Star Tribune Online

Government subsidies for private businesses ought to stop

Published Friday, Dec. 1, 1995

Mike Meyers
Staff Writer

Public subsidies to private enterprise are a bust. They represent bad economic policy, ineptly executed.

Time and again, elected officials seem incapable of ensuring that the public gets its due when government underwrites business.

Consider the latest example of that plain truth.

Food entrepreneur Jeno Paulucci got a bundle of money—and got away with a lot of questionable behavior—when he used more than $23 million in publicly borrowed money to underwrite a startup company in Duluth.

What reporters found

A recent Star Tribune investigation by reporters Joe Rigert and Richard Meryhew found that, in the process of collecting public loans at low or no interest, Paulucci had:

failed to create as many jobs as he promised and no one in Minnesota government took any action.

taken out $10 million in personal loans from one of his companies getting state help and no one in Minnesota government took any action.

engaged in dubious accounting practices in an effort to qualify for public loans.

played Ohio against Minnesota to sweeten his subsidies from the city of Duluth and, in return, produced many jobs that paid less than poverty-level wages.

Paulucci says he did nothing wrong, that he followed all the rules and requirements governing the loans.

Giving Paulucci the benefit of the doubt, let's say he's correct. What does that say about the oversight of loans and other benefits offered at public expense by the state of Minnesota and other governments?

The story of the Paulucci transactions is a small example of a much bigger problem: private businesses exploiting the weaknesses of politicians for private gain at public expense.

Someone operating a business—or planning to start an enterprise—approaches local and state officials for public aid. Promises are made about how many jobs will result and when the hiring will start. But promises can be forgotten or amended.

Anyone remember the $270 million the Metropolitan Airports Commission borrowed on behalf of Northwest Airlines?

State obliged Northwest

By early last year, Northwest no longer was comfortable with the original terms of its 1991 loan agreement. State officials were obliging. Minnesota officials and Northwest execs renegotiated the loan agreement. The airline got a deal that required the creation of fewer jobs than originally envisioned.

"They saw it in the state's interest and their constituents' interests to do this,'' said Jon Austin, Northwest spokesman.

The only clear winners, however, were the politicians.

Name the politician in Minnesota—or anywhere else—who has the gumption to call loans or grab collateral if a company turns out to be slow to deliver on its end of the bargain.

Imagine the headlines: "State Action on Loans Clouds Company's Future'' "Layoffs Tied to State Moves'' "State Blamed for Firm's Woes.''

When public money is up for grabs, politicians bow to pressure before the fact, as well.

Buy the Target Center to keep the Timberwolves in town? No problem.

What politician wants to take the heat for "losing'' a major-league sports franchise?

Buyers of a pro hockey team had the bad judgment to ask for money in the closing days of a legislative session. It's a good bet that a well-orchestrated public campaign by tavern owners, restaurateurs and others who benefit from proximity to sporting events would have improved the odds of a deal.

Owners of the Twins and the Vikings will have more time to extort public money with threats of their departure if the public doesn't deliver enough cash to build a new stadium, put a retractable roof on the Metrodome, build the teams a gold-plated training center or whatever outlandish demands the owners can concoct.

Plenty of threats

And the threat of moving the franchise to Florida, California or Oregon is a strategy that's hardly confined to sports. Paulucci's threat to relocate his food business to Ohio is mirrored a thousand-fold by companies all over the country. They've all learned the shortest route to the public treasury—r public credit line—is a vow to take their business elsewhere.

Earlier this year, two researchers at the Minneapolis Federal Reserve Bank asked Congress to end the game. Arthur Rolnick, the bank's director of research, and Melvin Burstein, executive vice president and general counsel, urged a federal ban on using public subsidies to bid for jobs.

Congress, led by Republicans who proclaim the virtues of private enterprise, should heed the call to let the marketplace decide what businesses are worthy of tapping the credit markets.

Paulucci, the owners of Northwest Airlines, the Timberwolves, the Twins, the Vikings and the legion of other entrepreneurs with their hands reaching for the public purse, should find private investors instead.

If companies don't live up to their promises, let them face the discipline of the market. They've enjoyed the compliance of public officials for far too long.

© Copyright 1996 Star Tribune. All rights reserved.

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