Welfare for the Well-Off: How Business Subsidies Fleece Taxpayers

Saturday, May 1, 1999

PART 1

Introduction

For most Americans the term welfare is associated with any number of negative images: laziness, illegitimacy, family breakup, irresponsibility, and wasted tax dollars. We hear "welfare" and our minds conjure up a young unwed mother of two or three infants, huddled in front of a TV set in a public housing tenement and living at taxpayer expense on monthly Aid to Families with Dependent Children (AFDC) checks and food stamps. We react negatively because too often these checks subsidize bad behavior and encourage dependency rather than self-responsibility.

The American Heritage dictionary defines welfare as "receiving regular assistance from the government or a private agency because of need." What is surprising about our modern-day welfare state is just who it is that Congress really believes to be "in need."

Some of the most subsidized recipients of public assistance are not welfare queens housed in public tenement apartments. They are not even poor or ailing at all. Far from it.

America's most costly welfare recipients today are Fortune 500 companies. In 1997 the Fortune 500 corporations recorded best-ever earnings of $325 billion, yet incredibly Uncle Sam doled out nearly $100 billion in taxpayer subsidies.1 These welfare payments come in every conceivable shape and size: government grants, sweetheart business deals arranged by the Commerce Department, cut-rate insurance, low-interest loans, a protective wall against foreign competition, exclusive government contracts, and a mind-boggling maze of special interest loopholes in the tax code. Table 1 lists the 1997 appropriations for fifty-five of the most unjustified federal business subsidy spending programs as compiled by the Cato Institute. Their combined price tag came to $38 billion in 1997.

All but a small handful of America's wealthiest corporations have participated in the hunt for federal or state government subsidies. Most of these companies are double-, triple-, and quadruple-dipping. In 1996 General Electric won fifteen grants for $20.1 million. Rockwell International received thirty-nine grants for $25.4 million. Westinghouse Electric received fourteen grants for $26.1 million. Yet each of these companies had profits of at least half a billion dollars in 1996.

Corporate welfare has all the systemic debilitating effects, including dependency and self-destructive behavior, that characterized the troubled legacy of the Great Society social welfare agencies. Just as the social welfare state became a pernicious, self-perpetuating industry inside Washington, so it is today with the corporate welfare state. For example, Representative Dick Armey has shown that the growth of the tax code and its special interest provisions has exactly paralleled the growth of the Washington K Street lobbying industry (see figure 1).

In the mid-1990s Congress and the states--at the urging of the American voters--enacted major reforms in social welfare programs. There are now time limits on welfare benefits. Work, training, or education is now typically required in exchange for benefits. The result: welfare rolls are down by 40 percent over the past five years and record levels of former recipients now working and paying taxes, not collecting them.

None of this reform ethic has taken root in the realm of corporate welfare. There is no plan in Congress or the White House to attack business subsidies. In fact, the business community has come to regard subsidy payments as de facto entitlements. There is no "two years and off" time limit when it comes to corporate handouts.

With the exception of a few valiant anticorporate welfare warriors--such as Republicans Senator John McCain and Representative John Kasich and Democrats Senator Russ Feingold and Representative Tom Andrews--almost no one in Washington wants to make an enemy of big business. As a Washington Post exposé on fiscal favors for big business noted, "Corporate welfare is the pork that won't slice." Republicans in Congress won't cut even the most egregious corporate welfare programs, such as the Department of Commerce's high-tech grants to Silicon Valley and the advertising subsidies for Ralston Purina cat food and California's dancing raisins. Bill Clinton and Al Gore say they want to "reinvent government" and end irresponsible business subsidies, but their actual record has been to call for larger benefits. In 1997 alone, for example, the Clinton administration requested a 4 percent overall increase in corporate welfare payments.2 Sixteen corporate subsidy programs were scheduled to receive increases of 10 percent or more.

If perhaps for different reasons, both the left and the right in America should recognize the damaging effects of the expansion of the modern corporate welfare state. Democrats should understand that corporate welfare is the essence of corrupt government. We have basically put Uncle Sam up for sale to the highest bidder--and that is seldom the poor, the disabled, or the working-class family with two wage earners struggling to pay the electric bills each month. Meanwhile, Republicans on the right should see that business handouts make big business a mere ward of the state--an advocate of government expansionism and a well-financed enemy of Adam Smith's invisible hand capitalism. Corporate welfare, in sum, is the antithesis of good government and the antithesis of a free market economic system.

Your Tax Dollars at Work (for IBM, GE . . .)

Corporate welfare comes in all shapes and sizes. Here are some prominent examples of the misappropriation of tax dollars in the federal budget.

