THE CASE
Defining and determining the Extent of Corporate WelfareThe Cato institute, a libertarian think tank, defines corporate welfare as'...the use of taxpayer dollars to provide benefits to specific firms or industries. This usually means direct subsidies, payments, grants, and the like to specific corporations.'('Encouraging Research: Taking the Politics out of R + D).
But other articles published by the Cato Institute show a more hideous side to
corporate welfare and question the purpose and function of various government
institutions. In ' Freddie Mac and Fannie Mae: Corporate Welfare King & Queen',
Vern McKinley questions the function and purpose of two large government
institutions, Freddie Mac and Fannie Mae, that control over half a trillion
dollars. The Wall Street Journal noted agreement from a surprising source; ' Federal
Reserve Chairman Alan Greenspan joined the mounting chorus of policy makers who have
been criticizing government subsidies for Fannie Mae and Freddie Mac, the giant
mortgage company.'('Greenspan Criticizes Impact of Benefits Provided to Fannie
Mae, Freddie Mac', Jerry Guidera, Wall Street Journal, May 23, 2000)
In the 'Cato handbook For Congress, 105th Congress, 9. Corporate Welfare' the Cato Institute goes on to list the "12 Worst Corporate Welfare Programs":
Market Access Program (Agriculture Department)
Advanced Technology Program (Commerce Department)
Technology Reinvestment Project (Defense Department)
Export Enhancement Program (Agriculture Department)
Maritime Administrative Operating- Differential Subsidies
Forest Service road and trail construction
Export-Import Bank
Overseas Private Investment Corporation
International Trade administration
Small Business Administration
Energy Supply Research and Development
Agricultural Research Service
Ralph Nader defines corporate welfare as:
'...the benefits conferred and costs incurred by a particular program, subsidy or
loophole. In these definitions, if a program is considered corporate welfare if
its public cost outweighs its public benefits. Others have asked whether the
private, corporate benefit outweighs the overall public benefit. These are
important questions -- questions which should be asked of any corporate welfare
program -- but they are too narrow to serve as the basis for defining corporate
welfare. Defining corporate welfare in this fashion also immediately orients the
debate about any particular program into a contest over the program's merits, with
defenders of the program inevitably explaining how it creates jobs and therefore is
worthy of taxpayer support.
A more robust definition of corporate welfare looks not to the benefits conferred on the public, but to the benefits conferred on corporations as compared to any corporate payment, or goods or services provided, to the government. If a program involves the government giving more to private companies than it gets back -- that is, where it is engaging in a transaction that cannot be justified as a fair market value exchange -- then it should be considered corporate welfare. No definition of corporate welfare will be all-inclusive -- some element of know-it-when-I-see-it will have to remain, including for pork-laden contracts for unnecessary goods or services -- but applied flexibly, this definition should serve well. The advantage of this definition is that it suggests analytic inquiries other than whether a program is "good" or "bad." It allows for the possibility of "good" corporate welfare -- programs that confer subsidies on business but are merited because of the overall public gain.'
Ralph Estes in Tyranny of the Bottom Line- Why Corporation Make Good People Do Bad Things has a broader definition of corporate welfare, or social costs as he calls them. Estes argues that corporate social costs should not only include hidden costs but also the cost of the consequences of corporate policies and actions. For example, Estes argues that pollution, stress and other burdens corporations place upon us should be considered. Chapter 8 entitled "The Public Cost of Private Corporations' talks about the lack of recognition for the costs corporations place upon us (page 171): 'CORPORATE FINANCIAL REPORTS purport to measure a firm's profit and loss. Nowhere in this accounting calculus, however, is there an allowance for external diseconomies or social costs, costs inflicted on society that are not incurred by the corporation itself and for which the corporation makes no sacrifice.'
