8.
AN ECONOMY FOR EVERYONE
“Equal rights to all; special privileges to none.”
THOMAS JEFFERSON (ATTRIBUTED)1
“In the market economy, every owner is continuously obliged to justify, through service, his right to retain control of the resources he claims.”
PAUL L. POIROT2
A few years ago, I gave a guest lecture at MIT’s business school. I laid out my view that success in business begins by focusing on how you can create value for others, starting with your customers and employees.
One of the students immediately challenged this, which I welcomed. He said, “Isn’t that naïve? In business, your focus needs to be on maximizing your profits.”
I responded by asking, “What’s more naïve, focusing on creating value for your customers, or expecting that they’ll pay you if you’re not creating value for them?” The conversation quickly changed.
This discussion is far from academic. Plenty of companies embrace the dangerous philosophy advocated by the student: profit by any means necessary. The result is injustice on a massive scale. It’s harming millions of Americans—people like Melony Armstrong.
Melony decided in her mid-twenties that she wanted to pursue her passion for hair braiding.3 Born in Ohio before moving to Mississippi, she acquired the skill by practicing on friends and family members. Demand for her services became so strong that she decided to make it a business. It wasn’t long before she encountered the many obstacles built by companies that were willing to rig the system to maximize profit.
Melony had fallen victim to the scheme of “occupational licensing.” Years before, Mississippi cosmetologists convinced the state government to create high barriers to entry into their industry. The reason: to stifle potential competitors and protect themselves—and their profits—from entrepreneurs like Melony. So they convinced the state that hair braiders should be required to get government approval before setting up shop, knowing full well that many, if not most, couldn’t clear these hurdles. Politicians in Mississippi, like most other states, agreed to this injustice with little or no opposition.4
The state demanded that Melony take a “wigology” class, which had nothing to do with hair braiding, in which she was already proficient. The class itself took 300 hours, and only two schools in Mississippi offered it.5 (By comparison, she would have needed only 120 hours of training to become an emergency medical technician—a job that quite literally deals with life and death.)
Since neither of the schools were in her hometown, it looked like Melony was out of options. She was ready to give up. Fortunately, a local cosmetologist agreed to teach her the class, keeping her dream alive.
That ordeal behind her, Melony finally opened her shop, Naturally Speaking, in Tupelo, Mississippi. Her plan was always to hire others and teach them the hair-braiding trade, yet that led to another, larger barrier. If she wanted to train and employ others, she would have to pay about $10,000 and take another 3,200 hours of schooling—a five-figure, three-year commitment.6 Once again, none of the required “education” dealt with hair braiding.
This was devastating. Yes, Melony finally had her business, but she didn’t have any legal way to expand it without jumping through another impossible hoop. Once again, the organized cosmetologist lobby had deliberately built a wall around their companies even though that meant hurting Melony and the people she might employ—not to mention the customers who valued her service.
Melony was going to train folks who might one day compete against her. For trying to empower others, she received a cease-and-desist letter. For trying to help people, she was held back.
It’s difficult to overstate just how much occupational licensing punishes the least fortunate and those who start with nothing. Licenses cost money and time that most don’t have. If you’re already struggling to make ends meet, can you afford to take three years off to spend 3,200 hours in training? The system stifles those who merely want the opportunity to pursue their passions and contribute. (Don’t worry, Melony persevered—stay tuned.)
GOOD PROFIT
Melony’s story shows the danger of pursuing profits by any means necessary. It fundamentally misunderstands the role of business and the point of profits.
This was the topic of my earlier book Good Profit. For a business to succeed long-term, and deserve to, it must practice mutual benefit—a win-win philosophy. At their best, companies create the innovations that improve lives, delivering better products at lower prices for more people. Profit isn’t the goal, it’s the result. Specifically, it’s the result of making a contribution to society. As Paul Poirot points out in the quote that frames this chapter, good profit is a measure of this contribution.
Good profit springs from businesses creating value for others. (This is what I call Principled EntrepreneurshipTM, if you recall from chapter three.) This concept requires listening and responding to changing needs and wants. To the extent that a company does this, it will deserve the money it makes, succeeding by enabling others to succeed. By contrast, ill-gotten gains—bad profit—come when businesses harm people to advantage themselves.
Customers depend on principled businesses, but not only them. So do employees. After formal education ends, business is the primary place where people discover, develop, and apply their gifts. Most folks work for most of their lives, as I have, and they need jobs that challenge and reward them for creating value for others. The best companies empower employees, helping them see that the more they serve customers, the more fulfillment and reward they’ll receive. As I described in chapter three, this approach transformed Koch Industries.
