Andrew Cuomo has an opportunity to change the state's development strategies.

Can we survive New York's economic "development" plans?

Here in Buffalo, we need to care about an obscure economic fact called the Canadian consumer debt-to-income ratio. Canadians are just like Americans except more so: Canadians consume more than they earn, and pull off that trick by borrowing money. Statistics Canada reported last week that the ratio of household debt to disposable income reached a new record this year when it hit 148.1 percent. The US number is 147.2 percent. A senior Conservative consultant told me a few months ago that Americans shouldn’t plan on Canadians coming down to Buffalo to buy much stuff for too much longer, because the banks in Toronto would probably start tightening things up in the new year. It’s December, and not only are they doing so already, but the Canadian government is warning about interest-rate increases in the coming year, and fretting out loud about Canadians’ ability to pay their old bills, much less come to Buffalo to shop.

Canadian shoppers kick in a few millions of dollars of sales tax to Erie and Niagara Counties, although that amount wobbles up and down depending on the exchange. It’s been as much as five percent of the take in Erie County in good years. But it’s not written in stone that Canadians will put up with US Customs inspectors at the bridges. And now, we’re being warned not to rely on Loonies and Twonies.

If Canadian disposable income is iffy, American is more so, according to the most recent numbers from the US Bureau of Economic Analysis. Personal income is just not rebounding in our part of the country, notwithstanding the assertions of other agencies that the Great Recession has ended. Retail trade seems to have made a modest recovery for Christmas 2010, but many economists suspect that there is much to be resolved. Even the Wall Street Journal has reported that a slight uptick in private economic activity is being hampered by government cutbacks, layoffs, and public-school downsizing as governments experience the so-called lag effect. Here in the Buffalo area, we see that $74.5 million in federal stimulus money received by Erie County is sitting in Erie County coffers, and that 200 county workers are being laid off, funding for libraries and culturals is being cut, and federal grants-in-aid to county health, social service, and environmental programs are being turned away, because Erie County Executive Chris Collins and the Erie County Legislature have chosen anti-government ideology over basic economic arithmetic.

Yet despite continued low income-growth, continued regional population decline, warnings from the Canadian government about the new realities facing even prosperous and more numerous Canadian households who come here to shop a little, New York State’s key economic development agencies stick to plans that area based on the idea that we and our neighbors have lots of money and nowhere to spend it all.

The events of December 16

Last Thursday, the leading New York State economic development agency endorsed spending more than $50 million of a unique and irreplaceable pot of public money on building replicas of canals in what was once America’s largest inland port so that Erie Canal Harbor can become a retail and entertainment hub. The $50 million is part of a plan to spend $153 million over the next couple of years on “[c]reating tenant spaces suitable for a mix of uses, including office space, hotel space, ground level retail and community facility spaces, to ensure that Buffalo can capture its share of future economic growth and new jobs,” according to the Modified General Project Plan. Nowhere in the official document is there any mention of the current economic context, including the glut of downtown office space in every category from A to C, or the glut in retail space in the area. (Buffalo metro has somewhere between 32 and 34 square feet of retail space per capita, compared to a normal ratio of about half that, while Portland, Oregon has less than 10 square feet per capita.) Also missing from the plan for Erie Canal Harbor are items that were part of the press releases of November, in which the agency that has authority over the historic terminus of the Erie Canal pledged to build a pavilion, create a “tent city” that would be something like an ongoing summer art festival, spend public dollars on the arts, and engage consultants with experience in “place-making.” The documents instead reflect what these economic development agencies have been planning for more than a year—namely, using a finite and unique public revenue to build replicas of canals, plus five parking garages, and hundreds of thousands of square feet of commercial, retail, restaurant, and hotel space.

So there are grounds on which to question the appropriateness of this use of public funds. Some also question the propriety of the deal. Without ever having gone through the usual public procurement process, in which potential developers for a publicly funded project are required to offer bids, the designated developer—which will use public funds to create the hundreds of thousands of square feet of new commercial space—remains Benderson Development Corporation, which has a sweet deal: It will pay $10 to take title to the development after it is built out.

At the very same time that Empire State Development Corporation was voting approval of the Erie Canal Harbor Development Corporation’s plans last Thursday morning, State Supreme Court Judge Frederick Marshall was delivering his decision in the Goldman v Bass Pro Shops case. Judge Marshall decided that the taxpayers who brought the lawsuit did not have standing to sue to stop this use of public dollars, dollars which came from the 50-year stream of payments that the Buffalo area was scheduled to receive from the New York Power Authority to compensate it for the Niagara Power Project’s environmental consequences. That 50-year stream of public money will become a one-time shift of cash to an economic development agency that has decided, notwithstanding all the meetings, protests, and questions about the existing glut of retail, parking, and commercial space in the Buffalo area, and amidst the crisis in public support for the arts, to build more retail, parking, and commercial space. And replica canals.

