Corporate Welfare Harms Corporations

People criticize business subsidies because they harm taxpayers. But there is another group harmed by business subsidies: the recipients. Government welfare for low-income families induces unproductive behaviors, but the same is true for companies taking corporate welfare.

When subsidized, businesses get lazy and less agile. Their cost structures get bloated, and they make decisions divorced from market realities. Lobbying replaces innovation.

Corporate leaders get paid the big bucks for their decisionmaking skills, yet many of them get duped by politicians promoting faddish subsidy schemes.

From the Wall Street Journal yesterday:

A Mississippi power plant intended as a showcase for clean-coal technology has turned into a costly mess for utility Southern Co., which is now facing an investigation by the Securities and Exchange Commission, a lawsuit from unhappy customers and a price tag that has more than doubled to $6.6 billion.

The power plant, financed in part with federal subsidies, aims to take locally mined coal, convert it into a flammable gas and use it to make electricity.

Conceived as a first-of-a-kind plant, it currently looks to be the last of its kind in the U.S., though China and other nations have expressed interest in the technology. Kemper costs have swelled to $6.6 billion, far above the $3 billion forecast in 2010.

A former Kemper project manager said he was let go after complaining to top company officials that public estimates for the project’s completion were unrealistic and misleading.

Brett Wingo, who was a project manager for the gasification portion of the plant, said he thinks the company put a positive spin on construction so it wouldn’t have to acknowledge to investors it was likely to lose federal subsidies due to delays.

To date, Southern has paid back $368 million in federal tax credits for missing deadlines, but believes it will be able to keep $407 million in grants from the Energy Department.

My advice to corporate leaders: don’t take corporate welfare. Grabbing hand-outs will undermine your cost control, induce you to make bad investments, and distract you from serving your customers. Subsidies will make you weaker.

More on Southern’s subsidized coal blunder see here.