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Corporate Welfare Lives on and On

29 Aug 2018

Doug Bandow

Congress created the usual special interest frenzy with its
latest iteration of the farm bill. Agricultural subsidies are one
of the most important examples of corporate welfare—money
handed out to businesses based on political connections. The
legislation suffered a surprise defeat in the House, being viewed
as too stingy. But it is certain to return.

Fiscal responsibility is out of fashion. The latest federal
budget, drafted by a Republican president and Republican-controlled
Congress, blew through the loose limits established under
Democratic President Barack Obama. The result is trillion-dollar
deficits as far as the eye can see.

Spending matters. So does the kind of spending. Any amount of
corporate welfare is too much.

From farm subsidies to
the Export-Import Bank, special interest feeding frenzies are still
the norm throughout government.

Business plays a vital role in a free market. People should be
able to invest and innovate, taking risks while accepting losses.
In real capitalism there are no guaranteed profits. But corporate
welfare gives the well-connected protection from many of the normal
risks of business.

Business subsidies undermine both capitalism and democracy.
Allowing politicians to channel economic resources toward their
preferred ends distorts investment and trade. Moreover, turning
government into an engine of illicit profit encourages what
economists call rent-seeking. Well-organized special interests
usually triumph over the broader public and national interest.

Explained Mercatus scholar Tad DeHaven, then a budget analyst at
the Cato Institute: “Corporate welfare often subsidizes
failing and mismanaged businesses and induces firms to spend more
time on lobbying rather than on making better products. Instead of
correcting market failures, federal subsidies misallocate resources
and introduce government failures into the marketplace.”

While corporate welfare suggests money for big business, firm
size is irrelevant. There is no substantive difference between,
say, the Small Business Administration and the Export-Import Bank.
Both turn capitalism into a rigged game of Monopoly.

Aid comes in many forms. There is spending, typically in grants,
loans, and loan guarantees; limits on competitors, such as tariffs
and quotas; tax preferences, attached to broader tax bills to
benefit individual companies and industries. All help ensure
business profits.

Agriculture in particular has spawned a gaggle of sometimes
bizarre subsidies. Payments, loans, crop insurance, import quotas,
and more underwrite farmers. When these distort the marketplace,
further efforts are concocted to address those dislocations. A
dairy program created milk surpluses, which in turn encouraged
state price fixing that generated massive cheese stockpiles, in
turn triggering giveaways to the poor. The federal government
killed off cows even as it continued to subsidize milk.

Money also goes to agricultural enterprises through the Rural
Business-Cooperative Service, which supports “business
development.” Through it, observed the Cato Institute’s
Chris Edwards, Washington subsidizes “utilities, housing
developers, and a vast range of other businesses, such as auto
shops, tractor companies, clam producers, carwashes, and
pharmaceutical firms.” The defeated farm bill even included
$65 million in special health care subsidies for agricultural
associations. Ironically farm households enjoy higher median income
and wealth than non-farm households.

The Market Access Program subsidizes agricultural exports. So do
the Emerging Markets Program and Foreign Market Development
Program. Other programs support general trade and investment. For
instance, the Export-Import Bank is known as Boeing’s Bank.
It provides cheap credit for foreign buyers of American products.
Ironically this gives foreign firms, such as airlines that purchase
Boeing airplanes, an advantage over U.S. carriers, which must pay
full fare. Ex-Im’s biggest beneficiary in recent years has
been China, especially its state-owned firms.

Contrary to its claims, Ex-Im is not vital for American exports:
it backs fewer than 2 percent of them. Around 10 companies benefit
from roughly two thirds of the organization’s largesse. Ex-Im
likes to say it makes money. But the real cost is channeling
economic resources to the politically favored.

The Overseas Private Investment Corporation provides another
carefully camouflaged subsidy. OPIC underwrites U.S.
investment—recipients have ranged from Papa John’s
Pizza to the Ritz-Carlton—in potentially unstable nations. If
the project pays off, investors win. If not, the rest of us lose.
OPIC’s real cost includes channeling business investment into
protected regions and industries. American businesses hoping to
make money in foreign markets should not expect American taxpayers
to guarantee those profits.

***

At the other end of the commercial spectrum is the Small
Business Administration. Smaller firms are a vital part of the
American economy and play an important cultural, community, and
family role. Yet small businesses are not an underserved market.
There is no dearth of, say, liquor stores, bakeries, or antique
shops. (Personally, I would love to see an antique shop on every
street corner.) SBA is a response to a political opportunity, not
an economic need.