To recap: as an institution, at its best, business does three things.
First, it empowers employees to self-actualize.
Second—and as a result of the first—it develops and supplies the products and services that others use to improve their lives.
Third, it helps create a culture of mutual benefit, in which people learn that success comes from contributing.
So, not only does business improve lives; it instills the mentality that is essential for societal success. At its best, business empowers people to contribute to progress.
But as Melony’s story shows, that’s not what many companies do. In certain key ways, the institution of business is breaking down. Instead of building a culture of mutual benefit, it is often pitting people against each other.
Why? Because of corporate welfare.
As you read in the introduction, corporate welfare is an insidious form of unequal treatment—which is to say, government-sponsored discrimination. It arises from collusion between businesses or other organizations (such as trade associations, unions, and nonprofits) and government. It allows the privileged to gain or keep power and wealth at the expense of everyone else. It takes the form of handouts, mandates, bailouts, and anticompetitive regulations, among many others, different examples of which I will cover shortly.
Whatever the name, corporate welfare is synonymous with a rigged economy, in which the politically connected climb higher by pushing the rest of society down. It’s a dagger aimed at the heart of economic opportunity for all and a major reason why so many are skeptical of business—and rightfully so.
THE CORPORATE WELFARE CRISIS
Corporate welfare is never far from everyday life. As Melony’s story demonstrates, the consequences may not be obvious, but they are significant and pervasive. Every American pays the price, and the price is bigger than anyone can see.
Occupational licensing illustrates this reality. Beyond Mississippi’s unreasonable barriers for would-be hair braiders, roughly a quarter of U.S. workers—from barbers to interior designers to upholsterers to so many more—are now covered by these laws, which are mandated by cities and states.7 This includes tens of millions of people in hundreds of different professions.8
While licensing differs by state, in almost every case, a profession is governed by a board. Eighty-five percent of these boards are controlled by—you guessed it—members of the licensed industry.9 Their obvious interest is to restrict competition and protect their profits. If that sounds eerily similar to the protectionism in higher education discussed in chapter seven, it’s because it is. And the result is the same—lower-quality products at higher prices.
While there are some legitimate public safety reasons for licensing—doctors, weapons manufacturers, and the like—many restrictions are patently absurd. For instance, you can’t sell flowers in Louisiana without a license.10 The established florists would prefer not to have you offering their customers better, less-expensive flowers. As a general rule, occupational licenses fail to improve health, safety, or quality, while they create other serious harms. So says about 90 percent of the economic research.11
By restricting competition, licenses hold back innovation and job creation, especially for the least fortunate. A 2018 study found that licensing prevents the creation of nearly two million jobs each year.12 Another study found that occupational licenses lower business formation in low-income communities by more than 10 percent.13 Corporate welfare is pushing down people who want to contribute and rise.
The businesses behind these destructive policies can also bilk the rest of us. Less competition generally means higher prices, and the annual cost of licensing is between $180 billion and $200 billion—money that Americans pay every year or fail to earn, lost to extra profit for protected industries.14
This puts the least fortunate at an even greater disadvantage. In addition to facing barriers to work, they also pay more at the register. They and their families are being squeezed from every angle. Minorities, people with criminal records, people for whom English is a second language, and military spouses are the hardest hit.15
It seems that only one group wins under occupational licensing: the companies behind the unjust system and their employees. Actually, they lose too.
Businesses that benefit from corporate welfare do so only in the short term. By turning their focus from serving the customer to securing their cartel, they lose sight of the innovation and value creation that would potentially transform them in the long run. Their focus on getting profit by any means today prevents the possibility of much more profit—good profit—tomorrow.
America’s auto manufacturers are a case in point. In the 1980s, they opposed imported Japanese cars, fearing the competition and threat to their profits. They successfully obtained a “voluntary restraint agreement” that put caps on the number of Japanese auto imports.16 American manufacturers benefited in the short term, keeping market share. But they lost in the long run by failing to adapt to customers’ wishes or keep ahead of their competitors’ innovations.
This ended up being catastrophic for the companies, millions of their employees, and hundreds of communities. Huge sections of the Rust Belt testify to the terrible cost of putting any profit ahead of good profit.
It’s worth dwelling on the cost to workers. A business that doesn’t innovate is holding back its workers. Their job may be protected for a while, and the pay may be good (also for a while), but the company isn’t providing them with a platform to challenge and improve themselves and find new ways to satisfy customers and find fulfillment.
