A Philosopher's Blog

Corporations & Relations

Posted in Business, Relationships/Dating by Michael LaBossiere on February 26, 2011

Some critics of Governor Walker have claimed that he is trying to balance the budget on the backs of the workers while providing tax giveaways to corporations. This raises an old issue of whether states should provide companies with special incentives in the hopes of attracting business.

When times are good, this might be seen as quite sensible. After all, if the state coffers are well packed, the state can afford to be generous in the hopes of luring in companies that will (in theory) create new jobs. Of course, when times are good folks tend to see little reason to lure in more companies.

When times are not so good, this is often presented as a good idea. In theory, offering companies tax breaks and other incentives will lure them to a state, thus creating jobs and leading to more revenue for the state.

This becomes  somewhat controversial when the state is offering these breaks while also cutting budgets, typically those for social programs. This could be seen as balancing the budget by taking from the poor and giving to the rich. After all, the corporations generally do not need the breaks and incentives. Rather, they are offered in the hopes of luring companies away from setting up shop in other states. This is, not surprisingly, a matter that generates some controversy.

On the face of it, it does make sense for states to try to appear attractive to business. To use an analogy, it is a lot like dating and relationships. Corporations are analogous to the prize catches in the dating world and to land such a fish, a person needs to provide incentives. After all, someone who is handsome, rich and charming is not going to settle for someone who has little to offer. The person who can offer the most is, in general, the one who gets the prize catch.So, just as a hot young babe (or dude) might be willing to marry an old man (or woman) who is ugly but rich, a corporation would be wiling to go to a state that forks over plenty of incentives

Just like in dating and relationships, there is also competition.  If a man wants to keep that hot babe or a woman wants to keep her sugar daddy (or vice versa) then s/he has to keep providing a reason for that person to stick around and not go off with someone else. Likewise for keeping corporations. If a state wants a corporation to stay and not pack up for Mexico or China, the state needs to put out for the corporation.

Of course, these sort of relationships do raise moral questions. One of the most important is the matter of how far a person (or state) should go in order to get and keep  that other person (or corporation). On one hand, it could be argued that what matters is getting that prize (hot babe or hot corporation) and sacrificing other things is thus justified. After all, unless that hot babe (or hot corporation) is properly appeased, she (it) will just move on to another source of incentives. On the other hand, it could be argued that people (and corporations) that are willing to simply go wherever they can get the most or wherever they can get away with whatever they want are not the best people (or corporations) to have around. To use the analogy, if a guy tells his wife that she must allow him to have threesomes while he smokes crack or he will dump her for someone who will, then she should probably divorce him rather than giving in (assuming, of course, she does not want that as well).

This is not to say that people (or states and corporations) should not take into account the benefits of a relationship. However, it should be asked if it is worth it to provide such incentives and whether or not doing so is a moral compromise or not.

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12 Responses

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  1. T. J. Babson said, on February 26, 2011 at 10:15 am

    I don’t think it is right for the government to give special breaks to anyone–everyone (and every corporation) should be treated the same. The law is the law–same for everybody.

    This is why the “waivers” (about 1000 now) from the requirements of Obamacare are also wrong.

    • Michael LaBossiere said, on February 26, 2011 at 12:26 pm

      I agree-the state should provide incentives and support that provides significant social goods (such as education), but the dole should be the exception rather than the rule. A rational guided free market (free but not unregulated) system based on merit and contributions would seem to be the best system. For example, the state should help poor people pay for college because a college educated person will tend to repay that investment back many times over via taxes, productivity and by not being a burden on the state. Businesses that are starting up and have potential should also be encouraged by the state-perhaps some initial tax breaks so they can get established (which would then be repaid to help support other start ups).

      • FRE said, on February 27, 2011 at 2:39 am

        IN GENERAL I agree, but with exceptions; medical care is one of those exceptions.

        Probably we will agree that medical insurance companies should not be able to deny coverage based on pre-existing conditions since doing so makes it impossible for some people to get medical care. A controversy regarding the new medical care legislation is that it requires people either to purchase medical insurance or pay a penalty. There is a good reason for that.

        If people were not required to purchase medical insurance, then many healthy people would not purchase it until they acquired health problems. That means that those people who had purchased health insurance immediately upon becoming independent of their parents would be subsidizing those who delayed purchasing it. Moreover, those without health insurance would, upon needing medical care, cause medical care providers to lose money which would have to be made up at the expense of people who did have medical insurance.

