the firm’s income at any time.
  4. Government’s “customers” have to pay for what the majority wants, while in a marketplace individual customers decide what they will pay for, no matter what others want.

None of these reasons imply that business owners are somehow nobler than government leaders. They simply must be more responsive to individual customers, and they must innovate and control costs in order to survive. Government leaders need only satisfy the majority of their “customers” because the minority, in effect, can’t easily take their business elsewhere.

Even faced with such obstacles, to their credit many government officials still try to operate in a more businesslike manner. A lecture hall full of such public servants spent a Saturday back in 1992 at Portland State University listening to an author of the book Reinventing Government try to help them out. Among other assumptions, the book postulated that government could become more efficient if it simply acted more entrepreneurial and less bureaucratic. This sounded good, until one realized that the authors may be confused about at least one key concept.

Co-author Ted Gaebler first asked his public employee audience to think more like profit-seeking capitalists so as to meet the needs of their constituents. However, later he explained that government might be able to do things more cheaply than the private sector because it doesn’t have to earn a profit.

So which is it? Is profit an indicator that you’re satisfying constituent demand, or is it a burden that raises prices on consumers?

Economists will tell you that in a competitive environment, profit is a signal that you’re meeting your customers’ needs. Profit actually can decrease prices, in part because profitable businesses can invest some of their profit into more efficient means of production.

The profit motive is often a key driving force for entrepreneurs who jump into a business because they see an unmet consumer need. They know that unless they can provide better, cheaper goods and services than their competitors, they won’t attract enough customers to cover costs, let alone earn a profit.

One clear example of the profit motive benefitting consumers is what happened when Wal-Mart launched an aggressive program in 2007 offering 30-day supplies of common generic drugs for just $4. Soon, Fred Meyer, Safeway, Walgreens, and others retailers decided to match that low price rather than risk losing customers to a competitor. Each of these big chains is a for-profit company. Yet, each realized that to make profits in health care, they needed to offer something that would attract and retain customers.

Taking the profit out of that health care segment wouldn’t have done anything to significantly reduce prices and save customers billions of dollars over the last five or six years. Who believes that government-centralized drug purchasing, or price controls, would have dropped monthly prescription prices down to just $4 each?

The “profit motive is bad” fallacy is just that―a fallacy.

While government can’t employ the profit motive directly, it can do so indirectly by contracting out some functions to profit-seeking enterprises. When done correctly, contracting out can allow profit to become a signal of citizen satisfaction in public services and can reduce the cost of those services.

Of course, contracting out public services doesn’t guarantee good service and taxpayer savings. Private firms can make mistakes just as governments do. They sometimes fail to meet customer needs, and sometimes they break the law and cheat their customers. But unlike government, most poorly run firms either go out of business as customers flee or change their ways to retain them. To flee a poorly run government, most of the time we have to pick up our family and move to another city, county, or state.

Finally, even if we agree that business should try to maximize revenue and profits, that should not be government’s primary goal. Rather than maximize revenue, government should maximize individual and economic liberty. In today’s modern world, it can only do that by reducing its size and scope.

For example, our Founding Fathers envisioned a government that would protect our lives, liberty, and property. It was not designed to provide our alcohol (OLCC), jobs (picking winners and losers in the marketplace), and entertainment (Oregon Lottery). Getting Oregon’s state, county, and local governments out of these services does not follow a business model; it follows a liberty model.

We can ask no more of our government leaders than that they protect our rights and otherwise leave us alone to pursue our own interests. That is the American way.

Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

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Employer Mandate a Recipe for Unemployment

By Sally C. Pipes

Walmart recently announced that it will not offer health insurance to new employees who work less than 30 hours a week. It’s reserved the right to do the same for existing workers. For these new policies, Walmart’s employees can thank ObamaCare.

The federal health reform law’s “employer mandate” requires companies with over 50 employees to provide insurance for anyone working 30 or more hours a week or face fines. That creates a strong incentive for companies to push their workers into a workweek fewer than 30 hours—and thereby avoid the additional costs ObamaCare intends to saddle them with.

Walmart isn’t alone. The employer mandate will make it harder for many businesses to operate efficiently, to hire new employees—or to ensure that existing employees can stay on full time.

Papa John’s CEO John Schnatter recently came under fire for stating that the employer mandate will take a bite out of his company’s pie. He said that his pizza chain’s franchisees would likely cut back employee hours—and that ObamaCare would add up to 14 cents to the cost of each pizza.

The owner of several Denny’s franchises in Florida has contemplated slapping a 5-percent ObamaCare surcharge on every meal, and a New York Applebee’s franchisee has said he may stop hiring because of the additional costs borne by the law.

