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Aid to Owners of Dependent Enterprises

We Should End Corporate Welfare As We Know It

There is widespread support for ending welfare, and for nudging, or pushing, welfare recipients into self-sufficiency through employment. Congress even voted to end Aid to Families with Dependent Children (AFDC), though President Clinton and the Republican Congress have since backpedaled.

However, there has been no similar attempt to eliminate what might be called Aid to Owners of Dependent Enterprises (AODE). All three levels of government—federal, state, and local—are in the game. The federal government currently spends more than $65 billion a year on what both Representative John Kasich and Ralph Nader call “corporate welfare.” State and local governments spend billions more under the euphemism of “industrial development incentives.”

For example, the federal government subsidizes commercial ads for companies like the Gallo Winery in foreign countries. The state of California recently sold a former hospital to Sun Microsystems Computer Co. for less than one-half of its fair market value. Both Oakland and San Francisco have given subsidies to privately owned professional football teams to construct and upgrade stadiums.

What Should Government Do?

In a totalitarian state there is no private realm of human action. Every aspect of life is subject to political control. Even if the people who wield public authority are democratically elected, government can be totalitarian.

In a free society, however, government is constitutionally restricted to a set of enumerated powers—i.e., government is limited. Far from having total control, government is kept in its cage precisely so most human action will occur in the private realm. There, individuals are left to pursue their own ends, free from government interference, as long as they do not coerce or attempt to coerce others. Every incursion by government into private affairs, no matter how well-intentioned, is a threat to liberty. AODE is such a threat.

All private enterprises should be free to succeed or fail on their own. When an entrepreneur gets an idea, it is up to him to assemble the necessary resources and turn his idea into action neither assisted nor burdened by government. Success or failure should be determined by the value consumers place on the product or service. The coordination between producers and consumers evident in a market economy emerges spontaneously out of the production-and-exchange activities of millions of individuals, all trying to do the best they can with the limited resources and knowledge they have. Prices of inputs and outputs, and the profits and losses that result, are signals that direct individuals into the most socially beneficial activities. Any government interference with this market process, beyond enforcing the rules of voluntary exchange, distorts those signals, and thereby impedes, or even cripples, the process.

All government agencies are staffed by human beings. The sum of the economically relevant knowledge possessed by separate individuals in an economy is always far greater, and more accurate, than the sum of such knowledge possessed by individual bureaucrats in any government agency. Thus, while markets do not generate perfect outcomes, governments inevitably make far more mistakes than do markets.

What to Do?

AODE takes at least four forms: tax breaks, financial aid, regulatory relief, and protection against competition. General tax breaks applying to all firms are always desirable. Americans are overtaxed: federal, state, and local taxes consume over 40 percent of national income. All taxes—income, sales, excise, death, capital gains, property, and payroll (and any I have omitted)—should be reduced. But they should be reduced for everyone, not just for a specific firm or a specific industry.

For example, the federal government gives tax breaks worth $500 million a year to producers of ethanol, a corn-based substitute for gasoline. Seventy percent of that goes to one company—Archer Daniels Midland, a $10 billion agribusiness. This is AODE at its worst. Of course, people like Ralph Nader and Robert Reich who criticize business tax breaks really only want to increase taxes. So targeted tax breaks should be eliminated only if the resulting revenue increase is handed back to taxpayers through general tax cuts. Killing the $500 million ethanol boondoggle could finance a small reduction in, say, the payroll tax.

Financial aid to specific firms and specific industries—whether in the form of direct cash payments, below-market interest rates on loans, or direct payments for training of employees—by any level of government is never justified. All such subsidies should be terminated and taxes cut accordingly. For example, eliminating just half the business subsidies in the federal budget would free up enough money to completely eliminate the federal capital gains tax.

Reductions in regulations, except those which proscribe coercion, are always desirable. States that try to lure businesses by offering better regulatory environments deserve applause. Even regulatory breaks for only specific firms warrant support, since once a state starts lifting the regulatory burden, even for one firm or one industry, interstate and inter-local rivalry will encourage the practice to spread.

Of course, such competition bothers some analysts. For instance, Melvin Burstein and Arthur Rolnick, economists at the Federal Reserve Bank of Minneapolis, have urged Congress to use the Commerce Clause of the Constitution to outlaw interstate competition aimed at attracting investors. They argue that the cost of such “economic war among the states” takes money away from legitimate public goods. But the set of legitimate public goods on which states should spend more money is either empty or nearly empty. Moreover, the original intent of the authors of the Commerce Clause was to knock down state interferences with free movements of goods, services, and resources among the states. The one good aspect of state (and local) AODE is to lower taxes and regulations, thereby encouraging interstate mobility of goods, services, and resources. Congress ought to exercise its legitimate Commerce Clause powers to encourage states to generalize the tax and regulatory incentives they now offer to particular firms and particular industries. This would promote interstate commerce.

Another form of AODE is protecting specific competitors against competition. For example, the federal government imposes steel import quotas to protect domestic producers from foreign competition. This one item costs the American economy around $7 billion a year in the form of higher prices for steel and products produced with steel. The state of California regulates the amount of land that can be used to produce navel oranges in order to shield incumbent growers from competition and limit price competition. New York City prohibits private vans and jitneys from competing with city-franchised and/or city-owned, monopoly transit systems. None of these restrictions are justifiable, since they benefit the few at the expense of the many. Such policies are, to quote economist Dwight Lee, “malice in plunderland.”

In sum, we should end corporate welfare as we know it. However, we should not permit this worthy idea to be misused to increase government intervention. End the subsidies. Convert specific tax breaks to general tax reductions. Convert specific regulatory breaks to widespread regulatory relief. Finally, get all governments out of the business of protecting particular competitors and into the business of protecting competition. In short, rebuild the Founders’ original wall of separation between the public and private realms of human action.

Charles W. Baird
Charles W. Baird

Charles Baird is a professor of economics emeritus at California State University at East Bay.

He specializes in the law and economics of labor relations, a subject on which he has published several articles in refereed journals and numerous shorter pieces with FEE.