  • Through the Rural Electrification Administration--now called the Rural Utilities Services (obsolete federal programs never go away, they just change their identity)--and the federal Power Marketing Administrations, the federal government provides some $2 billion in subsidies each year to large and profitable electric utility cooperatives, such as ALLTEL, which had sales of $2.3 billion last year.3 Federally subsidized electricity holds down the costs of running ski resorts in Aspen, Colorado, five-star hotels in Hilton Head, South Carolina, and gambling casinos in Las Vegas, Nevada.4
  • In 1997 the Forest Service spent $140 million building roads in national forests, thus subsidizing the removal of timber from federal lands by multimillion-dollar timber companies. Over the past twenty years the Forest Service has built 340,000 miles of roads--more than eight times the length of the interstate highway system--primarily for the benefit of logging companies.5
  • The U.S. Department of Agriculture (USDA) Market Promotion Program (MAP) spends some $100 million per year underwriting the cost of advertising American products abroad. In 1995 MAP gave $500,000 to Tyson Foods; $526,000 to the Pillsbury dough boy; $308,000 to Ocean Spray Cranberries; $2 million to the California Prune Board; $1 million to the Kentucky Distillers' Association (yes, Congress subsidizes the production and sale of booze); $14,000 to High Mountain Jerky (they make the famous Beef Jerky), and $281,000 to the Campbell Soup Company. Mmm, mmm, good! In the past MAP has even provided subsidies for foreign sales of U.S. tobacco products--thus contributing to the export of cancer and heart disease. The USDA says that MAP enhances U.S. exports of "high value-added commodities." But then why did Uncle Sam shovel out $239,000 in 1995 to Ralston Purina? Since when is cat food a "high value-added product"? Since Dick Gephardt, who represents Saint Louis, Ralston Purina's headquarters, became the highest-ranking Democrat in the House of Representatives.
  • In 1994 a House of Representatives investigative team discovered that federal environmental cleanup and defense contractors had been milking federal taxpayers for millions of dollars in entertainment, recreation, and party expenses.6 Martin Marietta charged the Pentagon $263,000 for a Smokey Robinson concert, $20,000 for the purchase of golf balls, and $7,500 for a 1993 office Christmas party. Ecology and Environment of Lancaster, New York, spent $243,000 of funds designated for environmental cleanup on "employee morale" and $37,000 on tennis lessons, bike races, golf tournaments, and other entertainment.7
  • From 1990 to 1994, the Commerce Department doled out $280 million in research grants to eight of the hundred largest companies in America--Amoco Corporation, AT&T, Citicorp, DuPont, General Electric, General Motors, IBM, and Motorola. But as the Philadelphia Inquirer discovered in a brilliant exposé on the Commerce Department program, these firms had combined profits of $26.8 billion in 1994.8 It's doubtful whether these Fortune 500 firms won Uncle Sam's lottery by chance. Federal election campaign records show that these firms, or their executives, doled out nearly $1 million of contributions to both political parties that year.
  • An estimated 40 percent of the $1.4 billion sugar price support program benefits the largest 1 percent of sugar farms. The thirty-three largest sugar cane plantations each receive more than $1 million.9
  • Sematech was launched in 1986 to promote the U.S. microchip industry over rivals in Japan and Germany. It spent several billion dollars of U.S tax dollars for the purpose of boosting the sales and profitability of U.S. chip producers--such as Intel. Now, some twelve years later and after spending taxpayer funds to prop up Intel, the Federal Trade Commission is spending taxpayer dollars to sue Intel under antitrust statutes for being too big and too profitable.

As these examples demonstrate, government provides special benefits to individual industries and companies through a vast array of policy levers. The three major business benefits doled out by Congress are spending programs, special tax breaks, and trade protectionism.

Tax Breaks

When former labor secretary Robert Reich protested against "aid to dependent corporations" back in 1995, his criticism was directed toward "special tax benefits for particular industries."10 The Democratic Leadership Council's Progressive Policy Institute has specified some thirty such "tax subsidies" that led to a loss of $134 billion in federal revenues over five years.11

One of the most inefficient and unwarranted tax subsidies is provided to the industry that produces ethanol--a corn-based gasoline substitute. Ethanol enjoys two tax breaks: a tax credit for companies that blend ethanol and an exemption from federal excise taxes.12 The tax breaks are allegedly justified on the grounds that they reduce pollution and U.S. dependence on foreign oil. But a U.S. Department of Agriculture study finds that the $500 million subsidy for ethanol "represents an inefficient use of our nation's resources."13 It concludes, "When all economic costs and benefits are tallied, an ethanol subsidy program is not cost effective."14 As for the supposed energy conservation and environmental benefits, a study by agricultural economist David Pimental at Cornell University discovered that "about 72 percent more energy is used to produce a gallon of ethanol than the energy in a gallon of ethanol."15

Politics, not economics, is the principal motivation behind the ethanol subsidies. Archer Daniels Midland (ADM), a $10 billion agribusiness based in Decatur, Illinois, produces 70 percent of the ethanol used in the United States.16 An estimated 25 percent of its sales are of ethanol and corn sweetener (another highly federally subsidized farm product).17 ADM and its CEO, Dwayne Andreas, have been among the nation's most generous campaign contributors, having given more than $150,000 in lifetime contributions to former Senate majority leader and 1996 GOP presidential nominee Bob Dole alone.18

There are scores of other targeted tax breaks that unjustifiably distort competition and create an unlevel playing field among and within industries. Just as government should not use spending subsidies to pick industrial winners and losers, it should avoid using the tax code for that purpose.

But one point deserves special emphasis. The problem with the tax code today is not, as many on the left have charged, that corporate America pays too little tax. Most firms today face too high a tax burden, not one that is too low. In 1995 the tax rate on corporate America came to 35 percent of net income. Further, with federal tax collections now above $1.75 trillion the case that Washington suffers from too little tax revenue is unconvincing. Research suggests that policies designed to bring additional dollars into the federal treasury would only invite higher congressional spending, not lower debt.19

As such, the goal in the fight to end corporate favoritism by government should not be to add to the aggregate burden on businesses but rather to spread the existing burden in a more equitable fashion. We should aim to close inefficient loopholes, level out the economic playing field, and use the savings to cut tax rates on all businesses--thus enhancing overall U.S. competitiveness.

Congress should abolish all tax deductions, including all of the special tax breaks for industries identified by the Progressive Policy Institute, in exchange for lower overall corporate and personal tax rates on business and personal taxpayers. That could be accomplished through a flat tax, as advocated by Representative Dick Armey and Steve Forbes; a national sales tax replacement of the income tax, as proposed by Ways and Means Committee chairman Bill Archer; or any policy that lowers rates and broadens the tax base.20

Trade Barriers

"Most of the statutes, or acts, edicts, and placards of parliaments, and states for regulating and directing of trade," wrote Benjamin Franklin, "have been either political blunders or obtained by artful men for private advantage under pretence of public good." Franklin was two hundred years ahead of his time in this observation. He would no doubt be aghast if he observed the entangling web of special interest trade protections that have been erected in recent decades. In 1993 there were more than thirty-six hundred product tariffs and quotas imposed by Uncle Sam, all obtained for private advantage under the pretense of public good.21

By erecting trade barriers, the government rewards one domestic industry at the direct expense of another. For example, in 1991 prohibitive duties were placed on low-cost Japanese computer parts. The motivation was to save jobs in U.S. factories that make computer circuit boards. But the decision to keep out foreign parts inflated by almost $1,100 the cost of a personal computer manufactured by U.S. companies, such as IBM, Apple, and Compaq.22 That gave a huge advantage to Japanese computer companies; it significantly reduced sales of the U.S. computer firms; and, worst of all, thousands of American jobs were lost.

