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Civitas Outlook
Topic
Economic Dynamism
Published on
Dec 12, 2024
Contributors
Veronique de Rugy

Corporate Welfare Dissolves Trust in Government and Markets

Contributors
Veronique de Rugy
Veronique de Rugy
Veronique de Rugy
Summary
Corporate welfare strikes at the heart of equality under the law, compelling citizens to lose trust in government and market institutions.
Summary
Corporate welfare strikes at the heart of equality under the law, compelling citizens to lose trust in government and market institutions.
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In 1983, President Jimmy Carter’s former chairman of the Council of Economic Advisers, Charles Schultze, explained why industrial policy couldn’t be implemented well in America. Democratic governments, he noted, can diligently handle their core responsibilities, but asking them to handpick industry winners and losers is like asking a referee to play quarterback—not only would they fail to identify the right industries, but any attempt would devolve into nothing more than “political pork barrel.”

Decades of industrial policy trials have shown that what starts as good, though misguided, intention is implemented as corporate welfare programs (also called pork barrel or cronyism) for government-picked corporate favorites, often with underwhelming—or even counterproductive—results.  

Considering that industrial policy is back in style on the left and the right, it is worth looking at what corporate welfare means in practice. Corporate welfare costs at least $150 billion annually. They include subsidies, grants, loan guarantee programs, and more. While economists and policymakers behave as if there is a difference between government subsidies intended to address market failures from corporate welfare, this difference in practice has become meaningless. What begins as targeted support for innovation, environmental protection, or economic development typically devolves into entrenched programs that primarily benefit large corporations with powerful lobbying operations. Whether it's agricultural subsidies that mainly flow to large agribusiness firms, "green energy" tax credits captured by big utility companies, or research grants effectively serving as private R&D funding for established corporations, the result is the same: private enterprises enriched by taxpayer money.

For decades, proponents of free enterprise and limited government have criticized this practice on economic grounds, emphasizing the cost of the subsidies, the misallocation of resources, and resulting economic inefficiencies. However, the case against corporate welfare isn’t merely an economic one; it’s also a moral one.

Unequal Treatment Before the Law

At the heart of liberalism is the principle of equality under the law. In theory, a just government acts as a neutral referee, ensuring that all individuals and businesses follow the same rules and are treated the same way. Corporate welfare violates this principle by granting special privileges to specific companies or industries at the exclusion of others and at their expense.

Take tax expenditures, deductions, credits, and exemptions directed at special interests. Beyond the fact that these tax breaks often fail to achieve their goals efficiently, they are incompatible with the liberal goal of horizontal tax fairness (which is attained by taxing everyone with the same income equally). Consider the Inflation Reduction Act’s electric-vehicle tax credits. By artificially boosting demand for the specific vehicles eligible for the tax credits, these credits favor subsidized automobile manufacturers over their unsubsidized competitors. Meanwhile, two taxpayers with the same income bear different tax burdens if one buys an electric car and the other buys a conventional vehicle. Also, it is worth noting that studies show that these tax credits mostly change the timing of the purchase of electric vehicles as opposed to the decision to purchase an electric vehicle. In other words, they subsidize taxpayers for doing something they would have done without the subsidy. They also unfairly penalize taxpayers who don’t consume government approved cars.  

Unequal treatment is a common feature of corporate welfare. The U.S. Export-Import Bank (ExIm) helps finance foreign purchases of U.S. goods. However, it only helps some foreign companies to buy some U.S. goods. For decades, the Bank’s number one beneficiary has been Boeing. ExIm’s activities create an unlevel playing field among American exporters. Data show that only two percent of U.S. exports are backed by ExIm. This means that 98 percent of U.S. exports somehow manage to happen without the government's help. Yet these unsubsidized exporters often must compete against their subsidized rivals.

This unfairness extends to the customers of subsidized exporters. While Boeing is being propped up, U.S.-based commercial airlines, which are not eligible for ExIm financing, often compete abroad with foreign ExIm-subsidized airlines. That’s an unfair government-created advantage granted to airlines with subsidized planes who compete with unsubsidized airlines. How big of an advantage are we talking about? Air Emirates once reported that ExIm financing translates into a roughly $20 million borrowing-cost reduction per plane. This explains why Delta Airlines sued ExIm for its support of overseas competitors.

Now consider the steel tariffs imposed during Trump’s first administration. They protected domestic steelmakers from foreign competition but raised costs for American manufacturers and consumers who rely on steel. Many more tariffs were imposed to protect other American manufacturers at customers' expense. When faced with pushback, the administration doubled down on favoritism and set up a system for exempting some companies but not others. For those seeking exemptions, the stakes were high. They would get large, significant, and unwarranted advantage over their competitors if successful.

The result was a hunger game-type lobbying fight in which the most politically connected players were the most likely to succeed. A recent study in the Journal of Financial and Quantitative Analysis shows that the Trump administration used its tariff-exemption machine to reward the administration’s most loyal campaign contributors. With Trump returning to the White House and tariffs being his favorite industrial policy tool, we can expect more of the same.

