Sen. Larry Tidemann (R-7/Brookings): "Nothing to see here..."

Sen. Larry Tidemann (R-7/Brookings): "Nothing to see here..."

Senator Larry Tidemann (R-7/Brookings) says the Government Operations and Audit Committee's probe of financial misconduct in the Governor's Office of Economic Develoment and the EB-5 visa investment program are pretty much over.

Over? I didn't even notice that they'd begun.

Michael Larson describes Tidemann and GOAC as rookie cops telling us there's nothing to see here. Rep. Kathy Tyler (D-4/Big Stone City) reminds us there's plenty to see, like...

That's not an exhaustive list of topics related to the Governor's Office of Economic Development and the EB-5 program that legislators of good conscience thought they were directing Chairman Tidemann and GOAC to address. But it's a good starting list of the symptoms of the culture of corruption in Pierre. Chairman Tidemann and his Republican colleagues have ignored this list of symptoms, put their stethoscope to GOED's big toe, declared the patient healthy, and gone golfing.

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Before being ruled out of order for asking questions Republicans don't want asked, Rep. Susan Wismer (D-1/Britton) told the Government Operations and Audit Committee that she had just read an article raising grave concerns about the EB-5 visa investment program.

She couldn't remember the title (she does have a lot on her mind—Republican stonewalling and corruption, her own campaign for Governor), but I think she was referring to this Fortune article from last week:

From the law’s inception in 1990, selling potential citizenship to the rich struck many as a corruption of American ideals. “Have we no self-respect as a nation?” asked Texas congressman John Bryant on the House floor that year. “Are we so broke we have to sell our birthright?”

But that powerful objection was overcome with an even more potent counterforce: The program would generate jobs where they’re needed most. Immigrants seeking EB-5 visas must invest their half-a-million dollars in a new business that creates 10 full-time U.S. jobs in a high-unemployment or rural district [Peter Elkind, "The Dark, Disturbing World of the Visa-for-Sale Program," Fortune, 2014.07.24].

The article notes that EB-5 enjoys bipartisan support, a fact alluded to by GOED boss Pat Costello in his testimony before GOAC today. Tycoons Warren Buffett, Bill Gates, and Sheldon Adelson support a reformed and expanded version of EB-5 and are worried that Congressional gridlock will result in the expiration of EB-5 on October 1 (what? Wait a minute—suddenly, I like gridlock).

But the Fortune article sees fraud and abuse in EB-5, just as we've seen (but which GOAC and the South Dakota Republican Party refuse to see) in South Dakota:

But because the EB-5 industry is virtually unregulated, it has become a magnet for amateurs, pipe-dreamers, and charlatans, who see it as an easy way to score funding for ventures that banks would never touch. They’ve been encouraged and enabled by an array of dodgy middlemen, eager to cash in on the gold rush. Meanwhile, perhaps because wealthy foreigners are the main potential victims, U.S. authorities have seemed inattentive to abuses [Elkind, 2014.07.24].

Lack of regulation, dodgy middlemen... sound familiar?

Rep. Wismer tried to get a straight answer from GOED chief Costello on how much economic impact the EB-5 program has had in South Dakota. Costello said South Dakota doesn't have such data.

Rep. Wismer should have read Costello and the committee this part of the Fortune article, which says Uncle Sam can't show any reliable economic impact from EB-5, either:

Others who have examined the program view it very differently. They question whether it generates many jobs—especially in needy areas. A December 2013 study by the Department of Homeland Security’s inspector general [also reported in the Madville Times, 2013.12.13] found that the government “cannot demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens.” A February 2014 paper by the Brookings-Rockefeller Project on State and Metropolitan Innovation concluded that “knowledge of the program’s true economic impact is elusive at best.”

There are two reasons for that. First, the government is exceedingly generous in its employment tally. It gives EB-5 investors credit for all the jobs theoretically spawned by a project even when EB-5 money represents only a sliver of its financing. Second, for many mainstream ventures, EB-5 money isn’t really creating jobs—it’s merely saving developers money for projects that would be financed anyway. (Indeed, those big companies are actually “hijacking” money from worthy smaller investments in hard-hit areas, argues Michael Gibson, a financial adviser who vets EB-5 investments.) [Elkind, 2014.07.14].

In other words, EB-5 is a poorly regulated, easily abused program with no reliably demonstrable economic benefits. But given the bullying and stonewalling the Republicans on the Government Operations and Audit Committee displayed today, you won't hear about that.