ObamaCare’s defenders suggest that these businessmen are just greedy. But it’s been widely known that the employer mandate would deliver a hefty blow to businesses since President Obama’s health care reform law was merely a bill.

In early 2010, the Congressional Budget Office (CBO) estimated that the employer mandate would force businesses to pay $52 billion in tax penalties from 2014 to 2019. That money will have to come from somewhere—whether higher prices for consumers or reduced wages for workers.

Further, the CBO recently cautioned that the employer mandate would cause a 0.5-percent reduction of the American labor force. That may not sound like much—but it’s equivalent to eliminating about 700,000 American jobs.

These job cuts will hurt the working poor most. According to a paper by Harvard economist Katherine Baicker and University of Michigan economist Helen Levy, those who earn within three dollars of the minimum wage are at the greatest risk of losing their jobs thanks to an employer mandate. Baicker and Levy concluded that “1.4 percent of uninsured full-time workers would lose their jobs” under the mandate.

In some cases, the employer mandate may backfire—and actually encourage businesses not to provide health insurance.

Businesses that do not furnish coverage must pay $2,000 per employee, excepting the first 30, if at least one of their workers receives subsidized coverage through the new insurance exchanges. Folks with incomes of up to four times the poverty level, or nearly $90,000, could qualify for subsidies. So a firm with 50 employees could be looking at a fine of $40,000.

But health insurance is expensive—far costlier than the fine. Average premiums for single coverage were north of $5,600 in 2012 and above $15,700 for family policies, according to the Kaiser Family Foundation. Many employers may find it more economical to pay the fine and turn their workers loose in the exchanges.

Indeed, former CBO Director Douglas Holtz-Eakin estimates that as many as 35 million Americans out of about 160 million could lose their existing employer-provided insurance thanks to—ironically enough—the employer mandate.

Taxpayers will pay the price. Richard Burkhauser and Sean Lyons of Cornell and Kosali Simon of Indiana University estimate that the feds could have to spend an additional $48 billion a year if employers dump their workers into the exchanges.

For now, though, the employer mandate’s impact will largely be felt in the business community, at firms as big as Walmart and as small as the local diner. “I don’t know what secret [the politicians] know, where they just assume we can write them a check,” Sam Facchini, owner of Metro Pizza in Las Vegas, recently told a Nevada newspaper. “We can’t pay for this. Most of us operate on a thin margin and trying to stay in compliance [with the law] will make things much tighter.”

Sally C. Pipes is President, CEO, and Taube Fellow in Health Care Studies at the Pacific Research Institute in San Francisco. She is a guest contributor for Cascade Policy Institute. Her latest book is The Pipes Plan: The Top Ten Ways to Dismantle and Replace ObamaCare.

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Mandatory Sick Leave Hurts the Working Poor

By Marc Kilmer

On March 6 the Portland City Council may vote on whether to require virtually all businesses that employ six or more people to provide them with at least five paid sick days per year. While this sounds well intentioned − who doesn’t support helping out a sick person? – it will actually end up hurting low-wage and less-skilled employees. For the sake of the working poor, this proposal should be rejected.

Let’s establish some basic facts about the employee/employer relationship. Employers provide compensation for an employee based on how much value that employee’s labor has for the employer. Employees with skills that are in higher demand get paid more, both because these skills help an employer’s business more and because there are fewer people with those skills. Any kid off the street can wash dishes, so a dishwasher is likely to make far less money than an electrician, someone who has a specialized set of skills.

Compensation is not just the wages paid to an employee. An employee costs a business much more than just salary. There are unemployment, Medicare, and Social Security taxes that must be paid. And if the company offers any benefits, then that is also a cost to the employer. An employee may make $40,000 a year, but it may cost the employer $60,000 a year to employ that person. The total cost of compensation, not just the salary, is what’s important to the employer.

Some people hold the view that an employer should provide a variety of benefits to workers, from paid sick leave to health care to disability insurance to retirement benefits. Any amount of money paid by employers for these benefits raises the cost of hiring that employee.

Mandatory sick leave increases the cost to an employer for hiring an employee. For more-skilled workers, that means that more money is going to the benefits side of the compensation equation and less to the wage side. So better sick leave means lower wages. Some employees may like that, some may not. But if the government mandates it, the employee has no choice.

For lower-skilled employees, the situation is more damaging. Since there are a federal and a state minimum wage, there is a floor below which an employer may not pay an employee. If the government raises the cost of compensation through mandatory sick leave, an employer cannot simply pay a lower wage to someone making minimum wage or close to it. In that case, the employee will have to be let go.

Some may say that the employer should simply absorb the cost of the higher compensation. What they ignore is that an employee’s compensation is based on the value that employee brings to the company. If an employer pays an employee more than his labor is worth, then that employer will soon go out of business.