And when the jig is up—which always happens—the employees usually experience profound shock and struggle mightily. Workers laid off from the auto companies can attest to this. Their former employers failed to help them adjust and prepare for the future.
Another telling example is the taxicab industry. It colluded with government to protect itself, creating things like “medallion” rules that cap the number of cabs on the road, allowing for higher profits and captive markets.17 Thus protected, the cab companies have stayed more or less the same for decades.
When rideshare companies entered the market, cabbies had spent so long stagnating that they couldn’t catch up. The price of medallions plummeted—from $1.3 million to $160,000 in New York City and from $545,000 to $10,000 in Philadelphia—leaving cab companies with huge losses.18 The rideshare revolution left taxis with fewer riders and lower profits. This outcome could have been avoided if they had pursued good profit.
These examples affect huge numbers of people. Yet they’re only a fraction of the crisis. Monopoly grants, mandates, cash subsidies, bailouts, tariffs, tax credits, loan guarantees, preferential and anticompetitive regulations, eminent domain abuse—they’re all corporate welfare, and all destructive.19
Sometimes, businesses advocate for these policies with overtly self-interested arguments. Other times, they appeal to some higher concept, such as national security or jobs. (Which is why one of my patriotic father’s favorite quotes was “Patriotism is the last refuge of a scoundrel.”20) This certainly applies to tariffs, which I’ll discuss in the pages ahead. While the arguments differ, the outcome is universal: long term, everyone is harmed.
The scale of this crisis is enormous. One way that companies—especially large ones—try to rig the system is by supporting complex and anticompetitive regulations. Why? Because they have large legal teams and can afford to comply, while the added costs will hurt smaller competitors and reduce start-ups.21
Hence, some big businesses cheer the growth of federal red tape, which ran to 23,000 pages in the Code of Federal Regulations in 1960 and nearly 190,000 pages in 2017.22 (State regulations are even more numerous but difficult to count.) Meanwhile, from the mid-1970s to the mid-2010s, the percentage of U.S. companies that were under a year old fell by roughly half.23 Regulation, much of it advocated by established business, is steadily stifling entrepreneurship and competition—often by design.
Elsewhere, the tax code contains $1.6 trillion in exemptions and other kinds of preferential treatment, benefiting a bewildering array of special interests.24 Did you know that racehorse owners get a special tax break for their prize steeds? Or that major companies get subsidized for doing research they would have done anyway? There are plenty of handouts for the industries that Koch Industries is in—all of which we oppose. The tax code is so full of holes, it is like a sieve.
THE WRONG KIND OF COMPETITION
Companies have figured out the game. Instead of competing for customers’ money through superior products and services, they compete for government-granted advantages using superior lobbying campaigns.
At the federal level, businesses employ armies of lobbyists whose sole job is to get special treatment for their clients. At the local level, they play cities and states against each other in search of the best “tax incentives,” which is a fancy phrase for corporate welfare targeted to specific companies. The politicians who abet this are basically bribing companies with taxpayer money.
This is a massive scam, costing tens of billions of dollars.25 When two scholars from Columbia and Princeton analyzed nearly 550 deals, they found that the cost extends far beyond the dollar amount.26
Tax incentives are usually sold as a quick way to get good jobs and spur widespread development. In reality, the overall employment bump is tiny—a few hundred extra jobs a year over a five-year period—and there’s little evidence that the rest of the economy gets more jobs, higher wages, or any other benefit.27 (Other research shows that as many as 98 percent of companies would have chosen the same location without subsidies, making the handouts essentially pointless.28) Moreover, the jobs themselves can cost up to $1 million apiece.29 It may be the least-effective, highest-cost jobs program in history.
And surprise, surprise: politics often drives the giveaways. Elected officials support incentive programs because it means ribbon-cutting ceremonies, plant openings, and other good PR opportunities. They benefit even when the handouts have negative long-term consequences.
Which is how most tax incentives end up. Corporate welfare can cause firms to locate in the wrong cities for the wrong reasons. When companies make decisions based on corporate welfare, they undervalue much more important considerations, such as attractiveness to talent, proximity to customers and suppliers, transportation, supportive communities, and so on. They get a short-term boon but a long-term loss.
Amazon has fallen into this trap. The company pitted more than two hundred cities against one another to see which one would give it the most money for a second headquarters.30 One of the winning bids, in Crystal City, Virginia, cost taxpayers at least $750 million.31 The second winning bid, in New York City, came to more than $2.5 billion in handouts.32 Amazon canceled its New York plans after citizens rightly revolted against this brazen corporate handout. The people of New York could tell you that tax breaks helped Amazon short term, and at the expense of everyone else.