Why bother having legislative hearings on EB-5? Rep. Wismer, just read us that Fortune article... and start handing out copies on the campaign trail.

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I know better than to get my hopes up. But after mostly idle chatter on the topic at the last couple meetings, the Legislature's Government Operations and Audit Committee will hear from not just one but two state officials tomorrow on the topic of financial misconduct in the Governor's Office of Economic Development related to the EB-5 scandal.

Pat Costello, current GOED commissioner, is on the agenda for Tuesday's 9 a.m. GOAC meeting. GOAC has summoned him to follow up on the discussion of what GOED is doing to make sure folks don't double-bill their plane tickets or claim other questionable reimbursements.

But first, they'll hear from the potential man of the hour, Attorney General Marty Jackley, who sends this note to the press today:

Tomorrow July 29th at 9:00 am, Attorney General Jackley will address the South Dakota Government Operations and Audit Committee of the Legislature regarding the Attorney General's investigation into potential financial misconduct at GOED. The hearing will be held at the State Capitol Building room #413 [South Dakota Attorney General's office, press release, 2014.07.28].

In a subsequent note to reporters, the AG's office says Jackley intends to "address matters that are outside of legal advice in open session." In other words, we may actually get some interesting comments from the state's top investigator on what's happening with the GOED/EB-5 investigation.

Chairman Tidemann, Rep. Wismer, members of GOAC, tomorrow's your chance to ask some really good questions to help South Dakota understand what happened with EB-5 money and to assure the voters that their elected officials are doing everything in their power to identify, prosecute, and prevent corruption in state government.

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Deadwood makes the New York Times... for being confused:

This old Western town of gunfights and gambling is going through an identity crisis.

...“It feels more modern, a little bit more Vegas style,” said Russell Lehmbeck, 43, a tourist from Wyoming who complained that Deadwood seemed confused about what it wanted to be. “It used to feel like I could get on a horse and ride down the road and no one would say a thing” [Steven Yaccino, "As Gold and Gambling Lose Their Luster, Deadwood Seeks a Spark," New York Times, 2014.07.10].

As we discussed in February, this identity crisis is motivated in part by the decline of gambling. It's not the smoking ban draining Deadwood's casinos; it's competition from 48 states that have legalized gambling in some form. Deadwood thus continues its civic conversations about how to retool its downtown and its community brand.

I still say build the outdoor-recreation brand. Get more hikers, bikers (the pedal kind), climbers, and skiers. Pitch the natural beauty that surrounds Deadwood... and make sure Wharf and the other miners don't take away any more of the mountaintops on which Deadwood should base its brand.

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I've heard this bit of Madison lore in a couple of permutations. Back in the 1960s, a contractor on a new project was planning to pay his workers wages higher than the local going rate. One of the city fathers (has Madison ever had a "city mother", a powerful woman going around and laying down the law?) went to the contractor and told him he couldn't do that. Pay your workers more, said the concerned civic leader, and everybody else will have to pay their workers more to compete. And heaven knows Madison doesn't want competition.

This story jumps to mind as I read Aaron Renn, who asks whether cities really want economic development and the change inherent in growth:

economic struggle can be a cultural unifier in a community that people tacitly want to hold onto in order to preserve civic cohesion.

Jane Jacobs took it even further. As she noted in The Economy of Cities, “Economic development, whenever and wherever it occurs, is profoundly subversive of the status quo.” And it isn’t hard to figure out that even in cities and states with serious problems, many people inside the system are benefiting from the status quo.

They have political power, an inside track on government contracts, a nice gig at a civic organization or nonprofit, and so on. All of these people, who are disproportionately in the power broker class of most places, potentially stand to lose if economic decline is reversed. That’s not to say they are evil, but they all have an interest to protect [Aaron Renn, "Do Cities Really Want Economic Development?Governing, July 2014].

Replace cities with South Dakota (o.k., and do with does and want with wants). Does South Dakota really want a huge class of well-paid workers who are not bound by local history or state assistance? Does South Dakota really want to invite a creative class that might revitalize local economies but would also include a bunch of people who don't look or pray or vote the way everyone else does? Does South Dakota really want to build an education system that guides students to become something other than cogs in a managerial machine and an economy that invites those independent thinkers to stay and thrive?

