Companies Should Not Impose Costs on Communities

Summary. Today, when a company closes a plant, it does so to increase its profits, but most of the cost of the closing is born by the plant’s community. These costs include lost income, reduced property values and retraining costs. It is unjust for the cost of a business decision to be paid by people who do not share in its returns. We need to find a way to insure that the company’s shareholders bear at least some of the costs of decisions that create profits for them. This is a difficult problem, and I invite readers to submit comments or pieces for posting that explore ways to do it.

The Wealthy Traditionally Recognize Responsibility for Their Communities

Two recent posts on this blog that were written by friends of mine dealt with the problem of the responsibility that companies may have for the communities in which they operate.  So, I would like to offer a more systematic meditation on the subject.  It is almost universally recognized that wealthy and prominent members of a community have responsibilities toward their community that are commensurate with their wealth and positions.  We in the Fox cities have been very fortunate in having people in our community who feel that responsibility deeply.  Thus for example, we have Theda Clarke hospital and a performing arts center, which was largely paid for by contributions from prominent members of our community.  Sometimes, a company itself rather than an individual may identify closely with the community where it operates and feel a responsibility to contribute to its well-being.  In the Fox Cities, we have Thrivent financial, which has been a fine corporate citizen for many years.

Today, Large Companies Often Feel No Responsibility

Today however, many large companies are owned by thousands of shareholders who know nothing of the communities in which those companies operate.  Some of those shareholders are likely to be pension funds or mutual funds who are not even interested in the companies accept as their operations are reflected in the prices of their shares.  Companies with these kinds of shareholders are likely to have little interest in the communities where they operate and may well cause those communities great harm by closing facilities and firing workers.

Costs Imposed on Communities are “Externalities”

In this situation, a company may increase its profits or its share price by imposing large costs on a community.  These costs may include lost income for the laid-off workers and for the merchants who sell to them.  The costs may also include lost value for homeowners and other property holders as well as retraining costs for the workers.  When a company is able to impose costs on persons outside of the company, is said to externalize the costs, and externalized costs are referred to by economists as “externalities.”

Injustice of Externalities Is Recognized By Our Laws

Our laws recognize the injustice of externalities in some cases.  For example, we no longer allow companies to impose the cost of environmental pollution on the communities where they operate.  We require the companies to install scrubbers on their smokestacks or to clean up their waste products before dumping them into our waterways.  We may even require companies to assist in cleaning up the environment when they have already polluted it as in the case where companies that dumped PCBs into the Fox River have been required to pay part of the cost of removing them.

 A different kind of example may be found in unemployment insurance.  A company may be able to increase its profits or insure its survival by laying off its workers.  In this case, we recognize that the cost of the layoff is borne by the workers, and so we have created unemployment insurance and required employers to pay into the insurance fund.  Thus, at least part of the cost of the layoffs is borne by the employers.

Plant Closings Should Not Impose Costs on Communities

Perhaps a plant closing may be thought of in a similar framework.  Perhaps, we should think of the costs of a plant closing as externalities, and we should not allow companies to impose them on a community any more than we allow them to do so with the cost of environmental pollution.  Perhaps we need to have a fund analogous to unemployment insurance to cover the costs imposed on communities when a plant is closed.  Doing this would not be a simple matter.  We would need to devise a system that was fair and that minimized the inevitable disruption of what would otherwise be free market forces.  We want to have costs fairly shared, but we also want to avoid creating rigidities in our economy that would increase unemployment and impoverish our communities. 

Join in a Conversation to Explore This Topic

I think this complex problem deserves careful consideration, and I suggest that we start a conversation on the topic.  I invite everyone to make comments or to submit pieces on this topic to me for posting.