CORPORATE WELFARE’S REAL COST
You may think, “So what?” Does corporate welfare really affect you? Absolutely.
To start, it worsens Americans’ quality of life.
Consider the effects on public health. Most states have so-called certificate-of-need (CON) laws, which create government boards that determine whether medical facilities can expand, innovate, or even get off the ground.33 The boards are usually stacked with representatives of hospitals and other healthcare providers—that is, the potential competitors of the new or improved facilities.34 They have a clear incentive to deny CON applications, which happens all the time.
The result: studies show CON laws can reduce the number of hospitals in a given area by 30 percent.35 And while CON laws are sold as a way to lower healthcare costs, they actually make healthcare more expensive. (It’s no wonder that these were among the first laws to be waived in some states when the COVID-19 crisis hit. They made it harder for patients to get the care they needed.36)
It’s a similar story with other restrictive policies. Federal rules prevent doctors from practicing across state lines, which limits access to care—an absurdity in the age of telemedicine that only survives because state medical associations lobby for it. Similarly, state “scope of practice” laws restrict the services that nurses, physician assistants, and pharmacists can provide. This restriction benefits doctors but raises costs and limits access for those who can least afford it, which can lead to worse health outcomes.
Corporate welfare also hits Americans’ wallets, in a big way.
The Mercatus Center has analyzed the price of some of these policies at the federal level. The researchers found that since 1980, regulations alone—huge numbers of which are anticompetitive—have made our country as much as 25 percent poorer than we otherwise would be. That’s now a loss of at least $4 trillion annually, or more than $13,000 in lost income for each American per year.37 This money could have improved lives, spurred innovations, and benefited people through higher wages, faster growth, and a litany of other social goods. And remember: this only pertains to one type of corporate welfare; many others exist.
Nor does corporate welfare impose a one-time cost. Its damages get worse over time, harming every American more and more, without us ever knowing what we’re missing.
The cost isn’t purely monetary or material, though. What’s worse is the degeneration in the culture that this policy of discrimination brings about. Mutual benefit becomes an afterthought, if it’s thought of at all. Society is corrupted from within.
To start, corporate welfare undermines the concept of equal rights. It causes businesses to think that consumers don’t deserve the chance to choose for themselves, and that some companies and workers deserve different treatment than others. They think that they can, and should, help themselves without helping others—and indeed, at the expense of others. Corporate welfare pits people against each other.
Research shows that the executives of firms that benefit from corporate welfare are more likely to say that competition is “unfair” to business and less likely to say that customer focus is the most important factor to success. Instead, more are inclined to believe that government assistance and relationships with influential policymakers are more important. Interpretation: corporate welfare corrupts business leaders’ whole approach.38
This helps explain why the public has increasingly lost confidence that business is a force for good.39 As well they should! If people don’t see companies creating value for them, then why should they trust them? For that matter, why should businesses even exist if they succeed without making their customers and communities better off?
Companies that advocate for corporate welfare are committing suicide, turning people against the institution of business itself. Society only accepts people getting wealthy if they earned it by improving people’s lives. If collusion between business and government determines who gets rich, why do we need a middleman? Get rid of business altogether and let government do it directly. Is it any wonder that more and more Americans are attracted to socialism?40
Corporate welfare also corrupts individual attitudes, which has a ripple effect. When companies get ahead by cheating, the employees doing the cheating and the customers being cheated begin to get used to it and think that cheating is okay—not just in business, but in every aspect of life. So when business goes awry, it pits people against each other in ways that have nothing to do with business. For instance, when people see companies get ahead through special benefits rather than by creating value, they expect the same for themselves. The desire to contribute fades.
Finally, corporate welfare undermines the progress that benefits us all. Many businesses that focus on receiving it no longer help people succeed in a fast-changing world. Employees, like the companies they work for, stagnate. For example, they’re not taught the skills needed to succeed in an increasingly automated, digital world. This is one of the primary contributors to a two-tiered society.
THE DISEASE AS CURE
To their credit, most Americans know that something is wrong: 68 percent think business and government collude, helping each other while hurting the rest of us; 76 percent think government should stop propping up specific firms and industries.41
Yet in response to public outcries, the opposite happens. Society gets more corporate welfare, not less—often at the insistence of well-meaning activists and politicians. This endless spiral compounds the damage enormously, holding back more people and slowing progress.
If people don’t see companies creating value for them, then why should they trust them?
