So as part of the conversation yesterday my friend S. asked this question and made this statement.
"Well, while we're on a timely and semi-related topic, how about the fact that profit is private, but risk is shared?
All of the good things that happen are due to the hard work of the individual or entity, so they owe the public nothing. When bad things happen it's not their fault, so the public (that would be you) is left to pick up the tab."
So, I would like to hear from some of my more conservative friends or my more liberal friends or even my more centrist friends. There, I think I covered all the bases. What do you people think? Is S making a good point? Is this something to even consider?
I think he makes an interesting observation myself. I know that often to lure business to an area the state or town will offer tax incentives to the business. But, what seems to happen so often after the tax incentive runs out is that the business packs up and moves away to a new place that is going to give them some more tax breaks.
An example of the problems this can cause is below. This comes from a background paper by the Tax Foundation Check it out if you have the time.
"State lawmakers are always mindful of
their states’ business tax climates, but they are
often tempted to lure business with lucrative
tax incentives and subsidies instead of broadbased
tax reform. This can be a dangerous
proposition as a case in Florida illustrates. In
July of 2004 Florida lawmakers cried foul
because a major credit card company announced
it would close its Tampa call center,
lay off 1,110 workers, and outsource those
jobs to another company. The reason for the
lawmakers’ ire was that the company had
been lured to Florida with a generous tax
incentive package and had enjoyed nearly $3
million worth of tax breaks during the
previous nine years."
Now, I totally understand that a business is free to do what they want when they want to do it. Other then maybe being limited by whatever contracts they may have signed. But I wonder is there an ethical or moral responsibility to whatever community that a business sets up shop in? I like to think there is. I would think that after you have been a part of a community and benefited greatly from the tax cuts and incentives they gave you that you would be willing to give a little back to help support the infrastructure that was in place that allowed your business to be a success. Or am I naive to even think that this should be a consideration for a company?
What do you think folks? I do think that the precedent that the bailouts set are not going to be a good thing for this country. I think that for a long time we had given lip service to the idea of America being a place where great risk can make for great reward and when that blew up in the face of some big companies President Bush and the Congress that was in place decided to bail them out and then President Obama came along and continued the tactic. I think that was a mistake.
Please folks, tell me what you think and as always do not hesitate to correct me. I do not mind at all.
8 comments:
I think to a certain extent tax breaks vs. public risk are two different issues.
Abuse of tax incentives is A Bad Thing, but for a struggling community offering that incentive (at terms largely dictated by the incentivee, if that's the word I want) may well seem a worthwhile gamble amongst unattractive alternatives. As stories of abuse proliferate, one would expect that governments would become more wary. It's a market like any other, and you can only abuse your customers so much before they spend their money elsewhere.
OTOH, my point about public risk is this: Any business venture entails a balancing of risk v. profit. If my business model has a low rate of return but high liability, it is not a viable business. Liabilities, however, are often underestimated or ignored for public resources.
If I run a trucking company, and I lease rather than own my trucks, my business model must be able to accommodate the not-unlikely risk of the loss of a truck, since the leasing agency will rightly expect compensation. I can either hold collateral (a bond) or carry insurance. If my business model is not profitable enough to cover the premiums or the bond, I'm out of business. If I decide to offer an expedited shipping service that involves launching my trucks with large trebuchets from hub to hub, the increased liability costs would force me to reconsider.
OTOH, if the risk is to a public entity, I need not be able to cover that bet. In the example of Surgichrome in my previous post, the cost of cleanup of hexavalent chromium from contaminated groundwater (including neighboring residential wells) and soil greatly exceeded the ability of the company to pay, so- you get to pay it, while the company continues producing profit. There was a pattern of ongoing contamination at that site for years, contamination which was certainly not an unusual risk for that sort of business.
The BP rig in the Gulf is an even more extreme version of the same problem. What is the value of a flood-controlling estuary, or of biological diversity? What's the value of a fishing community's culture? What are the tangible costs of shipping delays in and out of the Mississippi to the thousand of impacted businesses? If the business model is not able to cover the costs of a not-unforeseeable loss like this, why are they in business?
It's not an anti-business position to suggest that a business model be able to account for and accommodate actual risk, whether the risk is to private property or a public resource. That clearly does not happen, and we are left with the bill.
Theoretically isn't that was liability insurance is supposed to cover. I know it doesn't usually but isn't that supposed to be the point of it?
That's just it- liability requirements for damage to public assets don't even begin to cover the cost of potential losses as they do with private assets.
Surgichrome (along with countless others, I don't mean to single them out) couldn't afford to fix the problems they caused, we paid the bill to fix the problem, and they continued operating and offending. Does anyone doubt we'll see that scenario repeated with BP?
That's public subsidization of private profit, and that's my beef.
Frankly, a realistic analysis of the potential, not-unexpected losses of many industries would leave them with a completely nonviable business model. Adam Smith would suggest that those enterprises have no business opening their doors in the first place. Instead, we ignore it or pretend that it's all some socialist plot to discredit all business, which is complete nonsense.
I am getting where you are going now. I do not think I was totally understanding what you were saying before.
That makes sense to me. I never thought about that before and I do not think most people have ever thought about it in those terms. I hope a few other people jump on here so we can discuss it.
I would argue that businesses always have a responsibility to the community they are found in, but that is trumped by their responsibility to their employees and board (if any) and parent company.
However, all of us are under an overarching ethical responsibility in general and that trumps all other considerations, whether business or not. Capitalism is in simple the best system we have for economics, but without an ethical people, it ends up being as bad as any other.
One of the problems we face in modern culture is that people think the big business cronyism and inside playing with government is somehow capitalism when its nothing of the sort. If you have senators and presidents doctoring the system to benefit your company because its so big and powerful ... and so big they cannot be allowed to fail when they do stupid things or face a bad business cycle, that's not capitalism. There's no competition there, no true free market, so the system is choking out capitalism.
In essence, you have a reverse socialism, where the economy is controlled by the government, but only for the benefit of a favored, powerful few, a sort of Socialistic Oligarchy.
When Goldman-Sachs and Citibank are allowed to effectively write the legislation which affects them and stock the executive department (regardless of which president or party) with their guys, that's not capitalism.
I would disagree with little of what Christopher said, other than mention that the stated (and somewhat plausible) rationale for the bailouts was to prevent greater damage to the larger economy.
Corruption and cronyism are both very real, but their end, rather than making pols rich (with rare exception), is usually to provide funds to help pols get reelected. Something this massive and unpopular is more than a bit counterproductive to that purpose.
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