Steel import quotas are equally economically injurious to American manufacturers. Trade specialists believe that the inflated steel prices paid by U.S. firms have contributed to the competitive decline of several American industries, including the auto industry. The cost to the American economy of steel quotas is estimated at $7 billion a year.23

No one knows precisely the total cost to American consumers of barriers to free trade. But several authoritative sources place the figure at $80 billion a year.24 There is virtually no specific U.S. trade restriction the economywide costs of which do not exceed the industry-specific benefits. Therefore, Congress should immediately lift all barriers to free trade. If tariffs are to be imposed at all as a revenue-raising method, they should be uniform among all products and should not violate U.S. trade agreements.

Federal Outlays for Business Subsidies

The most pervasive and pernicious form of corporate welfare is the system of direct federal expenditures. These include government provision of grants, contracts, loans, credit guarantees, and insurance. Most of the rest of this essay focuses on these direct spending subsidies.

The Corporate Interest versus the Public Interest

So what has corporate America's response been to these indefensible taxpayer payments? Back in 1992 when the budget deficit hit its high-watermark of $290 billion, the CEOs of scores of major highly profitable corporations jointly signed a preachy letter calling on Congress to end its cowardice and stop the financial madness of deficit spending. They called for tough choices and a budget of sacrifices.

And then Ralph Nader, of all people, undertook an enlightening experiment. He wrote to these CEOs asking how many would be willing to give up their own subsidies. Are you willing, he asked them, to give up the Export-Import Bank, the Overseas Private Investment Corporation, the International Monetary Fund, or energy department subsidies? Nader got virtually no takers on his offer. Corporate America's communal response was sacrifices, yes, self-sacrifices, never.

In fact many corporations actively fought the feeble efforts of Republicans in Congress to cut off federal aid to business. The Export-Import Bank, which uses federal dollars to provide insurance to major U.S. corporate investments and contracts overseas, for example, was saved thanks for a massive lobbying effort by major U.S. exporters.

Meanwhile, on the tax side of the giveaway equation, the rout of the reformers has been even more complete. The battle to clean out all corporate loopholes and move to some kind of simple flat tax system was torpedoed by corporate special interests jealously protecting their multibillion dollar carve-outs. The home builders, realtors, mortgage bankers, accounting industry, municipal bond traders, life insurance lobby, tax attorneys, and others banded together to squash any serious effort at tax simplification and reform. In fact, the tax code has more corporate carve-outs today than it did five years ago. We have made the internal revenue code even more special interest friendly--a seemingly impossible mission. The stock values of the tax preparation industry--that is, the H&R Blocks of the world--grew at three times the rate of the Dow Jones average between 1996 and 1998.

PART 2

The Illogic of Corporate Subsidies

Proponents of federal subsidies to private industry maintain that a government support network for American firms promotes the national interest. A multitude of economic, national security, and social arguments are offered to justify corporate aid. For example, government aid to industry is said to preserve high-paying American jobs; subsidize research activities that private industries would not finance themselves; counteract the business subsidies of foreign governments to ensure a level playing field; boost high-technology industries whose profitability is vital to American economic success in the twenty-first century; maintain the viability of "strategic industries" that are essential to American national security; finance ventures that would otherwise be considered too risky for private capital markets; and assist socially disadvantaged groups, such as minorities and women, to establish new businesses.

But let's walk through the logic of corporate welfare subsidies and undress the argument in simple terms. Let's begin by accepting the proposition that if the federal government gives $5 million to IBM, that IBM will use the money for some productive purpose. The funds may be used, for example, to help IBM underwrite research and development for the next generation of computer products, expand a domestic operation, or increase its industry market share as it competes with domestic and foreign rivals. It would seem that everyone wins: American workers, IBM shareholders, and the U.S. economy as a whole.

But hold on. That is not the full story. If the federal government offers IBM a $5 million research grant, every other American firm and non-IBM worker would be disadvantaged because the rest of us have to pay the taxes or help underwrite the debt so that Uncle Sam can give IBM a check. The fact that IBM may produce something of value with the $5 million hardly makes a prima facie case for this income transfer. After all, if Congress were to send you or me a check for $5 million, we could no doubt find useful things to do with the money--many of which might have genuine societal benefits. We might give some of the money to charity, thus helping the poor. We might use the funds to start a new business, thus building up the local economy. We might build a swimming pool in our backyards, creating construction jobs for American workers. In fact, we could no doubt issue a compelling report to the relevant committee in Congress assuring the politicians in Washington that we had made good use of the tax dollars. If we can claim membership in some "disadvantaged" group--African-Americans, Latinos, women, disabled persons--we can make the additional claim that these funds are helping a downtrodden group in society. We could (and given human nature, probably would) advise Congress in our report that the government give us $5 million again next year, so we can even do more good things for our fellow man.

Hopefully the fallacy of our defense of our grant, and IBM's, is self-evident. It is based on a false logic that permeates the corporate welfare debate called "single-entry bookkeeping." It is the deceit of counting the seen but not the unseen. The Commerce Department--which is the command and control center of America's modern-day corporate welfare state--claims to have created 250,000 jobs through its business assistance programs. This is indeed an impressive number. It seems well worth the $5 billion a year we spend on the department's economic development activities. Where does the number actually come from? The answer is that Commerce officials count all the new jobs that have been directly created through the grant dollars it distributes to the IBMs and the Chevrons each year. Take away the grants and presumably the 250,000 jobs vanish.

But what about the costs? What no one in Congress ever seems to ask is, How many jobs were destroyed by confiscating $5 billion from the nonsubsidized taxpaying workers and businesses in the rest of the economy? The issue is whether we would have created even more jobs if we had never taken money from Peter and given it to Paul in the first place.

Economist Dale Jorgenson of Harvard University has calculated that every additional dollar of taxes collected by the IRS exacts a $1.35 toll on the economy because of collection costs and economic efficiency losses. This means that for a corporate welfare expenditure to be economically wealth producing, the benefit of every dollar spent must exceed $1.35. A 35 percent return on a dollar of government spending is the de facto economic break-even point. If the program yields less than a 35 percent return, the nation would be richer if we canceled the spending and cut taxes by that amount.