Look at the financial crisis of 2008. It was caused, in part, by corporate welfare for big banks. Policies encouraged these banks to sell financially unsound mortgages and then quickly pawn them off to Fannie Mae and Freddie Mac, giving them inflated profits and less risk.42 While the banks profited from these loans, the people with the mortgages lost when the value of their homes plummeted.
When it all came crashing down, taking millions of jobs with it, people were outraged, as they should have been. They clamored for a response. They got one—and it was more corporate welfare.
First, the federal government bailed out the banks, using a $700 billion fund of taxpayer money. As far as corporate welfare goes, few examples are as clear-cut as bailouts.
Second, in 2010, Congress enacted the Dodd-Frank Act, wrapping big banks in more regulation that the banks themselves helped to write. Bank executives described these new rules as creating a “moat” around their businesses, making it harder for would-be competitors to challenge their dominance.43 This turned into yet another fiasco, from which the big banks emerged the winners. Since the bailouts, the total number of banks has continued to decline, with no new charters since 2011.44 Meanwhile, the 15 largest banks in the country control more than half of all assets in the banking industry.45
The regulatory burden from the Dodd-Frank bill is so severe that only big banks can afford it. Meanwhile, community banks have been decimated since the law’s passage, with more than 1,700 closing their doors.46 These are the smaller, specialized, and personalized companies that meet the needs of small businesses and families. Now they’re disappearing.
As for the big banks, they now lobby to keep the parts of Dodd-Frank that benefit them.47 The head of Goldman Sachs said in 2015 that his company was gaining market share because the law made it harder for small companies to compete.48 Their gain is a loss for smaller competitors, the job creators those companies supported, and communities across America.
Another clear example of trying to cure a disease with the same disease is the reaction to tariffs. Tariffs are one of the most obvious, and destructive, forms of corporate welfare throughout history. They are protectionism, and protectionism is corporate welfare.
From our country’s beginning, American industries have demanded tariffs to give them a leg up on foreign competitors. Recent examples include tariffs instituted on foreign steel and aluminum in 2018. Demanded by U.S. steel and aluminum producers, the tariffs were sold as a cost-free way to resuscitate key industries and communities.49
Yet the tariffs have huge costs. By making foreign metal more expensive, tariffs made the thousands of companies that use the metal less competitive, especially manufacturers. According to one leading estimate, steel tariffs increased the price of steel products by about 9 percent, costing consumers about $5.6 billion in just the first year.50
While the whole point of the tariffs was to save jobs at U.S. steel mills, tariffs caused other companies to cut jobs in response. Federal Reserve economists found that manufacturing lost jobs overall in response.51 The government should have looked to history: the last round of steel tariffs in 2002 cost more jobs in other industries than it protected for steel companies.52
The damage wrought by tariffs became impossible to ignore. Yet what did the federal government do? More of the same. Instead of ending the tariffs, it began handing out exemptions to companies who petitioned the government. It’s just another opportunity for favored businesses to game the system to their advantage and their competitors’ disadvantage.
Within six months of the initial tariffs, the federal government granted more than 1,300 exemptions.53 Many more followed.54 Some exemptions were rejected after big steel companies pushed back.55 Others were probably granted because of the political benefits, such as jobs in states that could influence an election.
Nor did it stop there. Many businesses saw their costs rise because steel tariffs made raw materials more expensive. In response, they sought tariffs for their own products. For example, American nail manufacturers got hammered by the steel tariffs, leading them to cut jobs and raise prices. The administration responded by giving at least one nail manufacturer an exclusion—another handout.56 Then it slapped a new tariff on foreign-made nails, protecting the domestic manufacturers and raising costs for everyone.57 If two wrongs don’t make a right, then why would three?
The circus continued. Other businesses saw their markets fade as foreign nations instituted their own tariffs in response to America’s. For example, America’s tariffs on China caused China to slap tariffs on American soybeans. The federal government then set up a $28 billion subsidy scheme to keep farmers afloat.58 Once instituted, corporate welfare spreads like cancer.
And families and communities suffer the consequences. Corporate welfare encourages firms to focus on wooing bureaucrats rather than innovating and creating value for customers and society. Entire industries become obsessed with lobbying for favors, so the damage keeps mounting.
BUILDING BETTER BUSINESSES
Corporate welfare is so ingrained in the economy and the business community that it seems difficult, if not impossible, to eradicate. But we must eradicate it if we are to have a just and prosperous society.
If we do, more people will be able to find jobs that match their abilities. More businesses will focus on helping their employees flourish and contribute, spurring innovation and progress. If we eliminate corporate welfare, we can begin building a culture of mutual benefit and an economy that works for all.
