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Crony capitalism and the public sector ‘privilege’

Keywords: Tags  Parting Shots, Nucor Corp., IHS Global Insight Inc., Big River Steel LLC, Osceola Ark.

A proposal to build a 1.7-million-ton-per-year steel plant in Osceola, Ark., has drawn the attention of at least one U.S. steel producer, primarily because the $1.1-billion project would be founded on a $125-million package of loans and grants from the state.

Nucor Corp., Charlotte, N.C., has expressed vigorous opposition to the proposed role of the state, and has described to legislators the negative effects of the $125-million seed money on its Hickman, Ark., plant.

Consultancy IHS Global Insight Inc., Lexington, Mass., which was retained to evaluate the project, has weighed in with a remarkable assessment: “The steel industry can handle the addition of Big River Steel (LLC), both Phase I and Phase II, from a capacity perspective. However, if any other major facilities, other than projects already announced, were to be added to the U.S. steel stock, the industry would quickly find itself in a highly competitive zero-sum environment.”

Current producers would argue that they already are in a “highly competitive zero-sum environment.”

The notion that this particular 1.7 million tons per year of hot-rolled, cold-rolled and galvanized steel just tops out neatly to total current demand (less imports) is breathtaking. IHS goes on to explain that electrical steel, which Big River Steel would produce, is an “underserved” market.

Allegheny Technologies Inc., Pittsburgh, and AK Steel Corp., West Chester, Ohio, stand ready to serve this market with available capacity.

So what is the matter with this picture? Nothing, if Big River Steel were privately financed. It is the use of public funds that offends Nucor--and many others. It will be argued that “everybody does it”--and there is some truth to that--but does that make it right?

There is a growing awareness that every time the government picks a winner, they seriously distort the competitive landscape. Politicians will protest that they are “creating” jobs; but this is becoming a hollow argument. Jobs created in Arkansas can well be eliminated outside that state--but in most cases, if the market isn’t there, there will be no net gains in jobs.

“We’ll take it out of imports” is a familiar cry in the steel business, but nobody believes that any longer. The international market doesn’t work that way. Steel distributors are recognized for their market knowledge, and at a meeting of the Association of Steel Distributors there was vocal skepticism about the market impact of the proposed mill.

Does anyone really believe that an additional 1.7 million tons per year in demand for scrap could be created and not escalate the price of scrap to all consumers in Arkansas?

Steel companies and governments are destined to intersect in many ways and on many fronts. Pittsburgh-based U.S. Steel Corp.’s recent moves in Serbia and Slovakia are an illustration of the real-world power of governments over steel companies. In America, the pertinent question raised by Big River Steel is: Have we studied and absorbed the lessons of Europe, where the hand of government created whole steel companies, without regard to the marketplace, under the banner of “creating jobs?”

It takes a long time to learn some lessons. This issue isn’t a partisan political issue, because both Democrat and Republican politicians become entranced with doing good by “creating jobs.” Think back to ethanol and California-based solar company Solyndra LLC. They were undoubtedly the costliest jobs ever created. Even well-intentioned politicians can inadvertently wreak destruction in the marketplace.

There is growing interest in academic circles in “crony capitalism.” One paper that addresses this issue was produced by Matthew Mitchell, a senior research fellow at the Mercatus Center at George Mason University. Titled “The Pathology of Privilege: The Economic Consequences of Government Favoritism,” the paper summarizes Mitchell’s economic analysis with the observation that “privileges depress long-run economic growth and threaten short-run macroeconomic stability.”

Thomas C. Graham is a founding member of T.C. Graham Associates. He is a former chairman and chief executive officer of AK Steel Corp., president and chief executive officer of Armco Steel Co. LP, chairman and chief executive officer of Washington Steel Co., president of the U.S. Steel Group of USX Corp. and president and chief exec utive officer of Jones & Laughlin Steel Co. His column appears monthly. He invites readers’ comments and can be contacted at

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