In Table 1. 'The Public Costs of Private Corporations' (a partial listing) (page 175) lists some of the corporations social costs:
A) The cost in the workplace
1) Workplace injuries, illness, deaths
2) Discrimination (racial, gender,age, other forms)
3) Sexual harassment
4) Physical and emotional stress
5) Psychological abuse
2) The cost to the Customer
1) Unsafe or shoddy products
a) Injuries, illness, cancer
b) Economic loss
2) Price fixing, overcharging, deceptive practices
C) The cost of pollution
1) Air Pollution
a) Health effects
b) Discomfort
c) Visual impairment
d) Residential Soiling
e) Acid rain
f) Odor
2) Water Pollution(effluent emissions, sewage, thermal discharge from power plants)
a) Effects on health, mortality
b) Reduced recreation (e. g. fishing, boating, water skiing)
c) Loss of food fishing
d) Reduction of water resources(aqueous beds, reservoirs)
3) Visual (aesthetic) pollution
a) Billboards and signs
b) Plants, other facilities
c) Dirty Air
d) Dirty Water
e) Advertising-radio, TV, newspapers (discomfort and ugliness)
4) Noise pollution
a) Factories and plants
b) Construction
c) Airports; planes
D) The cost of waste
1) Sewage, trash (burden on treatment plants, landfills)
2) Hazardous and toxic waste
a) Radiation exposure
b) Transportation danger
c) On-site disposal (long term risk)
d) Burning (toxic emissions)
E) The cost of congestion
1) Streets, traffic , parking
2) Pressures on school system; overcrowding
3) Pressure on housing; higher prices
F) The cost of commercial encroachment
1) Zoning commitments not kept
2) Loss in home values
G) The cost of site damage
1) Leaking or abandoned underground tanks
2) Destruction of trees, plant life; erosion
3) On-site disposal of hazardous waste (also cost of waste, section D.)
H) The cost of consumption of natural resources
1) Depletion of energy resources
2) Consumption of other mineral resources
3) Depletion of wildlife resources (animals, fish, fowl)
I) The cost of manipulation of public opinion
1) Lobbying
2) Advertising and promotion
a) Gender stereotyping
b) Encouragement / inducement of unhealthy behavior
1) Smoking
2) Drinking
3) Fatty foods, other unhealthy dietary habits
J) The cost of crime and fraud
K) The burden of government services: police, fire protection, water supply, regulation, inspection, legislation, national defense
L) The cost to the national economy
1) Balance of trade/ balance of payments
2) Productivity ( lack of training, modernization, maintenance, competitiveness)
THE COST OF CORPORATE WELFARE
Corporate welfare runs into the hundreds of billions if not trillions of dollars annually. Let's look at some things we can easily identify as corporate welfare:
GOVERNMENT PROGRAMS: The Cato Institute('There's no Conceivable Reason to Preserve Corporate Welfare', Doug Bandon, July 23, 1997) estimates that the government spends $75 billion annually on 125 programs, directly enriching businesses.
QUOTAS AND TARIFFS: Government protection of industries such as steel, textiles and computers enrich business by $80 billion annually (Cato Institute,'There's no Conceivable Reason to Preserve Corporate Welfare', Doug Bandon, July 23, 1997). This figure does not include hidden costs such as higher prices to consumers from lack of competitive pricing. Such hidden costs make quantifying corporate welfare so difficult.
In pointing out some recent examples of the consequences of quotas and tariffs the Hoover Institute('Getting Business off the Dole', Stephen Moore, No.3 1999) begins by citing the observations of our founding fathers:
"Most of the statutes, or acts, edicts, and placards of parliaments, and states for regulating and directing of trade," wrote Benjamin Franklin, "have been either political blunders or obtained by artful men for private advantage under pretence of public good." Franklin was two hundred years ahead of his time in this observation. He would no doubt be aghast if he observed the entangling web of special interest trade protections that have been erected in recent decades. In 1993 there were more than thirty-six hundred product tariffs and quotas imposed by Uncle Sam, all obtained for private advantage under the pretense of public good. By erecting trade barriers, the government rewards one domestic industry at the direct expense of another. For example, in 1991 prohibitive duties were placed on low-cost Japanese computer parts. The motivation was to save jobs in U.S. factories that make computer circuit boards. But the decision to keep out foreign parts inflated by almost $1,100 the cost of a personal computer manufactured by U.S. companies, such as IBM, Apple, and Compaq. That gave a huge advantage to Japanese computer companies; it significantly reduced sales of the U.S. computer firms; and, worst of all, thousands of American jobs were lost.'
