How to slash corporate welfare

WASHINGTON — Washington -- A NEW POLITICAL catch phrase has entered the Washington lexicon: corporate welfare.

On the left, Labor Secretary Robert Reich and Rep. Bernie Sanders of Vermont, a socialist, have called for an end to "aid to dependent corporations."


On the right, Sen. Phil Gramm, R-Texas, and John Kasich of Ohio, the chairman of the House Budget Committee, have pledged to eliminate billions of dollars in federal loans and subsidies to selected industries.

Congress may finally be getting serious about getting business off government support.


Still, few in Washington fully appreciate the extent to which aid to corporate America permeates the federal budget.

The Cato Institute calculates that Congress finances more than 125 programs that subsidize private businesses at a net cost of about $85 billion per year. Add tax breaks, and the price tag exceeds $100 billion a year -- or half the annual federal deficit.

Here are eight of the most egregious examples of corporate welfare embedded in various agencies of the federal budget.

* Sematech. The Pentagon provides nearly $100 million a year to this consortium of semiconductor producers based in Austin, Texas.

Of the more than 200 chip makers in the United States, only the 14 largest, including Intel and the National Semiconductor Corp., receive aid from Sematech. Originally designed to help U.S. companies compete internationally, Sematech now mostly benefits the largest Silicon Valley producers at the expense of small domestic upstarts.

* Sugar price supports. Because Washington restricts sugar imports, the price for U.S. sugar is kept artificially high.

The 33 largest American plantations receive more than $1 million each in higher sales prices, and the cost is largely passed on to the poor.

According to a Commerce Department study: "Because sugar is an ingredient in many food items, the effect of the sugar program is similar to a regressive sales tax, which hits lower-income families harder than upper-income families."


* Subsidies to electric utilities. Through the Rural Electrification Administration and the federal power marketing administrations, the government gives some $2 billion in subsidies each year to large and profitable electric utility cooperatives.

Thus subsidies, in the form of low-interest loans, hold down the cost of running ski resorts in Aspen, Colo., and luxurious hotels in Hilton Head, S.C.

* Timber industry subsidies. Last year, the Forest Service spent $140 million building roads in national forests, thus helping pay for the removal of timber by private firms.

Over the past 20 years, the Forest Service has built 340,000 miles of roads -- more than eight times the length of the interstate highway system -- primarily for logging companies.

* The Department of Agriculture's market promotion program. Through the department's Foreign Agriculture Service, this program spends $110 million a year advertising American products abroad.

In 1991, taxpayers spent $10 million promoting Sunkist oranges, $2.9 million selling Pillsbury muffins and pies, $1.2 million boosting the sales of American Legend mink coats and $465,000 advertising McDonald's Chicken McNuggets.


* The advanced technology program. The administration's high-tech version of the Small Business Administration, started in 1993, funneled $400 million last year to such giants as Chevron, General Electric, IBM and Texaco.

Federal Election Commission records indicate that all of these companies, along with many other techno-pork recipients, were substantial contributors to Bill Clinton's presidential campaign or the Democratic National Committee.

* Ethanol. This corn-based gasoline substitute gets two special breaks: a tax credit for companies that make ethanol and an exemption from federal excise taxes that together amount to at least $500 million.

Though proponents defend ethanol subsidies on the grounds that the fuel reduces both pollution and U.S. dependence on foreign oil, an often cited 1986 Department of Agriculture study concluded that "when all economic costs and benefits are tallied, an ethanol subsidy program is not cost effective."

Indeed, it takes more energy to produce a gallon of ethanol than is in a gallon of ethanol.

Archer-Daniels-Midland, a $10 billion company based in Decatur, Ill., produces two-thirds of the ethanol used in this country. The company and its chief executive, Dwayne Andreas, have been among the nation's most generous campaign contributors. Bob Dole, the Senate majority leader, has received more than $150,000 from them over the years.


* The clean car initiative. This year, the administration is requesting $333 million for this program, also known as the Partnership for a New Generation of Vehicles, with the aim of producing a more fuel-efficient car.

The White House says the program will "ensure the global competitiveness of the U.S. automobile industry" -- that is, General Motors, Ford and Chrysler, whose combined profits last year came to a record $13.9 billion.

Many people in and out of government defend these programs by arguing that they strengthen strategic industries and thus protect high-paying U.S. jobs.

But tens of thousands of businesses export products abroad. Perhaps 1 percent receive federal assistance. At most, half of 1 percent of the millions of small companies will ever receive a Small Business Administration loan, yet the 99.5 percent that don't will pay higher taxes to support those that do.

If the government eliminated one-third of the corporate subsidies scattered throughout the budget, enough money would be saved to abolish the capital gains tax. That would create far more jobs and start-up businesses than 100 Sematechs.

In any case, should the government even be in the business of picking corporate winners and losers?


Business subsidies mainly create an uneven playing field, usually to the advantage of politically influential industry leaders and at the expense of their less well-connected rivals. Nor is it very likely that bureaucrats will correctly identify America's next Microsoft, Intel or MCI.

In fact, the government has a poor record of picking winners. The delinquency rate on the government's business loans is about 8 percent, compared to the approximately 3 percent among private banks.

Despite all the appealing arguments in Washington about the need to forge closer partnerships between the government and industry, in practice golden handshakes tend to have a corrupting influence on both.

Corporate welfare is anti-business as well as anti-taxpayer.

Stephen Moore is director of fiscal policy studies at the Cato Institute.