So, where should a Social Entrepreneur start? What can you do to transform the institution of business? What is a better way, and how can you help bring it about?
We need CEOs who practice Principled EntrepreneurshipTM—the practice of doing well by doing good.
The first thing we need are business leaders to take a stand. We need CEOs who practice Principled EntrepreneurshipTM—the practice of doing well by doing good.
This means building a company that empowers employees and contributes to communities. I know many CEOs who feel this way. And we strive to do this at Koch Industries by applying Market-Based Management®. Other companies have begun applying MBM, and for many, it has made a real difference.
Whatever management or business framework you use, or whether you use one, I encourage business leaders to focus relentlessly on creating an environment where people can self-actualize. No company will succeed in the long run if its team members don’t first succeed by contributing.
If a culture of contribution is essential, then corporate welfare cannot be tolerated. The best advocates against it are business leaders who don’t want it. This is a bigger pool than you might think: 84 percent of the leaders at companies that don’t benefit from such favoritism logically oppose it.59 If this describes you, one practical thing you can do is to publicly criticize corporate welfare and explain why. Don’t stay quiet.
We’re doing our part at Koch Industries. We participate in industries where subsidies, mandates, and favoritism are part of the legally mandated system and can’t be avoided. We nonetheless oppose corporate welfare in all its forms and lobby against it. We know that ending it will help us more in the long term. What is true for us is true for every business, no matter how much its owners or managers think they need special treatment to survive.
Corporate welfare has been around since well before I returned to the company, and I made an early point to oppose it. In 1971, Richard Nixon’s Committee to Re-elect the President—aptly nicknamed CREEP—asked our company for an illegal donation. The implication was clear: support us, and you’ll get favors; don’t, and you’ll get the opposite. I immediately turned down Nixon’s agents. Other business-people succumbed, and suffered the legal consequences.
Of course, most corporate welfare isn’t illegal, although it is always wrong and harmful to its recipients and to society. Here are two examples of where we vocally oppose such policies in our own industries.
Our company is one of America’s largest producers of ethanol, a substance with a wide range of uses, including as fuel. Ethanol is essential to innovation on better fuel economy, which is part of why we are in the industry. Yet that doesn’t mean ethanol should be propped up. Unfortunately, over the years, other ethanol producers successfully lobbied for federal ethanol mandates and subsidies—blatant handouts that we fought tooth and nail.
In 2011, we helped persuade the federal government to end direct ethanol subsidies. While this hurt our bottom line in the short term, it was the right thing to do, and it contributed to a better business environment in the long term.
We continue to oppose other ethanol policies that act as special favors to producers, such as the Renewable Fuel Standard, which mandates the blending of ethanol into gasoline. Like the subsidies, the current policy benefits Koch short term—ensuring that we always have a market for our product—but it hurts us long term, along with everyone else.
Policymakers recognize these issues yet are unwilling to abandon the RFS mandate. The reason is easy to discern: corn farmers in Iowa—the first state in the presidential primary process—support it.60 Politicians sometimes try to have it both ways, preserving the mandate while giving exemptions to other companies and certain refiners. This is just one more handout. We remain convinced that ethanol can succeed and improve people’s lives without government support. And so Koch will continue advocating an end to the RFS.
Another example of egregious corporate welfare that we vigorously and successfully opposed was the so-called border-adjustment tax in the 2017 federal tax reform bill. This provision would have created a new taxation system designed to benefit select U.S. companies, including manufacturers like us. It would have done so on the backs of the American people.
Koch Industries would have profited handsomely from the BAT. For example, while one of our refineries would have been subject to higher-priced imports from Canada, our refinery in Texas would have gained a big advantage on our competitors because we purchase our raw materials domestically. Another Koch company, Georgia-Pacific, primarily uses domestic southern pine trees to produce paper products, while its primary competitors rely on imports. In both cases, the BAT would have allowed us to raise our prices on consumers and capture a much bigger profit and market share. We opposed it anyway.
If it would make us money in the short term, why would we reject this policy? Because harming your customer is an excellent way to go out of business. Sure, the BAT would have given us potentially billions of dollars in profit, but consumers would have paid more than a trillion dollars in higher costs on imported goods. We would have made plenty of profits short-term, but in the long run, it would have made those who could least afford it poorer.
That is no recipe for long-term success. A company that disrespects customers will lose its customers. Either people will turn against it or creative destruction will overtake it. The better path is to strive to supply what customers value, giving them better products at better prices and rejecting mandates, subsidies, and measures to handicap competitors.