There are few corporate welfare programs that come close to producing a $1 return for every $1 spent. How many can come even close to matching the 35 percent threshold that would be required to make these programs worthwhile? So despite the rhetoric of government and industry economists that corporate welfare pays, the truth is quite the opposite. In almost all cases it is easy to show that America's economic welfare is lower, not higher, because of subsidies.

Let us take just one conventional example of the dysfunctional thinking in Washington that leads to aid to corporations. To pay for the catalog of new corporate welfare programs in his budget requests, Bill Clinton raised the corporate income tax rate by one percentage point in 1993. For a high value-added company such as Intel, which had net profits of $7 billion in 1995, this meant that the firm had to give up an additional $70 million to the federal government so that Bill Clinton, Newt Gingrich, and Commerce secretary Bill Daley could give the money to other companies. By taking from Intel and giving to McDonnell Douglas, we are simply transferring dollars from firms that produce the highest value added for every dollar they spend (as measured by their profitability) to firms that yield lower value added.

In some cases the money chase is even more nonsensical. It is frequently the case that the payer (Peter) and the recipient (Paul) are one in the same. Intel, for example, pays substantial taxes but also receives substantial amounts in grants. It is puzzling in the extreme to understand how anyone could reasonably argue that, when Congress takes money out of Intel's left pocket and then generously stuffs it back into Intel's right pocket, somehow Intel, its workers, taxpayers, or the U.S. economy benefit from the transaction. In such a case, the only real beneficiaries are Washington's lobbyists, lawyers, legislators, and fund-raisers. Intel would have been better off if the $5 million had never been picked from its pocket by Washington in the first place.

Here is one last thought experiment that helps expose the flawed thinking that underlies the corporate welfare state mentality. Imagine that the K Street corporate lobbyists, who so vigorously defend their subsidies, had to plead with the public for their indispensable handouts, rather than with members of Congress. Imagine that IBM, Chevron, and General Electric lobbyists did not roam the cavernous halls of Capitol Hill begging for dollars but rather had to go door to door through working-class neighborhoods with tin cups in hand. Or, alternatively, perhaps they would have to do telephone solicitations like the annoying salespeople who call up during the middle of dinner asking you to switch to MCI. The corporate lobbyists would have to make their pitch just like the folks from the local homeless shelter or the Red Cross do. "Excuse me, sir or madam," they would say. "I'm from General Electric, where we had $6 billion of net income last year. We're developing a new satellite technology. We're hoping that you would be willing to contribute fifty cents or a dollar to the cause." Almost all of us would stare in open-mouthed disbelief at the audacity of the request, then perhaps offer up a profanity as we slammed the door in the lobbyist's face.

Fortunately for the government affairs directors in Washington, when they embark for their quest for donations, they pound on the doors of congressional offices, not the doors of American taxpayers' homes. On Capitol Hill they find a much more receptive audience for their sales pitch. Yet herein lies a great paradox of the corporate welfare debate. If IBM asks every taxpayer in the state of Kansas to put fifty cents in its tin cup to fund its project, it gets nothing. But if it goes to the congressman from Kansas with a $5,000 political action committee (PAC) campaign contribution in one hand and a leather suitcase in the other, the lobbyist may walk away with a $5 million grant. In one profitable visit, the lobbyist raises the $5 million by taking fifty cents from the income taxes paid by every household in the state of Kansas.

Somehow, in the first situation, the $5 million grant seems utterly absurd. In the second, it is vigorously defended as promoting American competitiveness. In fact, IBM and the congressman may even boast to America about all the jobs that the program has generated.

In addition to highlighting the often absurd logic behind corporate welfare, this example underscores another flaw in these programs that should particularly outrage those who believe this political system is inequitable. As Robert Shapiro of the Progressive Policy Institute has put it, "Corporate welfare is inherently regressive." These programs take from the poor and give to the rich. This is true of U.S. foreign aid, farm programs, technology grants, energy subsidies, corporate tax loopholes, and protective tariffs. Shapiro's work has documented that relatively higher-income corporate shareholders get the gain, and relatively lower-income taxpayers and consumers pay the cost. For all the infatuation with fairness and equity in government these days, arguably the most unwarranted feature of the entire federal budget, from the perspective of promoting equity, is corporate welfare. No government policy contributes more directly to the gap between rich and poor.

Why We Don't Need Corporate Welfare

Back in 1995 the Progressive Policy Institute (PPI) published an impressive study entitled "Cut and Invest." The study found that more than $225 billion could be saved over five years by shaving off of the budget "federal spending and tax subsidies that insulate certain industries from competition." The report maintained that

Domestic subsidies cost the U.S. jobs, business formation, and overall growth. Not only do they reduce normal competitive pressures to innovate, they also place industries not receiving favored treatment at a disadvantage, by effectively raising their costs of capital and labor relative to subsidized sectors. . . .

Global markets require that the president and Congress cut those programs and tax provisions that artificially raise the rate of return for particular industries for no overriding social or economic purpose.

My colleague Dean Stansel and I have come to a similar conclusion in our analyses of corporate welfare. We have found that Congress funds more than 125 programs that subsidize private businesses costing at least $80 billion a year. Every major cabinet department, including the Defense Department, has become a conduit for government funding of private industry. Within some cabinet agencies, such as the U.S. Department of Agriculture and the Department of Commerce, almost every spending program underwrites private business activities.

It is useful to investigate what the opportunity costs are to the corporate welfare state. In other words, what are the alternative uses of the conservatively estimated $80 billion a year that Washington spends on spending programs for business? Table 2 is a sampling of the types of progrowth tax reduction initiatives that Congress could afford to undertake without adding a penny to the federal debt if corporate welfare were entirely ended. We could cut the personal income tax, the corporate income tax, or the payroll tax. We could entirely abolish the capital gains tax and the death tax. We could help finance a Dick Armey-style flat tax at a rate of 20 percent for all Americans. Those in the business community who contend that corporate subsidies add to America's competitiveness and industrial might must answer the following question: Do you really believe that these programs add more wealth, jobs, or venture financing for the American economy than would entirely eliminating the capital gains tax or adopting a low-rate flat tax that ends all punitive tax treatment of savings? Few could honestly answer that question in the affirmative.25

Myths of the Corporate Welfare State

Despite the substantial costs of federal business subsidies, the efforts of a wide ideological spectrum of organizations such as PPI, Cato, the National Taxpayers Union, some environmental groups, and even the Nader organizations to stop corporate welfare have been largely unsuccessful. As I told a Wall Street Journal reporter not long ago, "We fought a war against corporate welfare, and corporate welfare won."

