Controversy: The Rhetoric of "Corporate Welfare"

Since Robert Reich coined the phrase several years ago, "corporate welfare" has become a rhetorical target for progressives. Activists argue that government subsidies to private businesses amount to giveaways, which sometimes even promote harmful activity. These critics have established "corporate welfare" in the lexicon of both liberal and conservative politics: a recent computer search turned up the phrase in 520 articles from major newspapers and 107 articles in popular magazines over just the last two years. The critics are sometimes right, but their polemics can be politically insidious and discourage serious discussion about when and how government should get involved in private industry.

Invoking "welfare" legitimizes the idea that government in volvement in the economy is intrinsically corrupting. The phrase draws on the image of contemptible dependency on government that has dogged social programs for the poor and tries to transfer some of that contempt to CEOs. It risks reinforcing the presumption that government should leave poverty to sort itself out, while posing no real challenge to the wealthy, whose conservative defenders are quick to accuse anyone who publicly challenges inequality in America of conducting class warfare.

A second problem is more basic: the rhetoric of corporate welfare overlooks the legitimate basis of public support of private industry. Government has a basic interest in advancing research and development that the market will not produce spontaneously and in constructing and maintaining such tangible public goods as highways. Public policy has five basic ways of influencing the direction of private investment and other resource allocation: persuasion, taxation, regulation, subsidies, and incentives. Condemning corporate welfare invites eliminating the last two and thereby hobbling government.


SEEING GREEN

Growing experience in government subsidies in the United States and abroad can show us how to distinguish spending that promotes the public good from subsidies that merely enrich private firms. Among the most instructive programs are environmental protection efforts to improve the efficiency of industrial resource use, to develop new technologies that use renewable resources or to recycle nonrenewables, and to find ways to turn toxic wastes into less harmful substances. These valuable programs are drawn too easily into the rhetorical net of corporate welfare.

For example, generating electricity using solar energy reduces air pollution. Photovoltaics (PVs) -- the semiconductor-based solar cells now common in watches, calculators, and toys -- can generate electricity on a larger scale, for remote homes built far from electric grids or even as part of the generating capacity of conventional electric utility companies. The American PV industry is growing rapidly, more than doubling its shipments from 1992 to 1996 and exporting most of that production. Domestically, PVs generated about 2.7 million kilowatt hours of electricity in 1996. Yet despite these promising indications, PVs are still a tiny part of American electricity generation. The PV manufacturing industry consists of a couple of dozen firms, most of them small and with very limited funds for the research and development or expanded production they need to bring down their costs. While the prices of PVs have declined dramatically in the past 20 years, electricity from PVs is still more expensive than power from conventional sources. Experts predict that prices can continue to decline with aggressive and properly targeted R&D.

The Department of Energy (DOE) finances such R&D, including a program begun in 1991 called Photovoltaic Manufacturing Technology, which shares costs of R&D aimed specifically at bringing down manufacturing costs. So far, industry has funded about 43 percent of the $118 million cost of the program, with the federal government paying for the rest.

Another way of reducing pollution is to produce electricity from wind energy. Although it still forms a small part of national energy supply, wind-generated electricity rose 20 percent between 1992 and 1996 and utilities have continued to build or plan for new wind capacity. While the private sector is deploying this technology, the wind energy industry has benefited directly from government programs that reduce development, testing, and production costs. For instance, the Department of Energy has provided partial funding for a small, $5.6 million wind system in west Texas, due to come on line by late this year. The DOE is also underwriting, among other projects, part of the cost of developing prototypes of a more efficient wind generator being built by Cannon Wind Eagle Corporation of California.

Through all these programs, federal and state governments subsidize some of the cost of providing social benefits that the market would otherwise neglect. Private firms tend to underinvest in R&D because the new knowledge it yields will to some extent be public and the companies will be able to capture only part of the benefits. Furthermore, new technologies that reduce pollution provide benefits to society that may exceed the return on investment to a single firm. A long tradition of policy analysis shows that governments and other nonprofit institutions intervening in markets have a necessary role to play in providing these goods. Public opinion polls show that the public is also overwhelmingly in favor of environmental protection and the promotion of renewable energy. Characterizing these efforts as corporate welfare misleads the public about both its true interests and its preferences.


DRAWING LINES

Of course, not all subsidy programs are good ones, and even good ones can usually stand improvement. Often, as corporations have grown more powerful, they have extracted a bigger cut than necessary as the price of their political cooperation. It is not clear that it was good policy to have insurance companies play the role of Medicare intermediaries. It was probably bad policy to eliminate the Renegotiation Board, a World War II-era agency that renegotiated contracts after military contractors had reaped excess profits. Bio technology and pharmaceutical companies today set staggering prices for new breakthrough drugs, thereby limiting access to them, even though public dollars often financed most of the research on which the drugs are based.

