Wednesday Waste: Federal Subsidies Prop Up Corporate Executives at Taxpayers’ Expense

The federal government doesn’t just provide welfare to struggling families. On the contrary, it also gives huge sums of money to some of the biggest and wealthiest businesses in the world, amounting to about $100 billion per year through federal subsidies.

Corporate subsidies, or “corporate welfare” to its opponents, are supposedly designed to lower prices and employ Americans. But such well-intentioned justifications fail to materialize and the subsidies end up lining the pockets of corporate executives at no benefit to the consumers, or propping up unsuccessful businesses that aren’t meeting market demand.

The biggest recipients of corporate welfare are not struggling businesses, but rather very successful companies. The country’s top corporate welfare recipient is Boeing, one of the largest defense contractors in the world. Boeing receives a whopping $13.4 billion from taxpayers each year. Other household names at the top include Intel, General Motors, Ford, Fiat, Nike and Shell. Each rakes in between two and six billion dollars annually. Unfortunately, when businesses solicit money from taxpayers, rather than customers, incentives change.

In a free and open economy, consumer spending, not government rewards, signals businesses to act, and businesses are incentivized to listen to consumers. When the government intervenes, it creates artificial signals that are not based on market demand. Rather, they’re incentivized to make political friends and ask for favors. This does nothing for consumers and fuels cronyism and inefficiency.

Instead of focusing resources on customer satisfaction, companies now spend incredible amounts on lobbying. In the last eight years, American businesses have spent more than $3 billion per year on lobbying, more than doubling what was spent annually in the late ‘90s. On top of traditional lobbying, companies also spend millions of dollars funding the campaigns of candidates like Donald Trump and Hillary Clinton to get a friend in the White House. Companies make generous campaign donations sometimes to maintain federal subsidies.

Despite ethics laws, favors are granted to the companies and lobbyists who have the most connections. Such corporate subsidies rarely add value to the economy, nor do they benefit consumers.

If the United States ended federal subsidies today, these problems would largely go away. Corporations would go back to making money by pleasing customers instead of pleasing politicians. If the money spent on subsidies was left in the hands of taxpayers, they would spend it wherever they think is most valuable for themselves instead of having it spent wherever the politicians think is most valuable to their personal careers. Removing federal subsidies would result in better market efficiency and more valuable goods in society. Eliminating these subsidies would also take away more than 20 percent of our current deficit spending.

Some of the inefficiencies are not visible, because we’ve never had a truly free economy. However, some of the inefficiencies are very apparent.

One of the clearest examples is the Obama-connected Solyndra scandal. The company received guaranteed loans, and an investigative report showed that the company was constantly playing politics, instead of producing services, until it went bankrupt in 2011. Even as they were going bankrupt, top CEO’s were still receiving tens of thousands in  bonuses, on top of their already high salaries.

Another lesser-known example is the government’s attempt to subsidize broadband in rural areas, which led to much poorer results than promised. Forty percent of the projects were not even started by the time they were supposed to be completed. Analyses found that the subsidies did not have an effect on rural penetration and “that about 60 percent of subsidies went to rural providers’ overhead rather than to investment.”

Regardless of the business model, the free market will always be a better solution for people overall.

Tyler Arnold is a communications associate at Cause of Action Institute

It’s Time to End Ex-Im Bank’s Taxpayer Subsidized Corporate Welfare

When the federal government subsidizes a private company, we all lose. Such subsidies, often referred to as “corporate welfare” by critics, tend to benefit big companies, while stifling innovation and making it more difficult for smaller companies to compete. The Export-Import Bank, or Ex-Im Bank, is perhaps the highest profile example of this process.

The Ex-Im Bank claims to facilitate exports of U.S. goods and support American jobs. To do this, the Bank finances American businesses—freeing them from the need to obtain private loans—so that they can compete internationally. This may sound good in the abstract but its implementation imports all the hazards of corporate welfare.

In April, President Trump disappointed supporters of free trade when he seemingly changed his position on the Ex-Im Bank. As a candidate in 2015, Trump said the Ex-Im Bank was “unnecessary” and contradictory to free enterprise. However, three months after his inauguration, he called the Bank “a very good thing” claiming that “it actually makes money.” In his first budget proposal, President Trump decided to keep it. He also intends to nominate two board members, which will permit the bank to enter into full operation, meaning more and bigger loans from the taxpayer.

On the bright side, President Trump has nominated former Rep. Scott Garrett to head the Bank. In the past, Garrett has been an outspoken critic of the Ex-Im Bank, which hopefully means that should he be confirmed, he will limit its operations and advocate for reform. It can only be seen as a positive sign that the big businesses who benefit most have already come out in opposition to his nomination.

The Ex-Im Bank claims to “level the playing field” for domestic products and help small businesses compete internationally. But federal subsidies to politically-favored companies hurt both international competition and market efficiency. If a business can’t get a private loan, resources should be allocated elsewhere to companies that can better compete, without taxpayer-subsidized assistance. Artificially propping up private industry is not the role of the federal government.

Many economists recognize the failures of the Ex-Im Bank. But supporters, most prominently the companies that get these cheap loans, argue it is acceptable to sacrifice quality, efficiency and competition to help prop up American jobs. However, the biggest recipients are generally in good positions to sustain themselves and do not need these funds to retain American jobs.

Most beneficiaries of the Ex-Im Bank’s loans are, in fact, not small businesses. The largest recipient, by far, is Boeing, which takes a whopping 40 percent the Bank’s financing.  The top 10 recipients, which include Caterpillar, General Electric, and other behemoth companies (and which frighteningly includes “unknown”), makes up 75 percent of the Bank’s expenditures.

Boeing has repeatedly threatened job losses if the Bank goes away. In 2015, the company cautioned that ending the Ex-Im Bank would lead to the loss of thousands of employees because otherwise it would be unable to compete with the European company, Airbus. Congress gave in and re-instated the Bank—and Boeing went ahead and cut 4,000 jobs anyway. Re-instatement of the Bank did nothing to save those jobs, but it did line the pockets of shareholders (18 of which are members of Congress). Companies like Boeing don’t need subsidized loans to stay afloat. Faced with the possibility of the Ex-Im Bank closing, for example, the government and Standard & Poor released reports that found Boeing would do fine without the aid. The other largest recipients are similarly financially sound.

Free and open trade breeds competition and efficiency, whereas corporate subsidies set up a system of reliance, barriers to entry and inefficiency. If you’re playing with the house’s money, you’re much more likely to chase the river and make poor decisions. For example, in 1987, the Ex-Im Bank’s investments were so bad that it requested a massive federal bailout. After the loss of hundreds of millions of dollars, it needed a $3-billion bailout just to stay afloat. The bank had some gains and some losses in the 1990s. Although there was an overall profit of $5 billion since 1990, the low interest rates brought in much less money than it could have and defaults may result in a net loss in the future.

A federal budget agency found that the Ex-Im Bank’s current budget is on pace to cost taxpayers $2 billion over the next decade. Yet we continue to throw more and more taxpayer money at an unnecessary corporate welfare regime, benefitting not the free market but favored players.

Federal policies should create an even playing field for industry and a friendly environment for entrepreneurship to flourish. Only about two percent of all exports are subsidized by the Ex-Im Bank. If 98 percent of the market can export without needing any help from a corporatist bank, the other two percent should manage fine. The Bank helps line the pockets of politically-connected businessmen and gives little aid to the average person. It is time for the president and Congress to end it for good.

Tyler Arnold is a communications associate at Cause of Action Institute