The failure can be explained by the fact that the proponents of these subsidies continue to perpetuate myths about the benefits of the government-industry partnership model. The following is a restatement and refutation of those prevalent myths of corporate welfare:

1. The federal government can pick industrial winners and losers. The function of private capital markets is to direct billions of dollars of capital to industries and firms that offer the highest potential rate of return. The capital markets, in effect, are in the business of selecting corporate winners and losers. Capitalists put at risk their own money. With trillions of dollars now invested every year by Americans, the United States has the most efficient capital markets in the world.

The underlying premise of federal business subsidies is that the government can direct capital funds more effectively than can venture capitalists and private money managers. But decades of experience prove that government agencies have a much less successful track record than do private money managers of correctly selecting winners. Example: the average delinquency rate is almost three times higher for government loan programs (8 percent) than for commercial lenders (3 percent).26 The Small Business Administration delinquency rates reached more than 20 percent in the 1980s; the Farmers Home Administration delinquency rate has approached 50 percent.27 The Federal Housing Administration's default rate is 8 percent versus a 3 percent industrywide average for private mortgage insurers.

Corporate welfare supposedly offers a positive long-term economic return for taxpayers. But the evidence shows that government "investments" have a low or negative rate of return. In the late 1960s the federal government spent nearly $1 billion on the supersonic transport (SST), which experts in Washington expected would revolutionize air travel. Instead the plane went bankrupt and never flew a single passenger. In the late 1970s the federal government spent more than $2 billion of taxpayer money on the Synthetic Fuels Corporation (SFC)--a public-private project that Department of Energy officials thought would provide new sources of energy for America in the 1980s. The SFC was closed down in the 1980s, having never produced a single kilowatt of electricity.

2. Corporate welfare promotes American competitiveness. Business subsidies, which are often said to be justified because they correct distortions in the marketplace, create huge market distortions of their own. The major effect of corporate subsidies is to divert credit and capital to politically well-connected firms at the expense of their less politically influential rivals. This is precisely what Japan has found during its economic collapse over the past six years. In Japan the myth of industrial policy as a competitiveness strategy has led to a 60 percent reduction in the value of the Japanese stock market since 1991.

Although it is said that corporate subsidies are necessary so that U.S. firms can compete with their subsidized rivals in other nations, more than 90 percent of American businesses manage to stay in business without ever receiving government grants, loan guarantees, insurance, or airplane seats on Commerce secretary Bill Daley's trade missions around the globe. But they pay higher taxes, which lowers their competitiveness, to support those businesses that do.

Agricultural price supports are a case in point. Farm programs are alleged to be critical to the survival of American farmers. The truth is that, of the four hundred classified farm commodities, about two dozen receive more than 90 percent of the assistance funds.28 More than 80 percent of the subsidies enrich farmers with a net worth of more than half a million dollars.29

Given that there are more than one million small and large businesses in the United States today, the subsidies approach to prosperity is utterly futile. The only effective way to enhance the competitiveness and productivity of American industry is to create a level playing field, which minimizes government interference in the marketplace and substantially reduces tax rates and regulatory burdens. All the federal government's efforts to promote the big three U.S. automobile companies are inconsequential compared with the regulatory burden on that industry, which now adds an estimated $3,000 to the cost of a new car.30

3. Government and industry partnerships should be encouraged. Government and politics are, alas, inseparable. Much of what passes today for benign industrial policy is little more than a political payoff to favored industries or businesses. Taxpayer dollars that subsidize private firms are routinely rerouted to Washington in the form of political contributions and lobbying activities to secure even more tax dollars. Cash in; cash out. For example, the outdated Rural Utility Services survives primarily because of the lobbying efforts of the National Rural Electrical Cooperative Association in America. With a $78 million budget, that association is one of the most influential and heavily financed lobbying groups in Washington.31

During the 1992 presidential campaign Vice President Dan Quayle traveled to Michigan to announce a $250 million plan to upgrade the M-1 tank--which happens to be built by General Dynamics in Sterling Heights, Michigan.32 Before the campaign the Bush administration had argued convincingly that in the post-cold war era the more expensive tank was unnecessary.

Many of the top recipients of technology research grants awarded by the Clinton administration were also substantial contributors to the Clinton-Gore campaign or the Democratic National Committee. For example, table 3 lists ten Fortune 500 firms that were multimillion-dollar award winners of the Advanced Technology Program (ATP) or the Technology Reinvestment Project (TRP) in 1994 that were also large Democratic and Republican campaign contributors, according to Federal Election Commission data compiled by Common Cause. (Almost all firms that chase corporate welfare dollars hedge their bets by giving to both parties. In Washington, the way to gain a "seat at the table" is to contribute bipartisanly. Industry learns the rules of engagement in Washington quickly: giving to both parties is tolerated; giving to neither is not.) In sum, corporate welfare programs often put our government programs up for sale to the highest bidder.