A coda came two days later with news reports that the president of the Seneca Nation of Indians is reaching out to ECHDC to see how to coordinate the Seneca Gaming Corporation’s plans for expanding its Michigan Street casino. Jordan Levy, who chairs the board of ECHDC, serves on the board of the Seneca Gaming Corporation. According to its own records, the Seneca-affiliated casino corporation’s Buffalo operation draws its clientele from within 15 miles of the intersection of Michigan Street and South Park.

A few years ago, Erie County and local citizens sued the Bush administration to stop the Seneca Gaming Corporation from building a casino off Seneca reservation territory, arguing that while the Senecas have every right to build whatever they want on their own territory, it’s not only illegal but economically destructive to locate a sovereign nation’s tax-exempt entertainment enterprise—whose goal is to keep visitors inside its walls, spending money on Seneca-owned products and services—in a marketplace where locally owned, tax-paying businesses have to follow normal business rules. The current Erie County executive removed Erie County from that lawsuit. The Obama administration has been silent. The Seneca Gaming Corporation continues to compete with locally owned businesses and entertainment venues for local disposable dollars.

Welcome to the world of “economic development” in Upstate New York, where the state’s agencies will spend over $8 billion of taxpayer money in various direct subsidies, tax abatements, and project-specific infrastructure investments so that politically connected bankers, construction management firms, real estate developers, engineers, architects, and others will keep this system going.

Do note that the system has produced the following results: a drop in population to 1.1 million, which is below the region’s 1974 peak of 1.4 million, with a continued decline expected to continue at least until 2030. Meanwhile, because of direct and indirect subsidies for what is termed “development,” 76 percent more land in the Buffalo Niagara metro area is being used than in the 1970s, even as the population of the urban core has dropped from more than 400,000 to less than 280,000. As Rolf Pendall of Cornell University and the Brookings Institution noted, Buffalo and all other Upstate New York metros has experienced “sprawl without growth.”

Will Cuomo change any of this?

The “economic development” entities that taxpayers fund, directly and indirectly, are allegedly busy at work in the public interest, tasked to help bring new economic activity to aggrieved and challenged parts of New York State. Many observers question their efficacy. This past August, another report on the dysfunction of local industrial development agencies (IDAs) showed how public funds result in lower local tax revenues and fewer rather than more jobs. The Coalition for Economic Justice and its partners are now engaged in a broad campaign to help elected officials in Albany, and taxpayers, understand that the current system rewards insiders but doesn’t increase net employment or return any net positive on the public’s investment. But when Buffalo Assemblyman Sam Hoyt and his colleagues broached the prospect of public accountability, the blowback was intense: Construction unions joined with the financiers and developers who love the status quo to protest any enforcement of standards.

Few elected to public office in New York State seem to want to change this system. Elected officials are generally intimidated by the rhetoric of what in Washington used to be known as the “loophole lobbyists.” The Fiscal Policy Institute, a labor-affiliated think tank in Albany, continues to provide the intellectual horsepower for the accountability movement through its reports and analyses—including its most recent piece on “job-creating” tax breaks and handouts that add $5.4 billion to the state’s deficit without creating public benefit. This institute produced a sensible and moderate agenda for economic policy in 2006, giving special attention to the problems of Upstate metros.

But the worm may have just turned.

The recent hubbub over the Erie Canal Harbor, plus public outrage over Erie County government’s refusal to adequately fund quality-of-life amenities including libraries and culturals, has sent a signal to local elected officials that irritation with the status quo has a certain anti-elitist energy that endures. The political energy of 2010 is not spent.

And there is some evidence that even the business elite in Buffalo may have just figured out that Empire State Development Corporation’s plans and the Erie County executive’s policies cause more burdens than they’re worth. While ECHDC’s leaders press ahead with their plans for replica canals and 725,000 square feet of new commercial space, the board of directors of Buffalo Place—which is the business-improvement district that serves the companies that own existing real estate downtown—succeeded in getting Mayor Byron Brown on board with a letter to HSBC, imploring the bank to stay inside HSBC Tower rather than let Empire State Development Corporation and ECHDC build the bank a new, taxpayer-subsidized office.

And the business community seems to have awakened to the price-tag of County Executive Chris Collins’s anti-stewardship policy. While Collins hoards the $74.5 Obama stimulus funds in a surplus that is over $88 million, he has shifted responsibility to local businesses and philanthropies to not only continue their customary support of the 19 theaters, several small art galleries, dance groups, and other arts groups, but to make up for the county support that he cut.

Meanwhile, ECHDC has already spent $5.1 million on a single consultant, a New York City architectural and engineering firm that designed the replica canals. Empire State Development Corporation has endorsed spending $51 million on building those replicas, on a path toward building out the plan that has not changed much, except in its phasing, since last summer.

At the moment, the “economic development” strategy of New York State consists of ignoring the crisis of the existing culturals, the existing libraries, and the existing landlords of downtown Buffalo; ignoring or not addressing the coming challenges to cross-border commerce; endorsing a policy of downsizing public employment at a time of anemic consumer demand; and adding to destinations for disposable income without adding to the region’s ability to produce income.

As soon as Governor-elect Cuomo takes office, the question becomes this: Will these be his policies too?

Bruce Fisher is visiting professor of economics and finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.