        The only solutions I can see are to have a private medical insurance system and require everyone to purchase medical insurance, or for the government to pay for medical care. Although in some respects I don’t really like either approach, I have not seen an acceptable alternative.

        As most of us realize, we in the U.S., as a nation, pay more per capita for medical care than do other prosperous nations which have a greater life expectancy. Obviously something is wrong and should be corrected.

        One reason we pay too much for medical care is the propensity of medical care providers to order unnecessary tests and procedures which are of no benefit to patience. I’ve experienced that myself. When I had an infection, I had unpleasant side effects from the antibiotic; the side effects were a known problem of that medication, one side effect being headache, which I had. The practitioner switched antibiotics, which was fine, but then she ordered an MRI scan (cost $2500) to see if my persistent headache could be the result of a brain problem. She also ordered a doppler scan of my carotid arteries to see whether my brain was getting enough blood. Before ordering those unnecessary tests, she put me on oxygen for half an hour even though my blood O2 was fine, and gave me an unnecessary injection for the moderate headache. It is obvious that all that was a total waste of money since the headache was a known side effect and I had not previously had a problem with headaches. Of course Medicare and Medigap paid for everything, at others’ expense.

        We must find a way to eliminate unnecessary tests and procedures else medical care will continue to be too expensive.

  2. Anonymous said, on February 28, 2011 at 6:31 pm

    I could never figure out why the creators of businesses large and small, and that includes the”entrepreneurs” ,the so called backbone of our economic system, have bankruptcy as an option. The idea makes sense for municipalities, but for “entrepreneurs”? If a guy has an idea and the idea fails, tough. If he doesn’t have the nads to carry through an idea without a safety cushion, he should do something else for a living, like teach or make balloon animals.

    • WTP said, on February 28, 2011 at 9:05 pm

      Are you arguing against bankruptcy as it may be implemented in some instances (like say the recent “reorganization” of GM) or the entire idea? So long as the creditors get paid what they are owed, what’s the problem?

    • Anonymous said, on March 2, 2011 at 9:49 am

      Investopedia says an entrepreneur “runs a small business and assumes all the risk and reward of a given business venture . . .” etc. The bankruptcy option removes some of the risk if the so called entrepreneur” fails while leaving the reward intact if the entrepreneur is successful. Also according to the site divorceinfo in Chapter 11,” the debtor doesn’t escape the debt entirely but is allowed to pay less of it, pay it more slowly, or some combination of the two.” If the debtor pays less the creditors aren’t getting what they’re owed right?

      • WTP said, on March 2, 2011 at 11:18 am

        I agree in general and I am not versed in the actual implementations of bankruptcy laws so if you are, I defer. Certainly if the creditors are not all paid at least their principle, they are not being paid what they are owed (hence my GM reference). However if it is better for all of the creditors to keep the business running to ensure that all of them are paid off, at the slight expense of the interest on some of the loans, that is the better path. All bankruptcies are unique except for the reality that all creditors will want all of what they are due. The problem is who is where in line to get paid. The creditors also assumed risk when they loaned the money and so long as the rules of the game did not change in the interim, they accepted the risk/reward scenario and have their own responsibilities for the situation they are in.

        The debtor should not be able to hide his past bankruptcy, and the knowledge of such should be a warning to future creditors. Of course, all of this is a simplification in that most situations are combinations of varied entities with varied pasts. I doubt it is especially common that the same individual who wholly owns an enterprise that goes bankrupt later starts another enterprise which he/she wholly owns, but you may know better than I. Again, not saying it doesn’t happen but I wouldn’t loan them any money. OTOH, if someone else chooses to take that risk I wouldn’t stand in their way.