It seems nuts that a community of any size would throttle economic development and hold back its own general welfare. But combine concentrated power with an identity built on struggle (oh, life on the prairie is so hard, we're just barely hanging on, just like our homesteading ancestors...), and you can get a community that chooses a plodding status quo over dynamic growth.

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If EB-5 were just a scandal involving deliberately poor government oversight, get-rich-quick schemers, and a dead former state official made fall guy, it would still be reason enough to question the Senate-worthiness of the governor who sunk South Dakota into it, GOP candidate Marion Michael Rounds.

But the EB-5 visa investment program is also bad policy, a point Democratic U.S. Senate candidate Rick Weiland continues to stress. At last night's South Dakota Democratic Party convention banquet, Weiland said that EB-5 corrupts our immigration process and our economic development efforts by doing favors for wealthy foreigners:

To sell residency to rich foreigners, as my opponent aggressively advocated throughout his tenure as Governor, and in a debate just this spring, is not economic development, it is government enabled extortion, and it is wrong.

I am well aware that some in the business community view government enabling the trade of legal American residency to foreigners at $500,000 a pop to be a vitally important economic development tool. As Governor my opponent created and led the fight for this kind of government sponsored sale of residency in South Dakota, and he strongly supports it to this day. It epitomizes his view that enabling private profit is government's number one job.

I fundamentally disagree with that view. I think government's number one job is guaranteeing equal opportunity for all businesses to compete on a level playing field and to win their successes the old fashioned way, by earning them.

I believe South Dakotans can compete without this kind of morally offensive government help. We always have.

If a person is willing to sell legal residency in his own country for private profit, what won't he sell? Where is the line? As has been testified to Congress in great detail, EB-5 is a breeding ground for greed and corruption.

If elected I will vote to abolish the EB-5 enabled sale of legal residency nationwide. My opponent will vote to extend it. The window on our two different philosophies, and on the kind of Senator we each hope to be, could not be clearer [Rick Weiland, speech to South Dakota Democratic Party convention, Yankton, SD, 2014.06.27].

Voters deserve an honest investigation and discussion of the secrecylegality, and suspicious financing associated with South Dakota's EB-5 program. But whether that investigation brings anyone to court or prison, voters also deserve a thorough discussion of whether it is wise or just to keep selling green cards through EB-5. Rick Weiland has a winning issue here that fits with his central campaign theme, that Mike Rounds is all about profit over people, about favors for rich friends over fair and effective policy.

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Civilization took a big leap forward when we moved from hunting to gardening. So can economic development.

Consider Littleton, Colorado. In 1987, rocket maker Martin Marietta left town, laying off 7,800 workers.

“As good a citizen as Martin Marietta was, they were headquartered out east,” says Chris Gibbons, Littleton’s business director at the time. “Our future was being determined by people far, far away. They didn’t have to see the people in the grocery store on Saturday that they laid off” [Liz Farmer, "Economic Gardening Is Growing, But What Is It?" Governing, 2014.06.27].

Instead of going hunting for another big corporate employer, Littleton chose to focus on developing local businesses, specifically "Stage 2" businesses—10 to 100 employees, doing at least $1 million in business a year.

Gibbons called it economic gardening and began trying it out in Littleton in the late 1980s by identifying local Stage 2 companies and offering them more resources to help expand their business. Over the next 25 years, Littleton’s population increased by one-quarter but the number of jobs tripled and the city’s sales tax revenue went from $6 million to $21 million. “When Martin Marietta was there, we were a rocket town,” says Gibbons. “Now that economy is so diverse, there is no one industry that could fail and bring down Littleton like it could 25 years ago” [Farmer, 2014.06.27].

Tripling jobs and sales tax revenue, diversifying the economy, and increasing the number of locally invested entrepreneurs—can you beat that?

Oh yeah, and it costs less. Maryland is doing a similar economic gardening program. The state spends about $5,000 per business. The going rate in South Dakota is more like $4 million ($4.3M for Northern Beef Packers, $4.5M for French Bel Brands...).

Andrew Ratner, public relations manager for the Maryland Department of Business & Economic Development, says the idea is appealing in part because it takes the focus away from competing with other states. “That’s economic hunting -- everybody’s trying to land that enormous auto plant to move halfway across the country,” Ratner says. “And the amount of incentives that often have to be given to lure those kind of things, there’s often a lot of debate if that’s even worth it” [Farmer, 2014.06.27].