Mandatory sick leave sounds like a good idea, but it will end up hurting the most vulnerable workers in our society. The more the government mandates benefits for workers, the fewer low-skilled workers will be hired. We need to encourage getting these low-skilled workers in the workforce, not discourage them. For the sake of the working poor, the City of Portland should not mandate sick leave.

Marc Kilmer is a Maryland Public Policy Institute senior fellow specializing in health care issues and a guest contributor to Cascade Policy Institute, Oregon’s free market public policy research center.

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Sailing Competitive Seas

By William B. Conerly, Ph.D.

I picked up my beer at the yacht club’s bar and went out on the deck to watch the last few boats come in. It had been a good day’s sailing. We finished the race in the middle of the fleet, but we had a couple of new stories to tell. When John grabbed the chair next to me, I was all set to talk about the wind shift that had helped us at the end. John, though, had other interests.

 

“Tell me, Doctor, what are we going to do about these Japanese imports?” John asked.

 

I sail on the weekends; Monday through Friday I’m an economist. Even though I love economics, I didn’t want to spend the whole cocktail hour talking about it.

 

“Did you do the race to Drake’s Bay three years ago?” I asked. Without waiting for his answer I began my story. “After we rounded the point and turned north, a light fog set in. It wasn’t thick enough to be dangerous, but we couldn’t see the other boats.”

 

“I remember that one,” John said. “I never did figure out where the wind was that day, but everyone else seemed to find it. I think I was third from last.”

 

I continued: “After about two hours we happened to sail close enough to another boat to see her. It was Fred’s boat, which is pretty competitive with ours. We sailed side by side, about a hundred yards apart, and she was pulling away from us.”

 

“You should have been able to keep up with her,” John said. “You’ve beaten her plenty of times.”

 

“That’s what we thought. So we started looking around and decided to ease the Cunningham a bit.”

 

Racing a sailboat isn’t as simple as letting the wind catch the sails and push it along. The sails are airfoils, like airplane wings, but with an added complication: Being made of fabric, the curvature of the sails isn’t fixed in place. We have thirteen separate controls that will change the sail’s shape in one way or another.

 

The Cunningham is one of those thirteen.

 

“It was hard to tell at first, but it looked like we were no longer losing to her. We put two good fellows on the sheets—and we started to gain ground. We even got a little ahead of her.”

 

John asked if we had kept our lead. We hadn’t. After we got moving a bit faster, the other boat picked up speed. It took them 20 minutes to find the trick, and I don’t know what they did, but just as we were feeling confident, they got their boat moving definitely faster than ours.

 

“Rob looked up at the mainsail. You know how he’s so quiet. He softly said, ‘Maybe there’s too much mast bend. Can we let off on the backstay a bit?’ The mast looked fine to me, but on the rare occasions when Rob talks, we all listen.

 

“We eased the backstay a little, and then watched the speedometer. We picked up a tenth of a knot in no time, and started to gain on them.”

 

“Sounds like a game of leapfrog,” John remarked.

 

“It was. Pretty soon we couldn’t find any more gains out of sail trim. But watching Fred’s boat helped us spot a tired helmsman right away. I had been steering for 45 minutes when they pulled out on us. I felt fine, or thought I did, but when Murphy took the wheel he brought our speed right back up.”

 

“How did you finish the race?”

 

“First and second. Turns out we were the only two boats to have been in sight of anyone else for most of the race. We took second, which is too bad, but that was one of our best finishes the whole summer.”

 

“It sounds to me like you have that other boat to thank for your good finish, even if they did beat you.”

 

“Exactly. A speedometer tells you how fast you are going, but it doesn’t tell you how fast you could be going. You need a competitor to tell you if you have greater potential. It’s easy to think that you’re doing your best, but usually you aren’t. Besides,” I continued, “we were able to learn a trick from him. When the wind turned light and we were wallowing in the swells, we saw that he had vanged his boom down hard. We weren’t used to doing that, but we gave it a try and it helped.

 

“All the other crews thought they were doing their best, but they couldn’t see the other boats because of the fog. I know most of the other crews and they’re not lazy. It’s just hard to be fast when you’re out there by yourself.”

 

John finished his beer and stood up. “Well, Doctor, I’ve got to run. Thanks for the story. But I really would like to sit down some time and talk with you about the danger of foreign competition.”

 

“I thought that’s what we’ve been talking about,” I replied.

William B. Conerly, Ph.D. is the principal of Conerly Consulting, an economic and financial consulting firm, and chairman of the board of Cascade Policy Institute, Oregon’s free market research center. An avid sailor, he races his sailboat Strange Bird as often as he can.

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