June 15, 1997
Aid to Owners of Dependent Enterprises
by
Charles W. Baird
A national consensus, that we should end ordinary welfare -- e.g., Aid to Families With Dependent Children (AFDC) -- as we know it, seems to be emerging. Notwithstanding some efforts of President Clinton and some Democratic members of Congress to back away from some aspects of the 1996 Welfare Reform Act, the idea that welfare recipients should be nudged, or pushed, into self-sufficiency through employment is widely applauded. Impatient taxpayers are eager to dismantle most of the traditional welfare state.
However, there is no such consensus when it comes to what might be called government Aid to Owners of Dependent Enterprises (AODE). All three levels of government -- federal, state and local -- are in the game. The federal government currently spends more than $65 billion a year on what Rep. John Kasich (R-OH) and Ralph Nader call "corporate welfare." State and local governments do likewise under the euphemism of "industrial development incentives."
For example, the federal government subsidizes commercial ads by companies like MacDonalds and Gallo Winery in foreign countries. The state of California recently sold the real estate that used to be Agnews State Hospital to Sun Microsystems Computer Co. for less than one-half of its fair market value. Both Oakland and San Francisco have given subsidies to privately owned professional football teams for the construction and up-grading of stadiums and shopping malls. What is going on here?
First, this is an issue that forges strange alliances. There are not too many questions on which Congressman Kasich and Ralph Nader agree. Nor can there be more than two other issues on which former Labor Secretary, Robert Reich, and I agree. Nevertheless, many free market advocates and many government intervention advocates do agree that AODE is unconscionable.
Government interventionists don't like AODE because they are generally hostile to business, especially big business. To them, government intervention should be directed at controlling and punishing business, not giving it handouts.
Free market advocates don't like AODE because we see it as yet another encroachment of government into what should be entirely private affairs. There are legitimate things for governments to do -- e.g., provide the protective and judicial services that every free market society needs to function well; and, therefore, there are legitimate uses of taxpayer money. But, as the authors of the Federalist Papers explained at the birth of this country, to preserve liberty it is necessary to construct a wall of separation between the public and private realms of human action.
In a totalitarian state there is no private realm of human action at all. Every aspect of life is subject to political control and sanction. That is what "totalitarian" means -- government has "total" control. Even if the people who wield governmental authority are democratically elected, government can be totalitarian. There are many aspects of life which, in order to preserve liberty, must not be subject to majority vote. In private affairs the proper decision rule is not majority vote. It is individual choice.
In a free society government is constitutionally restricted to a set of enumerated powers -- i.e., government is constrained. Far from having total control, government itself is restricted. Government is kept in its cage precisely so there can be a private realm of human action. There, individuals are left to pursue their own ends, free from government involvement, as long as they do not impose, or attempt to impose, involuntary exchange on others. Every incursion by government into private affairs, no matter how well-intentioned, is a threat to liberty.
I believe that government at every level does far more than it ought to be doing. For example, the federal government spends about $1.6 trillion each year. If it were restricted to do only those things that are explicitly authorized by the Constitution, it would, at most, have to spend $500 billion. Therefore, it is a no-brainer for me to be opposed federal AODE. All private enterprises, of whatever size, should be free to succeed or fail on their own. When an entrepreneur gets an idea, it is up to him or her to assemble the necessary resources and produce the product or service with neither aid nor impediments from government. If the product or service is valued by consumers, the enterprise will be profitable, it will grow, and it will be imitated. If it is not, losses will result, the firm will shrink or disappear, and other entrepreneurs will avoid making the same mistakes.
A successful market economy -- one in which there is coordination between the pattern of production and the pattern of consumer wants and in which standards of living for the general public are improving over time -- is a spontaneous order. It emerges out of the production and exchange activities of millions of individuals each trying to do the best they can for themselves with the limited resources and knowledge they have. Prices of inputs and outputs, and the profit and losses that are implied by those prices, are signals that direct individuals toward production and exchange activities that are consistent with the production and exchange activities of others. Any government involvement with this market process, beyond enforcing the rules of voluntary exchange, distorts those signals, and, therefore, impedes, or even cripples, the process.
All government agencies are staffed by human beings. The sum of the economically-relevant knowledge possessed by the separate individuals in an economy is always far greater, and more accurate, than the sum of such knowledge possessed by the individual bureaucrats in any government agency. Hence, all government economic activity must be undertaken in ignorance of most of the relevant knowledge. Although markets do not generate perfect outcomes, governments make far more economic mistakes than markets do.
AODE takes four forms:, tax breaks, financial aid, regulatory relief, and protections against competition. General tax breaks, that apply to all firms are always desirable. American business, and therefore American consumers and workers, are over-taxed. The sum of federal, state and local taxes as a percent of personal income is over forty percent. All taxes -- income, sales, excise, death, capital gains, property, and payroll -- should be reduced. But they should be reduced for everyone, not just for those who are affected by a specific firm or a specific industry. AODE at all levels goes wrong when the tax reductions are targeted on specific firms, specific industries, and specific individuals.
I want to be careful here, because I think that people like Ralph Nader and Robert Reich who declaim against tax breaks to individual businesses really only want to increase taxes so that governments can do more, not less. So my AODE position with regard to targeted tax breaks is that they should be eliminated if and only if the resulting increase in tax revenue is handed back to taxpayers in general tax cuts. For example, the federal government gives tax breaks to producers of ethanol, a corn based substitute for gasoline, that amounts to $500 million per year. Seventy percent of the tax break goes to one company -- Archer Daniels Midland, a $10 billion agribusiness. That annual $500 million could finance, say, a tiny fraction of a percentage point reduction in the payroll tax. It isn't much, but, to paraphrase the late Senator Dirkson, a half billion here and a half billion there, pretty soon you are talking about real money.
Financial aid to specific firms and specific industries -- whether in the form of direct cash payments, below market interest rates on loans, or direct payments for training of employees -- by any level of government is never justified. All such subsidies should be terminated, and the saved revenue should be handed back to all taxpayers in the form of general tax cuts. For example, eliminating just half the business subsidies in the federal budget would free up enough money to completely eliminate the federal capital gains tax.
Reductions of regulations, except those which proscribe involuntary exchange, are always desirable. I applaud states that try to lure businesses in by offering better regulatory environments than those businesses have to endure in other states. I even applaud states that offer regulatory breaks to only specific firms to lure them in. Once a state starts lifting the regulatory burden, even for one firm or one industry, interstate rivalry will ensure that the practice will spread from firm-to-firm, industry-to-industry, and state-to-state.
Governments at all levels are in the business of protecting some businesses against competition. For example, the federal government imposes steel import quotas to protect domestic producers from foreign competition. This one item costs the American economy around $7 billion a year in the form of higher prices for steel and products produced with steel. The state of California regulates the amount of land that can be used to produce navel oranges in order to shield incumbent orange growers from competition from interlopers and ensure that the competition among incumbents will not reduce orange prices. New York City prohibits vans and jitneys from competing with city-franchised and/or city-owned, monopoly transit systems. None of this is justifiable. It is transparently nothing more than benefiting the few at the expense of the many. It works because the few are well organized, and on an individual basis they receive large benefits. The many, who are unorganized, pay a small amount per individual and thus are not motivated to resist the special privileges granted to the few. It is, to quote Dwight Lee, "malice in plunderland."
In sum, I agree that we should end corporate welfare as we know it. However, we should not permit this worthy idea to be abused as yet another way to increase the scope of government involvement in private affairs. Cut corporate welfare and return the proceeds to taxpayers.