4. Corporate welfare benefits workers and consumers. One of the main effects of many corporate subsidy programs is to raise prices to consumers. Trade restrictions, often sought by politically powerful industries, are estimated to cost consumers $80 billion a year.33 The sugar program alone is estimated to cost consumers more than $3 billion a year, according to a U.S. Department of Commerce study.34 The Commerce study concluded, "Because sugar is an ingredient in many food items, the effect of the sugar program is similar to a regressive sales tax, which hits lower-income families harder than upper-income families."35

The Commerce Department's ATP program is also advertised as a job saver. But from 1990 to 1994, the ATP provided more than $250 million to eight firms--Amoco, AT&T, Citicorp, DuPont, General Electric, General Motors, IBM, and Motorola. Over those five years, these firms reduced their total U.S. workforces by 329,000.36

5. Corporate welfare does not corrupt the political process. What is the old business adage? Keep the customer satisfied. One perverse but predictable outcome of a $100 billion-plus corporate welfare state is that industry begins to view Congress, rather than consumers, as their real customers. Firms begin to produce for government, not the market. Corporate welfare, notes Wall Street financier Theodore J. Forstmann, has led to the emergence of the "statist businessman in America."37 The statist businessman is "a conservator, not a creator; a caretaker, not a risk taker; an argument against capitalism even though he is not a capitalist at all."38

Again the sugar program is illustrative. In 1995 the program was under assault. It appeared that the anti-corporate welfare forces would finally win a high-profile fight on behalf of taxpayers and consumers. On the day of the vote on the House floor, big sugar prevailed by just three votes. It turned that five members of Congress who were original cosponsors of the legislation to kill the sugar subsidies voted against their own bill! Big sugar had provided hundreds of thousands of dollars of campaign contributions, with about a ten-to-one ratio going to members who voted for the price supports versus those who voted against them. The Fanjul family, owners of several large sugar farms in the Florida Everglades, captures an estimated $60 million a year in artificial profits thanks to price supports and import quotas. The Fanjuls are fierce defenders of the sugar program, and, to protect the cash cow, since 1992 this one family has contributed more than $350,000 to political campaigns.39

The Politics of Corporate Pork

In the heady days of 1996, when Republicans still had a revolutionary fervor, Congress abolished the wool and mohair subsidies--the much-maligned handouts that provided an annual payment of hundreds of thousands of dollars to each of fewer than two hundred sheepherders in the United States. Finally, Congress had gotten rid of a business subsidy. But in 1998 Congress resurrected the wool and mohair subsidy and the new version is just as absurd as the old.

Incredibly, between 1995 and 1998, with at least rhetorically the most conservative Congress in half a century, corporate welfare programs did not shrink, they grew. There is plenty of blame to go around for this policy failure. The retreat has been bipartisan. And the left and the right share in the hypocrisy on the issue, the left for claiming that it cares for the "little guy" while funding the biggest bully on the block and the right for claiming it believes in free enterprise--except when it comes to subsidizing corporate constituents.

But the Republican retreat on corporate welfare is more perplexing and laden with hypocrisy than the Democrats'. After all, the GOP is the party that describes itself as anti-big government.

It is precisely the Republicans' skittishness when it comes to pushing big business off the dole that gives their budget plans so little credibility with the public. The Democrats charge that Republicans want to cut schoolchildren off the dole but not the Fortune 500. The Washington Post assessed the budget plans of the Republican majorities by declaring that "everything seems to get cut--but not corporate welfare." Such attacks are devastating to Republican credibility. Why? Because they ring true. "If you can't push AT&T and GE off the dole," Silicon Valley venture capitalist Tim Draper asked a group of Senate Republicans in 1997, "how can we ever expect to get farmers, unions, artists, and seniors to give up their subsidies?" Exactly.

By funding corporations with tax dollars, the GOP has only reinforced the public's suspicion that this is the party of the rich, the privileged, and the well connected. The discredited mercantilist policies of the commerce and agriculture departments are the antithesis of the free market policies Republicans say they espouse. When I once asked Newt Gingrich why the 105th Congress had not made a serious attempt to slice out corporate pork, he responded: "This really isn't one of our top priorities. . . . And I don't like the term corporate welfare much anyway." You can lead an elephant to water, but you can't make him drink.

Corporate subsidies should not be last on the GOP's hit list; they should be first. Americans want government downsized if it is fair and balanced--meaning that the budget knife does not spare the most politically well connected.

The Republican budget revolution will continue to fizzle as long as GOP leaders ignore the corrosive impact that corporate subsidies have on the party and the government.

What seems clear from the policy failures of the past five years is that the corporate welfare empire in Washington cannot be toppled until the left and the right forge an alliance to purge the budget of corporate largesse. Representative John Kasich has heroically attempted to do so in the past with his "Stop Corporate Welfare Coalition." Only a handful of Republicans and Democrats would publicly join the Kasich crusade; the rest went into hiding in the bushes like the terrified Munchkins in the Wizard of Oz.

Despite the conventional orthodoxy in Washington that the United States needs to forge closer alliances between business and politics--so-called government-industry partnerships--the truth is that both government and the marketplace would work better if they kept a healthy distance apart. It's in no one's best interest for the regulators and the regulated to get too chummy.

In Washington there seems to be a fine line between too big to fail and too big to succeed. At the very moment that the federal government is in litigation with Microsoft, perhaps America's most innovative and profitable high-technology corporation in decades, Congress is spending hundreds of millions of dollars trying to prop up the firm's less-efficient computer industry rivals. If the government succeeds in its quest to knock Microsoft from its lofty perch, no doubt it will have a taxpayer-funded safety net waiting to cushion its fall.

We now have an unhealthy policy regime in Washington through which federal tax, regulatory, and antitrust policies are increasingly geared toward punishing success, while federal corporate welfare policies increasingly reward the losers.

TABLES & FIGURES

TABLE 1


HOW FIFTY-FIVE CORPORATE WELFARE PROGRAMS FARED IN THE FY 1997 BUDGET PROCESS (outlays in millions of dollars)