Are you a business leader? Do you know one? You can advocate against corporate welfare too. I have a colleague who calls it “being the skunk at the garden party.” When the city council proposes a tax credit for companies that move to or expand in your community, go to the council meeting and object. Tell them the handout corrupts business, which should only profit by creating value for, not harming, others. Let your local member of Congress know that your support depends on whether they treat all businesses equally—and the best way to lose your support is to offer you a subsidy. If you don’t, who will?
ART CIOCCA
A STORY OF BOTTOM-UP BUSINESS
ART CIOCCA IS FOUNDER OF THE WINE GROUP, WHICH HE GREW INTO THE WORLD’S SECOND-LARGEST WINE COMPANY. THROUGH HIS PHILANTHROPY, HE HAS HELPED ESTABLISH THREE UNIVERSITY CENTERS FOCUSED ON PRINCIPLED ENTREPRENEURSHIPTM.
When I got back from the Catholic University of America, I knew we were really onto something. The faculty got it. They saw the connection that I did between our faith and empowering people through business. They shared my almost visceral aversion to corporate welfare.
I made my largest philanthropic contribution in partnership with Charles soon after. The Ciocca Center at Catholic University is helping future business leaders see the importance of virtue in business—and the danger of abandoning it. It helps future entrepreneurs understand the importance of doing right by others.
This was a lesson I had learned many times in my career, like the time an employee told me, “This is stupid. I’m ready to quit.”
These words came from a line supervisor, and she was furious. She held nothing back, which was good, because I’d asked for her honest thoughts.
“We’re wasting time, we’re wasting money, and it’s making me crazy. It’s making my whole team crazy. We know how to fix this, but no one’s listening.”
We were standing next to a high-speed production line. It was sputtering, and the labeler was jammed, idling the line and the 15-person line crew. The expression on their faces told me they were depressed and demotivated. This was a stark contrast to the rest of the bottling room, which was alive with whirring, clicking, clanking.
I was there because we had a problem. I’d been going over the numbers and found that production was falling and costs were rising. For a small business like ours that operated on very thin margins, trends like that could be a death knell. We had to stay nimble to compete with the big boys.
When I got there that day, the bottling room manager said I had to meet someone who was about ready to walk off the job. A few minutes later, I found myself face-to-face with the line supervisor in front of Line #8.
Over the next few minutes, she laid out a very real problem.
She pointed out that there were issues with the brand management team’s new bottle label. The label was beautiful, she said, but it was an unusual shape on a thick paper stock that the labeler simply wasn’t designed to handle. No wonder the labeler was breaking and production was slowing, she told me.
I empathized with her, and I thanked her for flagging this problem. Then I asked if she had any solutions. She smiled. No one had ever asked her that. And she had a damn good answer.
As Line #8 bumped along next to us, she laid out some small but substantive changes to the label shape and paper stock. They were brilliant. After some arm wrestling with brand management, we introduced a new label that was cheaper and easier to apply but didn’t compromise on aesthetics or anything else marketing was trying to accomplish. It was a win-win.
That single change allowed us to make an extra 600,000 bottles of wine a year, at no extra cost. We recognized and rewarded the line supervisor for her honesty and creativity. We celebrated her success and showcased her as a winner.
But more important than the improved line efficiency was the culture change this event caused. Suddenly our people knew that if they spoke out, someone would listen. Our entire bottling team became motivated to make the business better, and that attitude soon spread to others.
In the history of our company, it was a real turning point. Empowering our employees has been a huge part of our success, and it’s a principle I’m working hard to share with as many future business leaders as I can.
— ART CIOCCA
Find more stories of principled entrepreneurs at BelieveInPeopleBook.com/stories
STAND UP, SPEAK OUT
This leads to the second action you can take: celebrate principled businesses. Equally important, celebrate the principled role of business in society.
Because of corporate welfare, a growing number of Americans no longer believe that business is benefiting them, and they’re right. This is a big reason why socialism is gaining ground, particularly among young people.
The Harvard economist Edward Glaeser has persuasively argued that decades of corporate welfare have pushed jobs, homes, and bright futures out of reach of the rising generation. He points the finger at industries and interest groups across the spectrum, from corporations to unions to retirees to homeowners. All have created an economic system that benefits them at the expense of younger generations.61
No wonder huge majorities of young Americans reject business as a force for good; they haven’t seen it do much good for them. They correctly think the economy is rigged against them.
While their concerns are justified, their solutions are misguided. Socialism means government ownership or control of the means of production, such that all economic decisions will be made by government officials. The people who benefit—in addition to the government officials—will be those who can curry the most favor with them.
