February 20, 2017

The Budgetary Cost of Privilege

While federal bankruptcy might be a major threat in the future, the most immediate serious problem our nominally free-market system currently faces is the unhealthy marriage between the private sector and government. This dysfunctional relationship appears in many forms, including subsidies, direct or guaranteed loans, protectionist policies like tariffs, price support or granted monopoly positions, and bailouts. The costs can be direct and visible in the federal budget or more subtle, resulting in distortions in investment or loss of jobs in disfavored industries.

Determining what is or is not corporate welfare is an inexact science, as is apparent in various attempts made in recent decades to put a price tag on the cost of government privileges granted to commercial interests. We focus here on a list comprised of agencies and programs that provide special benefits and advantages to specific companies or industries.

The estimated cost to taxpayers for these agencies and programs was roughly $56 billion in fiscal year 2016. This number includes direct and indirect subsidies to large corporations, small businesses, and industry organizations. The assistance comes from programs in various areas of the budget, including the Departments of Agriculture, Commerce, Energy, and Housing and Urban Development.

Any budgetary cost of corporate welfare spending systematically and grossly understates the cost of corporate welfare. Indeed, some of the programs listed in the table confer advantages with what appears to be little or no budgetary impact. There are also numerous other ways that certain government policies benefit particular commercial interests but are not accounted for on a list that focuses exclusively on the budgetary impact of privilege.

Beyond its budgetary costs, corporate welfare violates the bedrock American principle of equality under the law, introduces unwelcome distortions into the economy, fosters corruption and cronyism, and undermines markets when policymakers attempt to pick winners and losers.

First, the federal government’s subsidization of commercial interests infringes on the principle of equality under the law by using taxpayer money to give certain companies a leg up in a competitive marketplace. Second, even though policymakers often justify subsidizing particular commercial interests as necessary to offset alleged imperfections in the marketplace, the reality is that the subsidy programs generally serve parochial interests. Instead of making markets more efficient, subsidies usually distort economic activity, either creating or deepening whatever failures might have existed in the marketplace. Third, policymakers do not possess special knowledge that enables them to allocate capital more efficiently than markets. Thus, when the government starts choosing industries and technologies to subsidize, all too often it makes bad decisions at taxpayer expense.

Mere reform of these programs would fail to address the fundamental problem, which is the unfairness of government-granted privilege. These programs should be targeted for elimination—not “reform.”