Corporarte Welfare Queens

Mitt Romney once seemed like a moderate technocrat. But, as the Republican Convention and the video leak of his comments about the “forty-seven per cent” of Americans who “believe that they are victims” made clear, Romney now seems to fancy himself a small-government zealot, who promises the end of the culture of entitlement. Yet even as he assails people on Medicaid and Social Security, and those who receive the earned-income tax credit, for being “dependent upon government,” Romney has had strikingly little to say about another prominent group that’s “dependent upon government”: the many American companies whose profits rely, in one form or another, on government assistance.

From the days of high tariffs and giant land grants to the railroads, business and government have always been tightly intertwined in this country. But, in recent decades, what you could call the corporate welfare state has become bigger. Energy companies lease almost forty million acres of onshore land in the U.S. and more than forty million offshore, and keep the lion’s share of the profits from the oil and natural gas that they pump out. In theory, this is O.K., because we get paid for the leases and we get royalties on what they sell, but in practice it often works differently. In 1996, for instance, the government temporarily lowered royalties on oil pumped in the Gulf of Mexico as a way of encouraging more drilling at a time of low oil prices. But this royalty relief wasn’t rescinded when oil prices started to rise, which gave the oil companies a windfall of billions of dollars. Something similar happened in the telecom industry in the late nineties, when the government, in order to encourage the transition to high-def TV, simply gave local broadcasters swathes of the digital spectrum worth tens of billions of dollars. In the mining industry, meanwhile, thanks to a law that was passed in 1872 and never rewritten, companies can lease federal land for a mere five dollars an acre, and then keep all the gold, silver, or uranium they find; we, the people, get no royalty payments at all. Metal prices have soared in the last decade, but the only beneficiaries have been the mine owners.

In other cases, the government offers direct subsidies, like those which have helped keep many renewable-energy projects afloat. Farmers, despite food prices at record highs, still get almost five billion dollars annually in direct payments, along with billions more in crop insurance and drought aid. U.S. sugar companies benefit from the sweetest boondoggle in business: an import quota keeps American sugar prices roughly twice as high as they otherwise would be, handing the industry guaranteed profits.

The tax code, too, is a useful tool for helping businesses. Domestic manufacturers collectively get a tax break of around twenty billion dollars a year. State and local governments give away seventy billion dollars annually in tax breaks and subsidies in order to lure (or keep) companies. The strategies make sense for local communities keen to generate new jobs, but, from a national perspective, since they usually just reward companies moving from one state to another, they’re simply giveaways.

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More subtly, government boosts business profits via regulation. The most obvious example, perhaps, is the banking industry. The F.D.I.C. encourages people to deposit money in banks, and the biggest banks also benefit from the perception that the government will not allow them to fail, which enables them to borrow money at a low cost. Another leading beneficiary of regulation is the ethanol industry, a sacred cow of American politics. The government requires refiners to blend billions of gallons of ethanol into gasoline annually, and hands out an ethanol tax credit. As a result, forty per cent of corn acreage in the U.S. now goes to make ethanol. This jacks up food prices, since less corn is grown for feed and table, and the environmental benefit is dubious. But farmers and refiners benefit enormously, so the mandate stays in place. Vested interests of this kind also explain why so many states have onerous licensing regulations; Florida says that you need six years of training and apprenticeship to become an interior designer. Such regulations, which have grown precipitously in recent decades, are catnip to incumbent businesses worried about competition.

Perhaps the biggest boon that the government offers business is the benefit of copyright and patent protection. As the economist Dean Baker shows in his book “The End of Loser Liberalism,” patent protection is worth hundreds of billions of dollars a year to the drug industry alone. And while most of us would find it hard to imagine doing without copyrights and patents, that doesn’t justify the huge expansion of intellectual-property rights we’ve seen of late: the length of copyright has been expanded eleven times since 1962, and the range of things that can be patented has increased hugely, even in areas where, as Judge Richard Posner recently argued, there’s little or no economic benefit to society.
Corporate welfare isn’t necessarily a bad thing. Some of these giveaways arguably do a lot of good. But companies that benefit from these policies are just as dependent on the government as the guy who gets the earned-income tax credit. And, when Romney concentrates his fire on the latter rather than on the former, it makes you wonder if his problem isn’t with government assistance per se, but only with government assistance to poor and working people. Romney may say that he wants small government, but what he’s pushing for is a government that’s small when it comes to helping people and big when it comes to helping business.

-James Surowiecki October 8, 2012

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