NCPA - National Center for Policy Analysis

Corporate Welfare Spending vs. the Entrepreneurial Economy

June 15, 2012

Rising spending and huge deficits are pushing the nation toward an economic crisis.  There is general agreement that policymakers need to terminate wasteful and damaging programs in the federal budget.  One good place to find savings is spending on corporate welfare, say Chris Edwards, the director of tax policy studies, and Tad DeHaven, a budget analyst on federal and state budget issues, at the Cato Institute.

Some people claim that business subsidies are needed to help fix market failures in the economy.  But corporate welfare is just as likely to create failures by misallocating resources and inducing businesses to spend time on lobbying rather than on making better products.  Importantly, corporate welfare is rampant in the spending of the federal government.

  • A forthcoming Cato Institute study finds that federal business subsidies total almost $100 billion annually.
  • Farm income stabilization payments have fluctuated between about $13 billion and $33 billion annually, and they are often paid to households with above-average income.
  • Sugar subsidies offer artificially-created profits to sugar producers, protecting them from international competition, while increasing input costs for other, less influential businesses.
  • Various economic development programs also offer funding to businesses in numerous sectors, from energy to alcohol, in the hopes of spurring job creation.

The American public broadly opposes this government intervention into the economy, in which winners and losers are decided not based on merit but by political insiders.

Even if policymakers wish to ignore the preferences of the American people, the logical problems with corporate welfare persist.

  • Firms that receive subsidies become spendthrift, failing to check costs as they otherwise might.
  • Subsidies aren't driven by actual market demands, but instead are compelled by often arbitrary political desires.
  • Subsidies often drive firms to make financial decisions that are uncompetitive in the long run (they may, for example, locate too many operations in the United States).
  • Subsidies are only necessary to fund projects passed over by private investors, which were presumably passed over for a reason.

Source: Chris Edwards and Tad DeHaven, "Corporate Welfare Spending vs. the Entrepreneurial Economy," Cato Institute, June 1, 2012.

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