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The business-government interface and its discontents

Keywords: Tags  Parting Shots, Thomas Graham,

Pfizer Inc. tries to acquire AstraZeneca Plc, General Electric Co. tries to acquire Alstom, and ArcelorMittal SA and Nippon Steel & Sumitomo Metal Corp. acquire ThyssenKrupp AG’s Calvert, Ala., facility. Globalization at the national level continues, and for diverse business reasons. National governments approve, disapprove and delay, but the forces are larger than central governments.

At the state level, Toyota Motor Corp. leaves California in favor of Texas; the United Auto Workers union gives up on organizing the Volkswagen AG plant in Chattanooga, Tenn.; Big River Steel LLC proposes a new steel plant in Arkansas; and Illinois raises taxes on all corporations in that state, but waives the increase for those who threaten to leave.

At the municipal level, a rash of bankruptcies bites California cities and Detroit; Pittsburgh and Philadelphia, although not technically bankrupt, yield taxing and spending authority to state oversight; and Chicago looks ahead to huge unfunded pensions.

Are there any common threads connecting all of this apparently unrelated activity? 

Historically, America was always seen as the most desirable place in the world to do business. But New York-based Pfizer said it would save $1 billion in taxes by basing its business abroad, among other benefits.

It used to be accepted wisdom that steel would be made in Pittsburgh, cars would be made in Detroit and commercial airliners would be made in Seattle. It now appears that this once-solid theorem has been upended, and steel, cars and airplanes will be made in the “New South.” What were once “foreign” cars are manufactured in Southern states, where union-free manufacturing, lower tax regimes and welcoming state governments have radically changed these activities.

These changes have not gone unnoticed by what were previously foreign manufacturers. Would you build a steel plant in Pittsburgh or a car plant in Detroit? It is always argued that these new locations come with the burden of recruiting and training unskilled workers with no history or tradition in the manufacturing industry; obviously, this is a burden companies have freely chosen to accept.

One common thread bearing on these huge upheavals has been the change in the cost of public employees vs. the cost of private-sector employees. Private-sector employees reportedly earn 80 percent of public-sector employee compensation for comparable work. 

The compensation of public employees has a direct impact on the tax burden, and therefore the desirability of a plant location.

Politicians, supported by government employee unions, have always felt they have absolute power. The fissures in that assumption are becoming more evident. Chief Justice John Marshall is much quoted as saying, “the power to tax is the power to destroy.” In today’s world, that quotation might be better amended to “the power to tax is the power to destroy—if the company stays in this jurisdiction.”

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 executive officer of Jones & Laughlin Steel Co. His column appears monthly. He invites readers’ comments and can be contacted at


A look at earnings/sales ratios for select steel, natural resource companies

A comparison of earnings before interest, taxes, depreciation and amortization (Ebitda)/sales ratios for select steel companies puts OAO Severstal in the top global spot for the past year, followed by Gerdau SA. ArcelorMittal SA leads in North America. 

International iron ore suppliers lead in profitability, with Rio Tinto iron ore and BHP iron ore at the forefront. BHP and Rio Tinto report results on a half-year basis rather than quarterly.

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