This turns everything into a system of government-granted privilege. Seen through this lens, socialism is not the answer to corporate welfare, but rather its fullest expression.
We shouldn’t expect those who support socialism to change their minds until they see that business is truly dedicated to succeeding by creating value for others. It’s up to the business community to begin operating with a philosophy of mutual benefit, making a contribution and serving customers, and ultimately society. That requires rejecting the very idea of corporate welfare.
In addition to celebrating business done right, we all need to single out business gone wrong. This is something anyone can do.
I learned early on how hard it is to get this institution to stay on track. In the late 1970s, Milton Friedman helped me form a group named BLAST—Business Leaders Against Subsidies and Tariffs. We were persuaded to tone down our rhetoric, so we changed the name to Council for a Competitive Economy. But our mistake wasn’t changing the name, it was our strategy.
Only a handful of fellow business leaders joined. The typical response to the hundreds of letters I sent can be summed up in one that I’ll never forget. It reads, “I love what you and Milton are doing, but it won’t work in my industry. My company makes blue jeans, and if we go out of business, who will make our boys’ uniforms in time of war?” Such hypocrisy is unbelievable!
This experience made me realize that businesses will only change when they are pressured to do so. That pressure can only come from the bottom up—from you and me and many others.
You may not own a business, but your life is deeply influenced by what businesses do. Everyone has the right to expose and work to eliminate corporate welfare.
Employees also need to speak out. Talk to your peers or supervisors about why special treatment for the business is both wrong and harmful. Show that they are committing long-term suicide. If their practices are hurting rather than helping customers and society, they are harming their employees—and thus it’s not a good place to work.
Customers can also make a difference. Don’t like that the airline you fly lobbies for rules that limit their competitors? Fly a different airline and explain why on Twitter. Don’t like your car manufacturer supporting tariffs? Buy from someone else. Make the injustice known—letters to the editor, stockholder meetings, social media—and get others to do the same.
Find and show corporate welfare’s true human cost. Highlight its victims, tell their stories, and shame the businesses that hurt them. Companies respond to public pressure. So do the policymakers who aid and abet bad business practices. They all need to know that people demand better. The more of us who speak out, the sooner we’ll be able to transform the institution of business and reap the benefits it has to offer.
TRANSFORMING BUSINESS
Melony Armstrong shows the way. Her story didn’t end at the barriers built by Mississippi’s cosmetologist lobby and lawmakers.
Melony became so upset by the absurdity of the obstacles she faced that she dedicated herself to removing them. She talked to anyone who would listen, informing them about the injustice. She spent seven years writing letters, lobbying lawmakers, and building support. Many people never knew the licensing system existed; others thought it would be too difficult to end. They were wrong.
Melony Armstrong was prevented from starting a business because of the rules erected by established businesses to block new competition. She fought back and was able to open her hair-braiding boutique, Naturally Speaking, in Tupelo, Mississippi.
Melony persevered, mobilizing a movement of concerned citizens, aspiring hair braiders, and civil rights advocates. After drawing enough attention—including filing a federal lawsuit—she persuaded the Mississippi legislature to free hair braiders from the licensing racket. The new cost to be a hair braider? A registration fee of 25 bucks.62
Her stand against corporate welfare made an immediate difference. The day after the law was signed, four hundred Mississippians became hair braiders.63 The number has since grown to more than four thousand. She stood for the principle of equal rights, and won.
And what started with hair braiding didn’t stop there. After winning her first victory, Melony kept pushing for occupational licensing reform to help people in other industries. Following a second reform bill in 2017, Mississippi now requires licensing boards to demonstrate a concrete public harm before passing a new occupational license requirement.64 And it must ensure that any rule passed is the least burdensome to prevent the harm.
Similar and even more complete reforms have spread to other states, including Nebraska and Ohio, covering more than two million current workers.65 Countless future entrepreneurs and jobseekers will benefit. There’s also a growing national consensus that occupational licensing needs to be rethought.66 Melony helped catalyze a movement, transforming business from the bottom up. She is self-actualizing by pursuing her passion and empowering more people than she ever imagined.
You can too. I have never been more optimistic about the possibility of eradicating corporate welfare. Americans overwhelmingly see the problem, which means the solution’s time has come. The mounting dissatisfaction with the economic status quo shows that the country is hungry for a better way. One that opens doors of opportunity instead of closing them off for all but the fortunate few.
Social Entrepreneurs can bring that day about. We can build an economy where each person has a fair shot, where businesses continually transform, benefiting themselves by empowering their employees and creating value for society. This vision of an economy that works for everyone is closer than it seems.