Freeman

ARTICLE

Can the Budget Be Cut?

Few Government Expenditures Are More Obnoxious Than Corporate Welfare

APRIL 01, 1997 by DOUG BANDOW

Mr. Bandow, this month’s guest editor, is a Senior Fellow at the Cato Institute and the author of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).

To listen to Washington officials, you’d think cutting the budget was impossible. In their view, every program, no matter how inconsequential, has played a critical role in America’s past success and must be preserved to ensure the nation’s future progress.

But you don’t have to look far into the budget to find spending for which there is no conceivable justification. Consider welfare for business. For instance, over the last decade the Agriculture Department’s Market Access Program (MAP) has spent roughly $1 billion to promote the export of goods produced by agribusiness. Impecunious enterprises like McDonald’s, Ernest and Julio Gallo, Tyson’s Foods, Pillsbury Company, Campbell Soup Co., Pepperidge Farms, Jim Beam, Ralston Purina, Welch’s Food, Inc., and the Wine Institute have all ended up on the federal dole. Despite a new majority supposedly devoted to fiscal frugality, Congress actually increased program outlays for last year by $14.5 million annually.

Nor is MAP the only bit of corporate welfare in the federal budget. To the contrary, every year Uncle Sam spends $75 billion, roughly half the current deficit, on 125 different programs to directly enrich business. To these the 104th Congress made only modest reductions. Of the $19.5 billion budgeted for the 35 least defensible programs, Congress cut just $2.8 billion in 1996, or about 15 percent, report Cato Institute analysts Stephen Moore and Dean Stansel. They add:

Many corporate subsidy programs were reduced minimally, or not at all. Those programs include the Agricultural Research Service; the Conservation Reserve Program; the International Trade Administration; fossil energy R&D; the Bureau of Reclamation; the Office of Commercial Space Transportation; the Overseas Private Investment Corporation; the Export-Import Bank; and the Agriculture Department’s Market Promotion program.

Business subsidies deserve to go on the chopping block simply as a matter of priorities. Deficits continue to accumulate at more than $100 billion a year, and, unless further cuts are made, will soon start rising again. Thus, every low-priority program should be eliminated, and enriching some of the largest and most profitable businesses in America should be considered the lowest priority of all.

Nor are loans and loan guarantees a cheaper means to achieve the same ends of direct outlays. For instance, the Rural Business Cooperative Service and Rural Housing Service use below-cost credit to underwrite virtually everything, from housing to business, in rural areas. Unfortunately, politicized credit usually turns out to be bad credit. Delinquency rates for the government average eight percent, roughly three times private rates. During the 1980s the Small Business Administration saw 20 percent of its loans go bad. The delinquency rate for the Farmers Home Administration (since folded into the Rural Housing Service) ran nearly 50 percent. And even loans that are repaid are not cheap, since they divert credit from more productive uses elsewhere in the economy. That is, money is not free, so if Uncle Sam is providing subsidized loans to politically favored interests, he is inevitably directing money away from more deserving, but less well-connected, businesses and individuals.

A Matter of Principle

There is a more fundamental principle at stake, however. The problem isn’t just that we can’t afford to subsidize corporate America. It is that we shouldn’t do so. It isn’t right to take money from average taxpayers for the benefit of business interests. Put bluntly: Gallo Wine should pay to promote its own products. The role of government is to fulfill critical common goals that can’t be achieved privately, not to redistribute wealth among private parties based on the size of their campaign contributions.

The fact that major corporations don’t have to pay their own way, and instead are able to enlist legislators to mulct common citizens—and businesses with more modest political connections—deforms the entire political system. It is the availability of hundreds of billions of dollars in taxpayer loot that has encouraged the creation of PACs and the consequent flow of special interest money into politics. Companies like Archer Daniels Midland simply buy access to politicians in both parties, access lacked by the people who pay the bill. As a result, the only way to clean up politics is to eliminate the benefits up for auction, not to rerig the political game.

Of course, advocates of corporate welfare are rarely foolish enough to admit that their goal is self-enrichment. Rather, they argue that the programs generate countervailing benefits—usually jobs. After all, if McDonald’s is selling more hamburgers overseas, it is employing more people at home. But there is nothing in the Constitution that empowers Congress to take money from some to benefit others, even if a few jobs are created in the bargain.

In fact, far more jobs are destroyed in the transaction. The point is, federal spending is not free. Money given to Archer Daniels Midland, Boeing, General Electric, IBM, and Ralston Purina is taken from people and enterprises across America. Which reduces their purchases, investments, and other economic activities—and thus the number of jobs created. There ain’t no such thing as a free lunch, goes the saying, and nowhere does it apply with more force than to the issue of corporate welfare.

At the very least policymakers could target the most egregious of the 125 business welfare programs. The worst 35 alone cost $19.5 billion in 1995.

Where the Money Goes

The Commerce Department has always been the epicenter of general corporate welfare. Among the most outrageous business subsidies are:

• Advanced Technology Program ($431.0 million in 1995)—R&D grants to the giants of corporate America.

• Economic Development Administration ($409.7 million)—grants and loans to help local governments lure firms to their areas.

• International Trade Administration ($266.1 million)—export promotion services.

• Manufacturing Extension Partnership ($91.0 million)—technical assistance to manufacturing enterprises.

• Minority Business Development Agency ($43.8 million)—assistance to minority-owned firms.

• National Oceanic and Atmospheric Administration ($1.912 billion)—specialized forecasting activities for the agricultural, aviation, fishery, and shipping industries.

Another important fount of corporate welfare is the Agriculture Department, which spends even more money while benefiting an even narrower special interest. The culprits include:

• Agricultural Research Service ($758.4 million)—subsidies to increase agricultural productivity, improve food products, and encourage new uses of them.

