General Motors’ notice to shutter several plants reminds us that corporate welfare does not produce long-term sustainable businesses. It’s a band-aid and a colossal waste of taxpayers’ funds. Government could apply those funds to help retrain workers, assist them to find new jobs, and minimize loss of income during the transition to their new situations.
Businesses Create Wealth and Jobs
Business is the vehicle owners use to create jobs and provide incomes for employees and shareholders to become consumers and keep the economy growing. A firm must have the right people cooperating in the correct slots headed in the right direction. Its ability to pay its workers and shareholders comes from producing and selling machinery, equipment, goods, and services people want or need.
We should encourage business owners to pay their employees well, become profitable, retain profits, reinvest in the business, and pay dividends to their owners. But we shouldn’t bully firms to keep uneconomic plants open. If there is no market, there are no sales, no funds available. A structurally unsound business should close early while treating workers fairly and respectfully.
Corporate Welfare Destroys Jobs
Governments are not short of wealth destruction tactics. Thus, they give companies huge subsidies to “create jobs” or for other political reasons. They do not see that this is merely another major government-waste outlet. Sadly they do not examine results over time to see that their corporate welfare is anti-competitive and destroys jobs long-term.
Governments’ role is to create level conditions for firms to flourish. They must develop conditions amenable for businesses to want to operate in their jurisdictions. It is absurd and naive to believe bribing companies with handouts is more than a temporary fix. According to the Fraser Institute:
Between 1961 and 2013, the federal [Canada] department of industry disbursed $22.4 billion to businesses… The top 10 recipients received just under $8.5 billion, or 38 percent of all money disbursed… [M]any corporations or their parent companies that receive corporate welfare are anything but start-ups. Also, in many cases, cash-on-hand possessed by the company or parent company far exceeds the total original corporate welfare amount disbursed. This calls into question at least one justification for policy that allows subsidies to business-that taxpayer assistance is required to fill in for market failure and a lack of capital.
Some Blue Chip Companies Get Corporate Welfare
In the USA, corporate welfare recipients include Nike, Intel, Boeing. Indeed, it is outrageous how governments arbitrarily dispense taxpayers funds to large corporations without consultation or accountability. Why not use these funds to cut personal income tax? Here again is an example of complacent electorate allowing government waste.
In my experience in business in many countries, I saw several examples of corporate welfare, primarily because governments and unions did not want structurally unsound firms to close. Sadly, some of these firms received welfare payments for years but eventually closed.
Governments and the public need to realize structurally unsound businesses will not survive. Therefore, the best approach is an orderly closure early that includes retraining and relocating workers, where feasible. Encourage companies to close with utmost care and empathy for employees. The alternative of staying open provides false hope about the business’ future. If firms can survive only with financial aid from taxpayers, they have no future.
Corporate Welfare is Cronyism
Since corporate welfare strategies do not work over the long-term, why do governments continue them? The answer is obvious: Corporate welfare produces positive short-term political results. And most of all, ignorance leads the electorate to believe governments’ propaganda about using tax dollars to fund losing businesses. So, who will educate the public about business realities? To be sure, the government won’t. Thus, firms must take on this role although they start with a significant creditability gap. Sadly, a few greedy, self-serving CEOs, take excessive amounts from their firms in different forms.
History will show giving investment incentives to selected industries as Canadian and USA governments do is myopic. Indeed, Canada’s corporate welfare extends to aerospace, energy, agricultural, and automotive industries, yet with this massive support the auto industry is declining and will continue without more welfare. The alternative to corporate welfare is to eliminate special payments and incentives to businesses, eliminate corporate taxes, remove unnecessary regulations, and allow firms to grow and create jobs.