Program/Agency 1996 Actual 1997 Appropriation Percent Change
Agriculture Department (16 programs)
Agricultural Credit Insurance Fund $399.4 $355.3 -11.0
Agricultural Marketing Service 58.2 50.3 -13.6
Agricultural Research Service 740.2 785.9 6.2
Commodity Credit Corporation Export Loans program 377.7 393.8 4.3
Commodity Production Flexibility Contracts (replaces price support programs)a 5,570.0 5,385.0 -3.3
Conservation Reserve Program* 1,781.8 1,800.0 1.0
Cooperative State Research, Education, and Extension Service 907.5 908.6 0.1
Economic Research Service 53.1 53.1 0.0
Export Enhancement Programa 350.0 350.0 0.0
Federal Crop Insurance Corporation 1,263.7 1,591.0 25.9
Foreign Agricultural Service 124.8 135.6 8.7
Market Access Programa 90.0 90.0 0.0
National Agricultural Statistics Service 81.1 100.2 23.6
Public Law 480 1,134.0 1,067.8 -5.8
Rural Business-Cooperative Service (RBCS)b 112.4 104.8 -6.8
Alternative Agricultural Research and Commercialization fund (6.5) (7.0) 7.7
RBCS loan subsidies (49.6) (20.8) -58.1
Rural business-cooperative assistance program (0.0) (51.4) N/A
Rural Utilities Service (RUS)b 670.7 680.9 1.5
RUS loan subsidies (99.6) (38.2) -61.6
Rural utilities assistance program (498.9) (566.9) 13.6
Commerce Department (6 programs)
Advanced Technology Program $221.0 $225.0 1.8
Economic Development Administrationc 348.5 373.5 7.2
International Trade Administration 264.9 270.0 1.9
Manufacturing Extension Partnership 80.0 95.0 18.8
Minority Business Development Agency 32.0 28.0 -12.5
National Oceanic and Atmospheric Administration: nonweather activities 1,252.8 1,281.0 2.3
Defense Department (5 programs)
Army Corps of Engineers $3,366.3 $3,503.2 4.1
Defense Advanced Research Projects Agency: applied R&D programs
Dual Use Applications programs (formerly Technology Reinvestment Project) 195.0 195.0 0.0
Advanced Electronics Technologies R&D 409.0 368.1 -10.0
Computing Systems and Communications Technology R&D 396.3 325.1 -18.0
Materials and Electronics Technology R&D 248.1 222.8 -10.2
Energy Department (8 programs)
Clean Coal Technology Programd $12.0 $12.0 0.0
Energy Conservation programsb 553.2 569.8 3.0
Industries of the Future and Technology Access programs (115.7) (117.6) 1.6
Transportation technology programs (176.6) (175.2) -0.8
Energy Information Administration 72.3 66.1 -8.6
Energy Supply Research and Developmentb 2,727.4 2,710.9 -0.6
Solar and renewable energy (275.2) (270.0) -1.9
Nuclear energy (231.0) (222.7) -3.6
Biological and environmental research (419.5) (389.1) -7.2
Fusion energy (244.1) (232.5) -4.8
Basic energy sciences (791.7) (649.7) -17.9
Computational and technology research (0.0) (153.5) N/A
Fossil Energy Research Developmentb 417.0 364.7 -12.5
Advanced clean fuels research (19.6) (16.2) -17.3
Advanced clean/efficient power systems (80.3) (69.2) -13.8
Advanced research and technology development (21.4) (17.6) -17.8
Oil technology R&D (55.7) (45.9) -17.6
Natural gas research (59.7) (69.1) 15.7
Fuel cells R&D (52.5) (51.1) -2.7
Energy Technology Center program (55.3) (54.3) -1.8
General Science and Research activities 981.0 996.0 1.5
Power Marketing Administrations 312.5 240.1 -23.2
Uranium Supply and Enrichment activities 89.9 60.5 -32.7
Transportaion Department (7 programs)
Commercial Space Transportation Office $5.8 $6.0 3.4
Federal Highway Administration demonstration projectsd 800.0 800.0 0.0
Grants-in-Aid for Airports 1,450.0 1,460.0 0.7
Maritime Administration: Guaranteed Loan Program 43.5 40.9 -6.0
Maritime Administration: Operating-Differential Subsidies 162.6 148.4 -8.7
Maritime Security Program 46.0 54.0 17.4
Payments to Air Carriers (Essential Air Service program) 22.6 25.9 14.6
Independent Agencies and Other (13 programs)
Appalachian Regional Commission $170.0 $160.0 -5.9
Bureau of Reclamation (Interior Department) 809.2 775.3 -4.2
Export-Import Bank 790.2 772.6 -2.2
Federal Housing Administration 629.1 643.1 2.2
International Monetary Fund subsidiese 730.0 730.0 0.0
NASA: Aeronautical Research and Technology activities 873.0 888.0 1.7
National Institutes of Health: applied biomedical research and clinical developmentf 4,012.0 4,287.7 6.9
National Science Foundation: High Performance Computing and Communicationsg* 291.0 290.0 -0.3
Overseas Private Investment Corporationh 98.0 104.0 6.1
Partnership for a New Generation of Vehiclesg* 241.0 240.0 -0.4
Small Business Administrationi 689.2 852.3 23.7
Tennessee Valley Authority 109.2 106.0 -2.9
Trade and Development Agency 40.0 40.0 0.0
total (55 programs) $37,706.2 $38,183.3 1.3

sources: FY97 Congressional Appropriations Bill Reports, and H.R. 3610, FY97 Omnibus Appropriation Bill, Conference Report, Report No. 104-863, September 28, 1996.

*Congressional appropriation figure unavailable. Number listed is based on historical levels.

aProduction flexibility contracts, EEP, and MAP are mandatory, not discretionary, programs, so the figures listed are from H.R. 2854, Federal Agriculture Improvement and Reform Act of 1996, Conference Report, Report No. 104-494, March 25, 1996, p. 367.

bFigures in parentheses for selected programs within this category are shown for illustrative purposes only. Those amounts are already included in the total for this category. They do not represent additional spending beyond that total.

c1997 figure includes $25 million in separate emergency appropriations for disaster assistance.

dFigures for highway demonstration projects and Clean Coal Technology Program reflect historical level. Separate figures were not available. (Source: House Budget Committee)

eFigure for IMF refers to the IMF's General Agreements to Borrow and Enhanced Structural Adjustment Facility. (Source: House Budget Committee)

fFigure for NIH applied biomedical research is based on the historical share of total NIH research budget, as calculated by the Congressional Budget Office.

gFigure for 1996 is from Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 1997.

hOPIC figures exclude insurance fees and other offsetting revenues collected by OPIC.

i1997 figure includes $135 million in separate emergency appropriations for disaster assistance.

TABLE 2


WHAT $80 BILLION IN ANNUAL CORPORATE WELFARE SAVINGS WOULD BUY

Corporate Welfare Alternatives Annual Cost (in $billions)
Eliminate capital gains and death taxes $75
Cut corporate tax from 35 percent to 20 percent 84
Cut all personal income tax rates by 10 percent 79
Establish 20 percent flat tax 60
Four percentage point cut in payroll tax 82
source: Budget of the United States Government, Fiscal Year 1999.