Much corporate welfare is disguised in broader terms. The
Commerce Department’s Economic Development Administration
subsidizes “development” in “distressed
communities,” meaning the agency underwrites business, with
dubious results. The Department of Housing and Urban
Development’s Community Development Block Grants do much the
same. So does the Appalachian Regional Commission. Cato’s
Chris Edwards complained that “these are pork-barrel
handouts, not proper federal activities.” There are some 180
“economic development” programs of one sort or
another.

The Rural Utilities Service (once the Rural Electrification
Administration) continues, never mind that rural America got
electricity decades ago. Today RUS underwrites service in wealthy
resort areas and has expanded into broadband internet and even
television service. The Federal Communications Commission has
several programs to subsidize phone service. The Commerce
Department includes the Minority Business Development Agency, which
underwrites companies that qualify as minority-owned.

The Bureau of Land Management (mis)manages federal lands,
subsidizing use of rangeland by ranchers, for instance. There are
federal subsidies to develop, finance, and promote fisheries. There
are incentives for airline companies to serve small markets.
Foreign Military Financing is presented as a national defense
measure, but in most cases the chief beneficiaries are arms makers.
There is money to develop high-speed rail and aid shipyards, while
the Jones Act imposes huge costs on consumers to preserve expensive
U.S. merchantmen.

***

There are many housing subsidies, most notably mortgage support
and tax preferences, though the latter were trimmed by last
year’s tax bill. Federal Reserve monetary policy also is a
massive subsidy for housing industry enterprises and other
asset-based businesses. The Trump administration is pushing
subsidies for what the president calls “beautiful” coal
power plants.

Federal research and development outlays also offer bountiful
benefit to business. The more basic the R&D, the better the
argument that the public interest is being served. But even there,
warned DeHaven, “the government’s basic research can be
unproductive and pork-barrel in nature.” The closer to
commercialization, the more the expenditures are essentially
corporate welfare. Alas, Uncle Sam has a hideous record of choosing
winners and losers. Most often he chooses the politically
influential, which can mean picking losers.

That certainly was the case in the area of “green”
energy, for instance. The Obama administration funneled $535
million worth of loan guarantees to Solyndra, which President
Barack Obama called an “engine of economic growth.” The
company filed for bankruptcy in 2011 after spending $1.8 million on
its Washington lobbyists. The Washington Post later
reported that $3.9 billion in Energy Department grants and
financing flowed to 21 companies backed by firms connected to five
Obama administration staffers and advisers.

The Advanced Technology Vehicles Manufacturing program provides
$25 billion in loans for development of cars powered by alternative
fuels. Tesla is a major beneficiary. Some players enjoy multiple
benefits. DeHaven pointed to Enron, which “received billions
of dollars in aid for its projects from the Export-Import Bank, the
Overseas Private Investment Corporation, the U.S. Trade and
Development Agency, the U.S. Maritime Administration, and other
agencies.” When the firm collapsed taxpayers were stuck with
several bills.

Although most public attention falls on direct expenditures,
trade “protection” is no less a form of corporate
welfare. Both tariffs and quotas allow domestic manufacturers to
charge more for their products. Unfortunately, the cost of this
form of corporate welfare is hidden from the public. Tariffs and
other fees alone come to around $40 billion a year. Estimating the
cost of quotas and other non-financial restrictions is much
harder.

***

Tax preferences are another means of corporate welfare. Buried
in the tax code, they often are difficult to identify. Measures
that affect only one firm or industry, in contrast to those with
general economic impact, should be treated as subsidies. Some
measures are both, such as the mortgage interest deduction.

The Tax Foundation once calculated that “special tax
provisions” cost more than $100 billion annually in lost
revenue. Toss in just the mortgage interest deduction and the total
jumps dramatically. Although last year’s tax bill covered
important policy issues, it also incorporated more than a few
preferences called “tax extenders.”

States and localities also offer subsidies, many through grants,
free property, and tax preferences to attract businesses to a
particular area. The New York Timespointed to the case of
General Motors: “For years, mayors and governors anxious
about local jobs had agreed to G.M.’s demands for cash
rewards, free buildings, worker training and lucrative tax
breaks.” Estimates of these costs run between $50 billion and
$80 billion.

With the annual federal deficit again approaching $1 trillion,
ending corporate welfare alone would not restore fiscal sanity in
Washington. But it would be a good down payment. Killing corporate
welfare also would help answer the question: does the system
operate only for the influential and elite? Ending welfare for
profit-making companies should be a starting point for any effort
to balance the budget.

Doug Bandow is
a senior fellow at the Cato Institute. A former special assistant
to President Reagan, he is author of The Politics of Plunder:
Misgovernment in Washington
.

Click here to view the full article which appeared in CATO Journal