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July 30, 2014

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Public subsidies aren’t good business

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High atop a hill in Birmingham, Ala., stands a statue of Vulcan. With a spear raised in his right hand, the Roman god of fire and the forge makes an imposing figure — one that remains the tallest cast iron statue in the world. In 2001, however, he was less a symbol of the Alabama steel industry than of questionable government spending. Over a two-year period, $3.5 million in federal funds were spent overhauling the titan — to the point that fiscal hawk John McCain issued a tongue-in-cheek demand: “Not one more federal dollar to promote tributes to pagans!”

Unfortunately, the proper lesson has not been learned. For the people of Alabama, the level of largesse has only grown. Last week, The Wall Street Journal reported that ThyssenKrupp, a German manufacturer, decided to sell the largest, and newest, steel plant in America. It cost $5 billion to build and has been open for less than two years. Alabama gave the company $1 billion in subsidies — most of which is gone for good. That’s a lot of money. That’s crazy money. Which raises the question: How much crazy will it take for this kind of silliness to stop?

It didn’t seem silly to Alabama’s politicians when they started throwing money around five years ago. They were “competing” with Louisiana and Arkansas to “win” the plant. That language itself is part of the problem. When politicians view every plant to be their responsibility to “win,” they engage in economic micromanagement under the banner of job creation. They use their power to entice particular companies to behave in particular ways. And they lose sight of their real duty — to create an environment where economic growth can occur.

The massive incentive package granted by Alabama’s state and local authorities included tax benefits, training subsidies, site preparation and expedited permitting. The state was awash in press releases and handshakes. Left out of the smiling photo-ops, however, were executives from competitors such as Nucor, America’s second-largest steel producer. They got to stand by and watch as politicians handed ThyssenKrupp a competitive advantage to beat them over the head with.

Of course, it didn’t work out that way. Hindsight lays bare just how badly ThyssenKrupp had miscalculated. The German firm started construction in 2007, at the peak of a global economic growth cycle; its managers planned on importing inexpensive raw material from a sister plant in Brazil; and they assumed that world steel prices would remain high. Instead, the economy blew apart in 2008; high inflation and a strong currency have turned Brazil into a high-cost producer; and steel prices have fallen by 30 percent in the past two years. Who’s the Roman god of irony?

When Dan DiMarco, Nucor’s CEO, tells the Journal that “this thing never should have been built,” he’s right. But every day, some business somewhere makes bad investment choices. All the more reason the Alabama plant never should have been subsidized. Today, the responsible parties would argue that they were just trying to “create jobs” and “leverage the public sector.” Dividing the total subsidies across the 1,500 plant workers, the bill comes to more than $650,000 spent per job. That’s a whole lot of leverage.

On a level playing field, good managers and smart companies win; better investments and higher efficiency drive economic growth. When politicians use the public trough to finance bad corporate decisions, everyone loses. Diverting taxpayer resources to shaky operations is costly enough. But by sustaining weak players, subsidies also undermine the strong, which hurts the economy across the board.

Crony capitalism has been around forever, but it does seem that the behavior has spread like a bad rash through America’s capital cities in recent years. Massachusetts lost $10 million backing Evergreen Solar; Rhode Island’s bet on video games will cost it $100 million; and the disastrous loan guarantees to Solyndra and others have cost federal taxpayers more than $1 billion.

Politicians should view requests for special treatment not as an opportunity but as a warning. If you need to offer tax breaks, your taxes probably are too high. If you need to short-circuit the permitting process, your regulations are too onerous; and if you need to subsidize training, your public education system isn’t getting the job done. As Alabama learned, it was folly to think bureaucrats could simply conjure up a competitive steel plant. That’s the kind of hubris frowned upon by the gods.

John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Boston Globe. His father, former Gov. John H. Sununu, is a frequent surrogate for the Mitt Romney campaign.

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  1. Columnist is right. Good article. Government has no business choosing winners and losers in business. Let the free market do it.

    CarmineD

  2. Agreed. And, our government has no business choosing winners and losers in OTHER national governments.

  3. The Senator knows.