Yet critics of corporate welfare need to set aside their broad brush and develop criteria for deciding when such programs make sense. Some authors and activists have already begun the task, proposing ideas for distinguishing good programs from bad. Phil Bereano of the University of Washington has set out "process criteria," steps that would make it easier to assess any subsidy's social worth. For instance, the responsible government agency should disclose all of a program's expenditures, aims, and direct and indirect costs. Others have focused on substantive standards. The environmental group Friends of the Earth, in a report titled "Green Scissors '98," recommends eliminating programs that subsidize pollution or pay for cleanup in cases where polluters could bear the cost instead. Stop Corporate Welfare (SCW), a coalition dedicated to eliminating wasteful government subsidies to corporations, targeted budget increases for the Overseas Private Investment Corporation, a federal agency that promotes exports by U.S. firms. Many of the programs on SCW's "hit list" also deserve elimination, notably the Forest Service's practice of building roads in national forests to facilitate destructive private timbering.

More broadly, every subsidy should have to meet several standards. Positively, the program should respond to a real need that the market alone would neglect. Research into alternative fuels makes the cut, as did the funds that created the Internet; the millions of dollars that the government recently gave McDonald's to finance overseas expansion do not. On the negative side, the Green Scissors model highlights the possibility of ruling out programs that subsidize social harm. Moreover, government should take care that the public goods it helps to generate remain public: for example, new medical treatments developed with federal funds should be made generally available. And, of course, subsidy programs should be fully open to public scrutiny and debate. Distinguishing good subsidies from bad means paying close attention to particular programs, understanding what works and what does not. It is time to move beyond -- and bury -- the notion of corporate welfare and to rediscover the ends and proper means of government.



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Robert Reich

Neologisms are rather like children. Once they move out into the world you can no longer protect or control them. I had not especially intended "corporate welfare" to become a rallying cry for populists, libertarians, the current Republican chair of the House Budget Committee, good-government liberals, bad-government wrecking crews, denigrators of the poor, and Pat Buchanan.

I still think it's a useful term, though. Here's why. The private sector does all sorts of things that create public bads (say, pollution) as well as public goods (say, research on photovoltaics and wind energy, which reduce pollution). In the jargon of economics, these bads and goods are called "externalities," because they slosh over the border separating the private pursuit of profit from the broad public interest. It's well understood that the system of property rights and liability rules that apply to all businesses (and that we call the "free market") sometimes fails to adequately deter the private sector from generating too much of the public bads or encourage them to produce enough of the public goods. That's where regulations and subsidies come in. Regulations can reduce bads. Subsidies can increase goods.

The challenge is to design the regulations and subsidies just right. Sometimes a targeted tax (on the amount of gunk emitted into air or water, for example) will be preferable to a formal regulatory command. Equally, a targeted tax incentive (supporting the pollution-reducing research) might work better than a direct subsidy. Sometimes the best solution will be found in the creation of new property rights (resulting, say, in traded permits to emit certain amounts of gunk, or broader patent protections for pollution-reducing inventions).

So how should government go about the task? At the very least, apply some logic. Right now, just about anyone proposing a new government regulation on business has to show that the benefits it confers on the public exceed its costs (usually in the form of higher prices). But there's no similar test for the reverse side of the same coin. Government subsidies and tax breaks to business have mushroomed in recent years, without any showing that the benefits they confer on the public exceed their costs.

This asymmetry may have something to do with the political potency of private interests, which rarely view new regulations as favorably as they do new subsidies and tax breaks. Nonetheless, in the spirit of this magazine, which is dedicated to the liberal imagination, I will make a specific suggestion. Any proposed special subsidy or tax break flowing to an industry or a business must pass a four-part test. The proposer must show (1) the extent to which the public stands to benefit from the private activity; (2) how much of that alleged benefit depends on the incentive (it may be that businesses would do much of it anyway); (3) that this net benefit exceeds the cost to the public of the proposed subsidy or tax expenditure; and (4) that there are no less costly means of eliciting the same amount of public benefit.

Data and argument in support of these propositions would have to be supplied when the subsidy or tax break is proposed, and time allowed for public debate before enactment. Once enacted, any such subsidy or tax break would be reviewed periodically by the Congressional Budget Office to assure that the four criteria were still met. A business or industry demonstrating competitive injury would be able to challenge in federal court any such subsidy or tax break flowing to a competitor, by claiming that the four-part test had not been satisfied.

Perhaps Mr. Laird's solar- or wind-sourced-energy research would pass muster. But I'd guess that few other subsidies or tax breaks now on the books would do so. As of this writing, an estimated $1.37 billion per year flows to oil, gas, and mining companies; more than $3 billion to pharmaceutical companies that create offices in Puerto Rico; $500 million to corn-based-ethanol refiners; billions in tax breaks to the insurance industry; almost a billion dollars to timber companies; $69 million to McDonald's, Sunkist, Gallo, Campbell Soup, and a few other American-based companies, to advertise abroad; a multibillion-dollar giveaway to the major television networks in the form of free spectrum space; and so on. That this largesse flows because the companies or industries receiving it lobby hard for it and pony up generous campaign contributions to maintain it does not automatically mean that it's unjustified. But, at the least, we should be wary.

Mr. Laird is surely correct that not all subsidies to the private sector are tantamount to corporate welfare. But he can have no objection to scrutinizing them to make sure. A healthy skepticism toward public support for private enterprise is one of the central tenets of the new progressivism. There are few bumper stickers as evocative as "get government off our backs." But if the term "corporate welfare" helps draw attention to the need to get businesses off our backs when there's no good reason for us to carry them, it will have fulfilled its purpose.



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