11 February 2010

Real Profit or Deferred Loss?

How do we as the public differentiate between true profit and a deferred loss when it comes to large corporations? Their complexity coupled with the lack of transparency (defended through the mechanism of proprietary information) prevents the public from understanding their true workings. When the true story comes out it's usually far too late to raise any objections. Lets take a look at a short example.

For simplicity, lets look at a mining operation. This is an industry which directly affects the environment in which it operates. Corporation X owns and operates a copper mine in Montana. They have a large body of law they must obey, including environmental, financial, and labor regulations. They operate the mine for ten years, reporting a profit of fifty million dollars a year. After ten years they decide the remaining ore is not profitable, and they sell the mine to another corporation who thinks they might be able to make a profit.

Sounds good right? Capitalism at work. Jobs are created, profit is accrued, shareholders increase their wealth. Raw materials are provided to the world economy. Good work! But wait... maybe the story doesn't end.

Corporation X moves on, and the new owner, corporation Y, takes ownership of the mine. The bad news starts to roll in. During the last ten years environmental regulations were ignored. Lead and arsenic taints the water table, the tailings from ore processing have been dumped in the river reducing the fish population by up to 90% and causing sediment buildup, and erosion around the mining site has stripped the surrounding area of massive amounts of topsoil. Corporation Y applies for Superfund status to help clean up the area, arguing that the problem isn't their fault and they shouldn't be forced to foot the bill. Now the federal government steps in and uses taxpayer dollars to begin the cleanup. Costs climb as more and more problems are unearthed and the full extent of the damage is realized.

The original owner made five hundred million in profit over ten years. The cleanup costs reach a total of six hundred million.  Now we begin to see the real picture. If they had obeyed the laws, and conducted their business properly, they would not have been profitable at all. Now we see that what I refer to as a deferred loss. Adding insult to injury, the profit was made at the taxpayers expense. It is also called an externality: a cost of business is shifted outside the corporation so that someone else must foot the bill.

In many businesses externalities are built-in, such as raw material providers. Someone else must pay the price, whether it is environmental, financial, or social. This begs the question: how much of reported profit is truly profit, and how much is deferred losses?