TABLE 3


CASH IN, CASH OUT

Company Campaign Contributions 1994 grant awards (millions $)
1992 1994 TRP* ATP*
AT&T** $30,000 $60,000 $1.9 $8.2
Boeing   127,000 44.2 6.0
Chevron 61,000 159,000   16.6
Exxon   60,000   16.6
General Electric 46,000 107,000   21.8
IBM ***150,000   78.5 9.4
McDonnell Douglas 43,000 59,000 1.5 5.3
Shell 65,000     16.6
Texaco 22,000     16.6
United Technology Corp.   41,000 24.6  
Total 458,000 572,000    

*TRP stands for Technology Reinvestment Program. ATP stands for Advanced Technology Program. Grant award figures are total amount per contract. Some of the funds were distributed to subcontractors.

**Includes grants to AT&T Bell Labs.

***Given by Thomas J. Watson, chair emeritus, IBM.

sources: ATP and TRP lists of 1994 award recipients; Common Cause reports, based on Federal Election Commission data.

FIGURE 1


WELFARE FOR THE WELL OFF

Figure 1. Lobbyists in Washington, D.C., and Words in Tax Code, 1964-1993 (Source: Dizil Annon, "The Tax Monster," Wall Street Journal, June 19, 1996, p. A-20)

1Fortune, April 27, 1998, p. 216.

2 Dean Stansel, "Federal Aid to Dependent Corporations," Cato Institute Briefing Paper, Washington, D.C., May 1, 1997.

3 Energy Information Administration, "Federal Energy Subsidies," U.S. Department of Energy, November 1992; Standard & Poor's Register of Corporations and Executives, vol. 1, 1995 (New York: Standard & Poor's, 1995), p. 89.

4 Scott Hodge, "A Prosperity Plan for America," Heritage Foundation, Washington, D.C., 1993, p. 76.

5 Wayne Gable, Wasting America's Money: Your Tax Dollars at Work (Washington, D.C.: Citizens for a Sound Economy Foundation, 1990), p. 101; and Richard Stroup and John Goodman, "Progressive Environmentalism," National Center for Policy Analysis, Dallas, Texas, 1991, pp. 37-38.

6 "Taxpayers Get Stuck with Tab for `Morale' of Contractors," Washington Times, October 18, 1994, p. A6.

7 Ibid.

8 Gilbert Gaul and Susan Stranahan, "How Billions in Taxes Failed to Create Jobs," Philadelphia Inquirer, June 4, 1995, p. 1.

9 General Accounting Office, "Sugar Program: Changing Domestic and International Conditions Require Program Changes" (GAO/RCED-93-84), April 1993, table 3.3, p. 33.

10 Robert Reich, "The Revolt of the Anxious Class," speech before the Democratic Leadership Council, November 22, 1994.

11 Robert J. Shapiro, "Cut and Invest: A Budget Strategy for the New Economy," Policy Report, no. 23 (Progressive Policy Institute) (March 1995).

12 Salvatore Lazzari, "Alcohol Fuels Tax Incentives and EPA's Renewable Oxygenate Requirement," CRS Report for Congress, October 7, 1994.

13 U.S. Department of Agriculture, "Fuel Ethanol and Agriculture: An Economic Assessment," August 1986.

14 Ibid., p. 20.

15 David Pimental, "Ethanol Fuels: Energy Security, Economics, and the Environment," Journal of Agricultural and Environmental Ethics, 1991, pp. 1-13.

16 Peter H. Stone, "The Big Harvest," National Journal, July 30, 1994, p. 1790.

17 John A. Barnes, "Anatomy of a Rip-Off," New Republic, 1989, pp. 20-21.

18 Ibid, p. 20.

19 Richard Vedder, Lowell Gallaway, and Christopher Frenze, "The Impact of Taxes on the Deficit," Joint Economic Committee of Congress, 1992.

20 For a discussion of a form of the latter, see Laurence J. Kotlikoff, "The Economic Impact of Replacing Federal Income Taxes with a Sales Tax," Cato Institute Policy Analysis No. 193, April 15, 1993.

21 James Bovard, Fair Trade Fraud (New York: St. Martin's Press, 1991), p. 84.

22 Bovard, "U.S. Trade Laws Harm U.S. Industries," Regulation 16, no. 4 (1993): 50.

23 Bovard, Fair Trade Fraud.

24 Ibid, p. 5.

25 For an estimate of the growth impact of a capital gains tax cut, see Stephen Moore, "The Tax Treatment of Capital Gains," National Chamber Foundation, Washington, D.C., 1990.

26 U.S. General Accounting Office, "Debt Collection: Information on the Amount of Debts Owed the Federal Government," December 1985.

27 David F. Linowes, Privatization: Toward More Effective Government, Report of the President's Commission on Privatization (Urbana: University of Illinois Press, 1988), pp. 41-42.

28 Stephen Moore, Slashing the Deficit (Washington, D.C.: Heritage Foundation, 1990).

29 For a critique of the federal farm subsidies, see Jim Bovard, The Farm Fiasco (San Francisco: ICS Press, 1989).

30 Stephen Moore, Government: America's ;ns1 Growth Industry (Lewisville, Tex.: Institute for Policy Innovation, 1995), p. 92.

31Associations Yellow Book 3, no. 2 (winter 1994) (New York, Monitor Leadership Directories), p. 692.

32 Jeffrey Gerlach, "Politics and the National Defense: The 1993 Defense Bill," Foreign Policy Briefing, no. 22 (Cato Institute), January 20, 1993, p. 5.

33 Bovard, Fair Trade Fraud, p. 5.

34 U.S. Department of Commerce, "United States Sugar Policy--an Analysis," 1988, p. v.

35 Ibid., p. 10.

36 Gilbert Gaul and Susan Stranahan, "How Billions in Taxes Failed to Create Jobs," Philadelphia Inquirer, June 4, 1995, p. 1.

37 Theodore J. Forstmann, "The Paradox of the Statist Businessman," speech before the Cato Institute, February 1995.

38 Ibid.

39 Rich Lowry, "The Undeserving Rich," National Review, December 31, 1994, pp. 21-22.

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