      • Anonymous said, on March 2, 2011 at 1:54 pm

        None of which changes my opinion that “If the entrepreneur doesn’t have the nads to carry through an idea without a safety cushion, he should do something else for a living, like teach or make balloon animals.” (my apologies to balloon animals). Maybe the following is why I feel this way—at BankruptcyData.com in their Brief History of Bankruptcy I found this. . .
        “In the United States, early federal bankruptcy laws were temporary responses to bad economic conditions. The first official bankruptcy law was enacted in 1800 in response to land speculation. It was repealed in 1803. Similarly, in 1841, in response to the panic of 1837, a second bankruptcy law was passed. This law was quickly repealed in 1843. The economic upheaval of the Civil War caused Congress to pass another bankruptcy law in 1867, and that law was repealed in 1878. All of these laws contained some allowance for discharge of unpaid debts. The first two laws, those of 1800 and 1841, allowed only minimal discharge of debt; while the 1867 law was the first to include protection for corporations.
        Before the 20th century, rules and practices concerning bankruptcy generally favored the creditor and were harsher toward the bankrupt. The focus was on recovering the investments of the creditors, and ­unlike now­ almost all bankruptcies at this time were involuntary. The practice of involuntary filings does continue to exist, with an option to convert to voluntary filing status, but is relatively rare.”
        Where’s the 21st century entrepreneur’s American independent spirit?? The spirit that helped to build this country???

        • WTP said, on March 2, 2011 at 2:58 pm

          I’m afraid I’m not following you, though your line of reasoning seems vaguely familiar…

          While I agree with your opinion that someone who has gone bankrupt should be viewed with caution, what are you suggesting should be done? Are you objecting to the creditors not getting all of their principle and interest? So long as taxpayers are not expected to pick up the tab for the failed business, all of the other parties involved knew the risks and entered into the agreements voluntarily. Of course this is putting aside the cases of out-and-out fraud, which is a whole other matter. What specific “safety cushion” are you concerned about? What are you proposing should be done differently?

        • Anonymous said, on March 2, 2011 at 3:47 pm

          This kind of thing, for example bugs me: From USALegalCare.com. . . “Priority of claims is determined by Section 507 of the Bankruptcy Code, but as a general rule secured creditors, such as some banks and bondholders, have a higher-priority claim on the proceeds of the sale of corporate assets than unsecured creditors, such as vendors who have not been paid for products they previously delivered to the company (and who don’t have any collateral for their claim).”So where does the guy who provides the services to mop the floors and the guy who had a contract with the business and was depending on that contract to keep his 5 person business afloat-all of whom are US taxpayers– end up? Getting the hindmost, assuming there is anything left after the IRS, banks and bondholders and stockholders” pick the carcass clean. One suggestion: reverse the order of dispensation of payments.
          Another. . . I’d like to see in large, bold print on every contract an entrepreneur or corporation enters into with a vendor or a service words like “If this business goes belly up you, the service provider or vendor, will receive complete payment for goods and or services rendered even if I, the owner must sell any assets ‘legally exempt’ under any federal or state bankruptcy laws or, if necessary enter into a modern equivalent of indentured servitude to repay my debt to you.”

          • WTP said, on March 2, 2011 at 6:04 pm

            Well, I definitely agree vis-à-vis shareholders. Shareholders should get bumpkis. There is the real moral hazard problem, which was what was so egregiously wrong about the GM bailout.

            As for the unsecured creditors, they (should) know that they are unsecured going into the business and bid their contract accordingly. Perhaps that guy who got the contract in the first place under bid his competition by not taking this situation into account. He assumed risk, whether he knew it or not. As for your contract suggestion, something similar could be built into a contract or the contractor could require some form of deposit or other financial arrangement. I think you’d have a hard time with the indentured servitude thing. We outlawed slavery in this country a few years ago. But then again, if both parties agreed to the stipulation, no reason in my mind it shouldn’t be allowed.

            • Anonymous said, on March 2, 2011 at 8:09 pm

              1/Yeah, I did go over the line a bit with “indentured servitude”.
              2/ Yes, they (should)—hence the recommended contract addition.
              3/I still say the main,perhaps even the only, burden of risk should rest with the business ownerI We want to lift the limiting hand of government from business (see regulations and taxation, for example) so let’s keep government, of which the legal system is part, out of business’ way in this case as well. If a business is going to fail, everyone owed should get paid until the very last and lowest is satisfied. If owners/entrepreneurs end up in paupers’ graves, so be it. Too big to fail? Too big to go to jail?I don’t think so. Let the chips fall as they may. Let the consequences be felt by the debtors, by the creditors if need be, and, if necessary let whatever unpredictable and possibly serious collateral economic damage take its necessary toll.
              So sayeth erik.

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