Sunday, January 20, 2013

No More Corporate Welfare

No More Corporate Welfare:
When Congress and President Obama came up with their
beyond-the-last-minute deal to put off addressing the coming fiscal
The Wall Street Journal
 turned the spotlight on a
little-noticed, yet too typical aspect of Washington's
machinations: "The bill's seedier underside is the $40 billion or
so in tax payoffs to every crony capitalist and special pleader
with a lobbyist worth his million-dollar salary. Congress and the
White House want everyone to ignore this corporate-welfare
blowout," the Journal reported.
So a bill that was represented as the first steps toward fiscal
responsibility (try not to laugh too hard) contained billions of
dollars in corporate welfare. And it was a bipartisan affair.
How sad. How Washington!
Beneficiaries of the various special tax treatments and
exceptions includes owners of NASCAR speedways, companies in
American Samoa, rum producers, businesses on Indian reservations,
railroads, Hollywood moviemakers, and green-energy firms, including
wind-power equipment producers.
As the Journal commented, "The great joke
here is that Washington pretends to want to pass 'comprehensive tax
reform,' even as each year it adds more tax giveaways that distort
the tax code and keep tax rates higher than they have to
Corporate welfare is nothing new, of course, and according to
Cato Institute budget analyst Tad DeHaven, in "Corporate Welfare in
the Federal Budget," fiscal 2012 saw $98
 in "pro­grams that provide payments or unique
ben­efits and advantages to specific companies or industries."
(DeHaven acknowledges that defining and calculating corporate
welfare is "not an exact science." Indeed, not. To the extent the
U.S. military safeguards access to, say, Middle East oil fields,
that portion of the Pentagon budget can be regarded as corporate
welfare, but it's not usually thought of that way. Similarly,
highway subsidies to commercial shippers may give certain firms
advantages over firms that don't engage in lost-distance
Manipulating the tax code to benefit particular interests has
obvious appeal for politicians—it's a source of power and
influence—and a code that did not permit such manipulation would be
much less attractive to them. Outright cash subsidies from the
taxpayers, while not unheard of, smacks too much of cronyism and is
more likely to alienate taxpayers. But complicated exceptions
written into the tax laws can be presented as creative governance
on behalf of the public interest. But it is cronyism as offensive
as outright subsidies.
The benefits of a market economy lie in free competition. When
the market is rigged by politics, benefits are diverted from
consumers to politically chosen producers (who can be counted on to
reward their patrons). This is what corporate welfare accomplishes.
In a freely functioning market economy, all products compete with
one another, and producers compete not only for customers, but also
for scarce factors of production, including labor, land, and
materials. Remember: We live in a world of scarcity. Factors used
for one purpose cannot be used for another. Tradeoffs are
necessary. The price system, which is ultimately configured by
consumer preferences, guides the competitive process by which the
factors of production are employed in their various purposes. For
example, an entrepreneur who expects her product to be more
profitable than a rival's product will be in a better position to
bid factors away from the rival, and if the entrepreneur's forecast
is correct, consumers will have been well served.
But if the government intervenes with corporate welfare to lower
the rival's costs, whether by specially reducing taxes or some
other manipulative method, consumers will be defied because
products they prefer will not be produced or not produced in the
quantities desired. The politically connected businessperson will
profit at their expense, as well as the expense of the competitors
who were treated discriminately by the tax code, especially
if the government buys the favored product.
Corporate welfare is not primarily about lowering taxes. That
would be a worthwhile goal, of course, and could be achieved simply
by slashing tax rates and simplifying the code. But when taxes are
lowered selectively by writing complicated exceptions into the law,
the goal is to bestow privileges on cronies, not to reduce the
burden of government on all. Corporate welfare, among its many
sins, violates equal protection under the law.
Essential to a free society is people's ability to go about
their peaceful business unmolested by government. A good part of
that activity includes producing goods and services for consumers,
who in turn are free to say yes or no to the offerings. Corporate
welfare is a way for politicians to maintain the fa├žade of a free
economy while rewarding some activities and punishing others. The
politicians substitute their preferences for the preferences of
consumers, distorting relative prices in the process. Thus if
government artificially makes it more profitable to produce wind
turbines than washing machines, political judgments replace
economic judgments. This is not something to be welcomed. Such
political judgments are made by men and women who never face the
market test and who risk no capital of their own. The failures of
their schemes will not be easily traceable to their decisions (what
politician or bureaucrat suffered because of the Solyndra fiasco?),
and much of the cost of those policies will be in the form of goods
and services not produced because of the
diversion of resources. Thus voters will be in a poor condition to
assess the performance of politicians, making officeholders largely
unaccountable for their economic meddling. Inevitably, the authors
of corporate-welfare schemes will blame the nonexistent "the free
Even if a particular citizen were to understand the source of
the problem, it would take a herculean effort to unseat the
politician(s) responsible, and if even that exceeded, it would not
necessarily change anything. That citizen would still be forced to
support the meddlesome system.
Contrast this with the free-functioning market economy. If
entrepreneurs err and destroy value by misusing scarce resources,
consumers' retribution may be swift: They can simply withhold their
money and reject the ill-conceived products, forcing the
entrepreneur out of business and shifting resources to more able
hands. Ironically, it is the free market that puts control into the
hands of the people. Political democracy is only the palest
approximation of the "true democracy" of the marketplace.
As we can see, consumer clout far exceeds voter clout, and
therefore economic producers—when they have no access to government
privilege or shelter from competition—are far more responsive to
the people than are politicians. Officeholders create theatrical
effects to impress voters. Entrepreneurs have to produce results.

Tax benefits directed at particular interests are often defended
on grounds of "market failure." It's said that under some
circumstances rational individual behavior in the market yields a
less-than-optimal outcome for the whole public. This can be
answered in several ways. First, if such failures truly exist, they
represent profit opportunities to entrepreneurs. There's a general
principle here that is often overlooked. The case for competitive
markets is not that they are perfect—how could they be when they
are filled with fallible human beings? Rather, the case is that
discovery and correction of errors produces entrepreneurial profit.
No lure is more powerful than the prospect of profit.
Moreover, even in the unlikely event a market failure couldn't
be corrected, it would not follow that a government solution would
be better than adapting to the situation. Why assume politicians
won't make things worse, particularly in light of the perverse
incentive system described earlier? There is simply no reason to
believe that political operatives can have the incentives or
information needed for ameliorating undesired market outcomes. One
cannot invoke market failure without coming to grips with
government failure.
This article
originally appeared
at The Project to Restore America