• Commodity Credit Corporation ($9.813 billion)—assorted crop subsidies.

• Conservation Reserve Program ($1.743 billion)—payments to farmers not to farm their land.

• Cooperative State Research, Education, and Extension Service ($932.1 million)—assistance to farmers in their operations.

• Economic Research Service ($53.9 million)—agriculture industry research.

• Export Enhancement Program ($800 million)—subsidies for big exporters.

• Federal Crop Insurance Corporation Fund ($709.2 million)—underwriting crop insurance for farmers.

• Foreign Agricultural Service ($118 million)—overseas government offices to promote food exports.

• Forest Service/Road and Trail Construction ($130.9 million)—building roads, most of which primarily benefit private lumber companies.

• Market Promotion Program [since renamed the Market Access Program] ($85.5 million)—underwriting corporate advertising abroad.

• National Agricultural Statistics Service ($81.3 million)—collection of data used to formulate crop subsidies.

• Rural Utilities Service ($128.1 million)—subsidizing the cost of electricity and telephones in one-time rural areas, delivering many of the resulting savings to business.

Energy and Transportation Subsidies

The Energy Department devotes billions of dollars to research and statistical activities that primarily benefit the energy industry. The Energy Information Administration ($84.6 million) accumulates industry data, the Energy Supply Research and Development program ($3.315 billion) underwrites research on energy technologies, the Fossil Energy Research and Development program ($423.7 million) subsidizes more energy research, and the Power Marketing Administrations ($272.5 million) provide cheap power to some of the nation’s most affluent regions.

The Transportation Department is another agency that benefits business more than the public. The Essential Air Service program ($33.4 million) subsidizes airlines to serve politically favored areas, the Federal Highway Administration/Demonstration Projects ($352.1 million) deliver almost pure pork to local construction firms, the Maritime Administration/Differential Subsidies ($214.4 million) underwrite high-cost merchant ships, and the Office of Commercial Space Transportation ($6.1 million) funds supposedly private-sector space activities.

The Department of the Interior, through the Bureau of Mines ($152.4 million) and Bureau of Reclamation ($841.2 million), supports the mining and cattle industries. The Geological Survey ($547.6 million) maps resource deposits, to the benefit of mining interests. In the Department of Defense, the Army Corps of Engineers ($3.409 billion) creates waterways and water projects, which typically enrich local business interests. The Semiconductor Manufacturing Technology program ($89.5 million), known as Sematech, provides direct handouts to the semiconductor industry. The Technology Reinvestment Program ($443.0 million) underwrites the behemoths of industry to produce dual-use (for both civilian and military) technologies.

Moreover, Congress has established a number of independent agencies with no function other than the enrichment of business. The Export-Import Bank ($782.1 million)—long known as Boeing’s bank because it financed so many of the aircraft manufacturer’s deals—provides loans, loan guarantees, and credit insurance to the purchasers of American goods. The Overseas Private Investment Corporation ($58.3 million) offers loans, loan guarantees, and risk insurance to U.S. businesses that invest overseas. The Small Business Administration ($917.4 million) hands out loans and loan guarantees, and provides consulting services, to smaller enterprises. The Tennessee Valley Authority ($142.9 million), like the Power Marketing Administrations, offers low-cost electricity. The Trade and Development Agency ($45.0 million) promotes U.S. investment overseas.

Restrictions, Quotas, and Tariffs

Some corporate welfare is delivered indirectly. The $1.4 billion sugar price-support program is backed by quotas on imported sugar, which cost consumers several billion dollars a year. Some 40 percent of the benefits of the program go to the largest one percent of sugar farms. All told, the U.S. government imposes restrictions, like quotas and tariffs, on more than 8,000 products, including autos, computer parts, mushrooms, steel, and textiles. Estimates of the cost of protectionism, which primarily enriches domestic producers, run as high as $80 billion annually.

The Jones Act requires that private companies use U.S. flag vessels to ship products between U.S. ports. Military goods and half of other government cargoes (furnished under federal contract, for instance) must go on more expensive American carriers. This simple regulatory directive, which cost the Department of Defense alone $436 million in 1995, acts as a huge windfall for corporate America.

Ethanol, a corn-based substitute for gasoline, is expensive and inefficient, but receives two tax benefits—credits for firms that produce ethanol and exemption from federal excise taxes—worth some $500 million annually. Companies like Archer Daniels Midland, which dominates the ethanol market and contributes heavily to Democrats and Republicans alike, are the primary beneficiaries.

Subsidies to Amtrak support a quasi-independent firm and lower the price to business travelers. So-called Food for Peace, ostensibly a foreign-aid initiative, was created to unload domestic food surpluses abroad. NASA offers a cornucopia for government contractors. The Corporation for Public Broadcasting provides welfare to the wealthy, if not specifically to corporate America. And on and on.

Even a decade of huge budget deficits has changed nothing. Over that time Congress eliminated two truly egregious programs, the Synthetic Fuels Corporation (which subsidized the production of high-cost synthetic energy) and Urban Development Action Grants (which paid businesses to invest in particular regions). But the rest continue, though occasionally with different names (Congress turned the Rural Electrification Administration into the Rural Utilities Service). And new ones, like Sematech, continually arise.

It is time to kick corporate America off of the dole. The federal budget has long been filled with waste. But few expenditures are more obnoxious than those for business welfare. Policymakers should be able to agree that there is at least one thing government should not do—mulct taxpayers to enrich corporate interests. If legislators won’t cut this kind of abusive spending, what programs will they kill?

ASSOCIATED ISSUE

April 1997

ABOUT

DOUG BANDOW

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

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