Not to overload you with metaphors, but how long have I been saying this about the Toyota lottery?

Governor Daugaard has seen the hunting fail and inkled that he might pursue an economic gardening policy. The evidence from Littleton and Maryland show that moving from hunting to gardening makes sense.

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CNBC takes away South Dakota's #1 ranking for business, and KELO-AM's Greg Belfrage, who inclines Daugaard-ward more than I, says our drop from #1 to #11 may say "less about South Dakota than it does about the accuracy and reliability of these endless media rankings."

Given that GOP-soothing grain of salt, let's look at CNBC's business rankings for our neighborhood in detail:

State NE MN ND SD IA WY MT
Overall 4 6 10 11 12 21 33
Cost of Doing Business 10 38 22 6 7 18 12
Economy 11 5 7 20 18 41 38
Infrastructure & Transportation 18 5 10 31 25 12 25
Workforce 16 30 8 6 37 18 46
Quality of Life 8 4 5 10 20 16 11
Technology and Innovation 40 11 49 50 29 46 45
Business Friendliness 3 15 7 2 9 8 42
Education 19 12 22 30 22 12 21
Cost of Living 21 28 12 16 12 33 25
Access to Capital 35 11 45 26 49 35 27

South Dakota's in a competitive neighborhood. Three of our neighbors are top-ten states. All but Wyoming are in the top half on the overall ranking.

Yeah, it looked better with just one 1. How're we gonna fix that?

Yeah, it looked better with just one 1.
How're we gonna fix that?

As I noted this morning in response to a Republican spokesman, South Dakota's weak points on this scorecard, three areas where every neighboring state outperforms us, are education, infrastructure, and technology and innovation. Hmmm... when we see happy rankings, we gloat, buy a banner in the Minneapolis airport, and tell businesses those rankings indicate good reasons to move to South Dakota. When we see grim rankings, do we pout? Do we ignore them? Or do we tell ourselves those rankings indicate good reason to fix South Dakota?

Why might we be lagging in those three categories? Consider that education, infrastructure, and technology and innovation are the three areas in CNBC's methodology where improving a state's score hinges most on doing something, on spending money. We can't deregulate our way to good schools and roads and inventors. Investing real money helps all of those things happen. And investing real money gives South Dakota lawmakers the willies.

Zooming back out the nationwide dataset, CNBC's rankings provide a chance to look for relationships. Which of the above factors go hand in hand, and which run appear to run opposite?

  • Rankings for business friendliness and the economy seem to have the least to do (mathematically, the lowest average correlations) with the other factors on CNBC's business scorecard.
  • The cost of living and the cost of doing business are, predictably, closely associated (on a scale of 0 for no relationship to 1 for perfect relationship, the two factors correlate at 0.88).
  • The next strongest correlation is between tech/innovation and access to capital (0.66). Again, we'd expect that: folks starting more high-tech businesses and pumping out more patentable inventions probably have more venture capitalists around to support their efforts, along with the state resources that CNBC considers.
  • Rankings for quality of life and cost of living have a notable relationship, but it's negative (–0.62). Read this carefully: states ranking higher for quality of life tend to have lower rankings for cost of living. For instance, Hawaii is #1 for quality of life but 49th (as in worse, more expensive) for cost of living. Kentucky is #1 (as in best, cheapest) cost of living but 42nd for quality of life. Hmm... does money buy at least a little happiness?
  • None of the other correlations on the grid crack 0.60 (which is an arbitrary cut-off, but hey, a blogger has to take a break somewhere, right?), but education shows two mild correlations of interest. Seven of the top ten states for education (New York, Connecticut, Massachusetts, Maryland, New Jersey, Pennsylvania, and Vermont) are among the ten states with the highest business costs (taxes, utilities, commercial rent, etc.). Six of the states with the lowest business costs (Oklahoma, Louisiana, Mississippi, Idaho, and South Carolina) are in the bottom ten for education. A similar pattern arises from the rankings of education and cost of living: states where folks pay more to get by tend to have better-ranked education systems.

CNBC's state business rankings may be just one more arbitrary set of numbers, to ignore or embrace as fits the narrative of our choice. But if we embrace those numbers as signs that South Dakota is doing well, we should consider giving them equal consideration when they point to things we can fix. And the things CNBC says we need to fix—our schools, roads, and research and development—won't fix themselves. Just as in business, if we want to grow, if we want to get back to #1, we have to invest.

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