GIVEAWAYS: The government annually gives things away for free or sells items
below cost. A partial list of things would include land, mineral rights, air
rights, timber rights, etc. Periodically there are some big bonanzas:
1)The Federal Communications Commission pursuant to the Telecommunications Act of 1996 handed over digital television spectrum to the existing broadcast industry instead of going to competitive bidding. In his June 30, 1999 testimony before Congress Ralph Nader estimated this to be valued at $70 billion. This does not include the existing analog benefit of $132 billion(Nader) previously given to the broadcast industry.
2)The Mining Act of 1872 allows companies to buy land for $5 an acre and not have to pay royalties. The Mineral Policy Committee estimates the benefit to mining companies to be $2 to $3 billion annually. They estimate that the collective benefit to corporations from 1872 to 1993 to be $230 billion. Then there are the hidden costs of mining, or 'social costs' as Estes calls them. Costs to be bore by society and not by the companies that created them. The Mineral policy Committee estimates that the costs to cleanup for the mess created by mining companies to be between $ 30 to $70 billion.
3) From 1993 until recently, the government contracted with Network Solutions Inc. (NSI) to manage certain domain name registrations on the Internet. For this service NSI was allowed to charge a fee. NSI was subsequently purchased by SAIC for $3.9 million. Ralph Nader testified that the market value of NSI stock was in excess of $2.5 billion.
GOVERNMENT RESEARCH AND DEVELOPMENT: This is probably one of the more crucial and questionable areas of corporate welfare. And it is one of the most difficult to uncover and quantify. The question is do corporations unjustly profit from government or government-funded research and development?
Research and Development (R + D) is particularly important today because we are in the midst of a technological revolution. But the question is first, who funded the research and development for this technological revolution and second, if it was the government, was it adequately compensated? What sort of a deal would a venture capitalist have cut? Just look at the previous giveaway to Network Solutions that had a $3.9 million investment turn into $2.5 billion in only a few years. The Internet is at the heart of our technological revolution and the government- or should we say the pentagon- funded and created it. Then there is the telecommunications revolution: How much of NASA and star wars research was behind it?
Paraphrasing Nader's testimony :The relationship between business and government R + D grew strong during WWII. Yet in 1947 Justice Department concluded 'where patentable inventions are made in the course of performing government financed contracts for research and development, the public interest requires that all rights to such inventions be assigned to the government and not left to the private ownership of the contractor.' Still there was some inconsistency as the Defense Department allowed contractors to retain rights. The government business relationship evolved over time, but beginning in the mid 1970's business in collaboration with universities began lobbying to claim the rights of government sponsored research. This effort bore fruit in 1980 with the passage of the Bayh-Dole Act, which gave control over many government sponsored inventions to universities and small businesses. The government R + D giveaway was pushed further by President Reagan in 1983. A Presidential Memorandum instructed executive agencies to grant exclusive license granted by the government into designated 'fields of use'. In 1986, the Federal technology Transfer Act authorized federal laboratories to enter into exclusive contracts with corporations for developing and marketing inventions originated in Federal Laboratories. (Please see the appendix for a detailed overview of the legislative changes which lead to the current government business R + D relationship.)
The government's role in advancing technological research questions the validity and assumptions of the capitalist system. If government expenditures and efforts are at the heart of our technological revolution is capitalism capable of leading us in advanced technological development? In other words has technological development become so expensive and time consuming that corporations focused on the next quarter's earnings can no longer devote the capital to its development? Is capitalism only a distribution mechanism? And if government R +D is funding corporate R + D, it raises a host of issues, from would these corporations survive without help?, to how profitable would they be without exploiting government R + D?