The Corruptions of Politics and Markets

These examples demonstrate how corporate welfare undermines the principle of impartiality. However, it gets worse when the government picks winners and losers, creating a system in which success is no longer determined by merit or innovation but by political connections and lobbying skills.

Remember Solyndra? After failing to secure private capital, the solar panel manufacturer received a $535 million loan guarantee from the Department of Energy in 2009 as part of the Obama administration's green-energy initiative. Despite initial promise and high-profile support, the company filed for bankruptcy in 2011, and taxpayers were stuck with the bill.  

Solyndra’s collapse sparked political controversy as questions arose about rushed loan-approval processes and political influence in the funding decision. Company executives repeatedly visited the White House before and after receiving the loan guarantee. Email evidence also suggests the administration knew of the high financial risks but proceeded for political reasons. Oklahoma billionaire George Kaiser, a major Obama campaign bundler, was the largest Solyndra investor, raising pay-to-play concerns.

Worse still, corporate welfare encourages rent-seeking—pursuing wealth through political influence rather than productive activity. Businesses spend billions of dollars lobbying for subsidies, tax breaks, and favorable regulations.

According to the SEC, “Boeing spent $206,050,000 on federal lobbying from 2010-2022, and $26,620,000 in 2021 and 2022 alone.” In recent years, the company also moved its headquarters from Chicago to a DC suburb. Like all of us, Boeing has a right to petition the government. But questions arise when the company seems so enmeshed with the federal government. The company often gets presidents to broker deals to sell its commercial planes to foreign airlines. Boeing also unquestionably developed a cozy relationship with the Federal Aviation Administration (FAA), which certifies Boeing passenger and cargo planes. And let’s not forget that ExIm is an entire agency that is very focused on subsidizing Boeing’s foreign sales.

Boeing benefited in other ways. Recall the 292 percent tariffs the Commerce Department slapped in 2017 on Canadian Bombardier’s C-Series jets to protect Boeing against "unfair competition." According to the Boeing complaint that triggered the duty, Bombardier was getting help from Canadian taxpayers and, hence, gaining an edge over the competition in that market. Like many other aircraft manufacturers, including Boeing, Bombardier was being subsidized. The duty was reversed in January 2018 after the U.S. International Trade Commission unanimously ruled that Bombardier's sales didn't harm Boeing. Yet, “Bombardier was indirectly forced by the US government tariffs to relinquish 50.01% of its stake in the CSeries program to Airbus for a symbolic CAD$1.”

These resources could have been used to innovate or improve products and services rather than seeking government-granted protection from competition. When businesses are granted government privileges, they become less accountable to consumers. Instead of competing by offering better products or services at lower prices, they rely on political connections to secure their market position. This leads to inefficiency, waste, and stagnation. As my colleague Gary Left has documented, Boeing’s current problems are likely a product of a cronyist company now detached from its great engineering legacy.

Boeing isn't alone in seeking government largesse. Over 12,000 lobbyists traverse the halls of Congress and spend $3.2 billion annually, often to pursue subsidies and special treatment for their corporate clients. The semiconductor industry, led by Intel and TSMC, seeks billions in CHIPS Act funding. Green energy companies like First Solar chase tax credits and grants from the IRA. Oil giants protect their tax preferences. Wall Street firms work to shape financial regulations. Tourism players lobby for travel promotion funds. Meanwhile, pharmaceutical companies deploy armies of lobbyists to maintain favorable policies, while agribusiness giants protect farm subsidies. Each industry has transformed lobbying into a core business function, some viewing government influence as essential to profitability.

The result is a distortion of free markets and the erosion of trust in the institutions of capitalism and democracy.

The Erosion of Trust

When citizens see large businesses receiving special treatment from the government, they are less likely to believe in the fairness of the capitalist regime. A case in point is the series of bailouts of major corporations during the Great Recession. While ordinary Americans bore the brunt of the economic collapse, the federal government rescued large banks and auto manufacturers. This created a widespread perception that the system was rigged in favor of the wealthy and well-connected. And, in truth, corporate welfare is, without a doubt, welfare for the well-off.

The consequences of this erosion of trust are profound. The 2008 bailouts sparked both the Tea Party and Occupy Wall Street movements, marking the beginning of our current populist era. The COVID pandemic saw massive payouts to those who needed it the least, further enflaming the populists. Sadly, support for free markets declines as people associate capitalism with cronyism. Populist movements gain traction, promising to fix the system by expanding government control. Ironically, these solutions often lead to more corporate welfare, as politicians use public funds to reward their favored constituencies.

If we want to restore public trust in the market economy but also in politicians and corporations, we must draw a clear distinction between free markets and cronyism. We must clarify that true capitalism is about competition and voluntary exchange, not corporate welfare. That requires ending all government-granted privileges to private companies.

Veronique de Rugy is the George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University. She is also a nationally syndicated columnist and contributing editor to Civitas Outlook.

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