|Illustration by William Bramhall|
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. 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.
By erecting trade barriers, the government rewards one domestic industry at the direct expense of another. The cost to the American economy of steel quotas, for example, is estimated at $7 billion a year.
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.
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 are 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. 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 Administration, 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. 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.
- 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.
- The U.S. Department of Agriculture (USDA) Market Access 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.
- 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. 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 in 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 sugarcane plantations each receive more than $1 million.
- Sematech was launched in 1986 to promote the U.S. microchip industry over rivals in Japan and Germany. It spent several billion 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.
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.” 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.
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. There are scores of 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.
“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.
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. 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.
In the heady days of 1996, when Republicans still had some revolutionary fervor, Congress abolished the much-maligned wool and mohair subsidies. Finally, Congress had gotten rid of a business subsidy. Guess what? Congress restored the subsidies last year.
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.
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. 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.
In our analyses of corporate welfare, my colleague Dean Stansel and I 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.
THE ILLOGIC OF CORPORATE SUBSIDIES
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 in taxes so that the federal government 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 and 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.
Consider the Commerce Department, which is the command and control center of America’s modern-day corporate welfare state. It 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.
MYTHS OF THE CORPORATE WELFARE STATE
Despite the substantial costs of federal business subsidies, the efforts of a wide ideological spectrum of 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). The Small Business Administration delinquency rates reached more than 20 percent in the 1980s; the Farmers Home Administration delinquency rate has approached 50 percent. 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, 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. More than 80 percent of the subsidies enrich farmers with a net worth of more than half a million dollars.
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 that 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.
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.
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. Before the campaign the Bush administration had argued convincingly that in the post–Cold War era the 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, ten Fortune 500 firms that were multimillion-dollar award winners of the Advanced Technology Program (ATP) or the Technology Reinvestment Project (TRP) in 1994 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. The sugar program alone is estimated to cost consumers more than $3 billion a year, according to a U.S. Department of Commerce study. 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.”
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.
If Congress can’t push AT&T and GE off the dole, how can we ever expect individuals to give up their subsidies?
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 members of 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.” 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.”
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 out 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.
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.
As the party that describes itself as anti–big government, the GOP should make corporate subsidies the first item on the its hit list. 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. “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.
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.