Sunday, April 11, 2010

Utilities, Cities, Stupid

Some basic economics lessons for civic leaders ought to be a prerequisite for office. The stupidity is astonishing in light of the inability to grasp something so simple. Check this out, regarding water rates, from ABC News:
The grim economy is hitting some consumers in the wallet in yet another way: their water bills.

Many water utilities are raising rates because water use is down, in part because manufacturers have closed or are cutting back, tourism has fallen and the real estate market is in the doldrums.

Water companies for the most part get their money from customers. When water consumption goes up, revenues go up — but when consumption falls, so do revenues.

Water companies often raise rates to pay for high-priced capital expenditures, such as new water lines or treatment plant expansions. But they also have to hike rates when water use goes down to bring in enough money to pay their basic operating costs.

They have it exactly backward, in the same way as cities screw up on tax policy. If demand is low, you're going to jack up the rates? But that will just further drive down usage!

Cleveland didn't (doesn't) get this. Population starts to leave, so in an attempt to keep the tax revenues from falling, they jack up the rates... which makes more people leave, so they jack up the rates... Duh!

If you want to attract people top cities, or encourage water usage, LOWER the rates. People will have more incentive to come to the city, or to use the water. If you want to cut costs (the other, more greatly neglected way to strike a balance), lose some employees. After all- usage is down! Less for them to maintain.

As for me, I'm not entirely unhappy that water usage is down. Water resources are scarce, and lower usage natioally might allow some aquefers to recharge. Many desperately need to be. Raising rates is an excellent conservation tool. Idiot utility managers are accidental environmentalists.


Wainstead said...

I don't think taxes were what caused the population decline in Cleveland... it was probably white flight more than anything. Taxes do drive businesses out, but what business left Cleveland? Steel, which couldn't compete no matter where it was manufactured in the United States.

Cleveland does have a tax rate problem, but fixing that probably won't be the magic bullet.

Mike Kole said...

I'll give you two examples of tax flight, one historically well known, the other close to home for you & I.

Rockefeller left Ohio over taxes, relocating in either NY or NJ. Can't recall which. But it was precisely over taxes.

Over to St. Hyacinthe neighborhood, I will remind you of the old, shuttered Ferro Motors plant. It boomed during WW2, employing many of the Poles who lived in that neighborhood. The plant was bought by GM after the war, and rather than modernize it where it stood, because of taxes, GM decided to relocate to Brookpark and Parma with new plants, where the tax rates were almost nil. That old Ferro plant has been shuttered for about 50 years. That single item decimated the neighborhood.

One could call that 'white flight', but one corporation's tax flight became one neighborhood's job flight to the suburbs. Those Poles in Parma then gave rise to Ghoulardi jokes, so it obviously wasn't all bad.

The tax policy fix would not be *the* magic bullet, true. It would help enormously, along with fixing the schools. As I saw it, the decline of Cle's population made it less white, but it made it even more less wealthy. If people had means, regardless of skin color, they did one of two things- move to the suburbs, or send their kids to private schools. Cleveland Heights? Shaker Hts? St. Hyacinthe, still a mixed race neighborhood, is almost uniformly in poverty.

Mike Kole said...

Just found an article on JD Rockefeller that has his tax policy flight summarized, at the last quarter of the article:

Bob G. said...

You hit the utility issue right on the head...see it here in Ft. Wayne as well.

You got it...that's EXACTLY what happens.
I'm "living the adventure" 12 years into a neighborhood that changed AROUND us.

Your response is spot on, too. When businesses get taxed out of town, there go the jobs, and soon after there goes the people.
And then Section 8 & HUD move right on in, and whatever USED to be a nice neighborhood goes down the crapper.
I saw it happen in Philly decades ago...hasn' yet recovered, but HAS become a very nice "welfare state".
(and they still owe the PPD about $8 mil in O/T & retirements)

Good post.

Mike Kole said...

Thanks, Bob!

More thoughts about wealth or poverty magnetism: If it is going to be public policy to tax at a graduated scale (esp), but really at any rate, officials need to be sensitive to the wealthy. If they're to carry the load, you do want to keep them around.

It's not too hard for someone to do the math, as I once did. Making $50k/yr and saving 6% in taxes = $3k/yr, or $30k over 10 yrs. Hell, that's more than half a year's wage preserved every ten? That's a no-brainer!

Now consider if someone makes $20 mil/yr. Saving 6% = $1.2 mil/yr. Moving isn't going to cost that much, so it's an even easier call to make to leave.

This is just one thing that is worrysome to me about our growing cultural wealth envy and 'soak the rich' mentality. If you're counting on sopping some of their money, they have to be around for the sopping. Biting the hand that feeds, etc.

Al said...

Cleveland Water Rates Explained

The Cleveland Water Commissioner explains how conservation relates to rate increases.