Many would argue that business is capable of having a long term R + D horizon and point to the drug and biomedical industries to show to how capitalism can take the long view if properly rewarded. Maybe? There is government involvement there as well. The 'New York Times' reported in 'Drug Makers Reap Profits on Tax-Backed Research', April 23 2000 referring to an MIT study pointed out: 'A 1995 study by the Massachusetts Institute of Technology found that, of the 14 new drugs the industry identified as the most medically significant in the last 25 years, 11 had their roots in studies paid for by the government.'
Corporate welfare in the drug industry raises a slew of questions. Are we creating the right drugs? Although Viagra has been a big financial success we would be asking ourselves why there have been no new malaria drugs in the last 28 years? Sadly it all comes down to money as the Nation reports ('Millions for Viagra, Pennies for Diseases of the Poor' Ken Silverstein, July 19, 1999). Noting that only 1% of all new medicines brought to market between 1975 to 1997 were to treat tropical diseases the Nation goes on to say;
'Certainly, the majority of the other 1,210 new drugs help relieve suffering and prevent premature death, but some of the hottest preparations, the ones that, as the New York Times put it, drug companies "can't seem to roll...out fast enough," have absolutely nothing to do with matters of life and death. They are what have come to be called lifestyle drugs-remedies that may one day free the world from the scourge of toenail fungus, obesity, baldness, face wrinkles and impotence. The market for such drugs is worth billions of dollars a year and is one of the fastest-growing product lines in the industry. The drug industry's calculus in apportioning its resources is cold-blooded, but there's no disputing that one old, fat, bald, fungus-ridden man who can't get it up counts for more that half a billion people who are vulnerable to malaria but too poor to buy the remedies they need. ' (our emphasis-bold) Even more alarming than the drug industries focus on creating life style drugs is how its emphasis on money in a world crippled by corporate welfare perpetuates the problem. Corporate welfare benefits the rich shareholders of corporations. The rich get richer. The drug industry focuses its R & D effort on the rich. Fewer drugs created for the 80% of Americans that own 10% of the corporate shares. The rich get richer. Less drugs...The system becomes a perpetual self-rewarding machine. Absurd? Consider the following: the wealthiest 1% of Americans own 47.3% of the countries financial wealth while the bottom 40% own none (actually a negative 1.1%). How much could a billionaire pay for the creation of a drug such as Viagra?, compared to poor mothers whose children are suffering from a disease related to malnutrition or pollution? Is it coincidental that our and the media's attention on a particular disease only materializes when a movie star or rich person contracts the disease and takes up the crusade for a cure? Then there are costs of drugs? The 'Wall Street Journal' in 'Drug Firms Face Price controls, But Aren't Ready to Dial 911 Yet said; "Polls show that voters think drug costs are out of control and want help from policy makers'. The New York Times article dealing with the eye drop Xalatan found that Americans pay the highest price in the world for the drug which costs pennies to make. The 'New York Times' says the USA government helped finance the development of Xalatan with $4 million from the National Institutes of Health. The USA has not financially benefited but the inventor Dr. Bito was made a millionaire and Columbia University got about $20 million in royalties last year. The 'New York Times' said: 'The taxpayers have reaped no financial return on their investment; their reward, government officials say, is the eyedrop itself.'
BAILOUTS The US government has bailed out large corporations such as Chrysler and Lockheed, several foreign governments such as Mexico and Russia directly or indirectly via institutions such as the IMF, financial institutions both large and small and large speculators such as Long Term Capital Management. Please see "It's Time We Kicked the Rich Off the Dole' for a discussion of how the Federal Reserve has contributed to the bull market for stocks by continually bailing out speculators. As we noted in the aforementioned article the Federal Reserve's actions have created a moral hazard which is encouraging speculation in financial markets.
GIVEAWAY FINANCING: The government had its hand in bailing out banks in both the LDC and Savings and Loan (S + L) crisis; for which it received minimal compensation. Both of these debacles began by banks directly, or indirectly through the purchase of junk bonds, providing easy or cheap financing. The Big Banks were eager to give money away in the 1970's while in the 1980's smaller banks were aggressive purchasers of junk bonds. Junk bonds provided financing to many corporations that could not have found financing otherwise and to takeover artists. Was the government properly compensated?
TAX-FREE PROFITS Time Magazine, 'How The Little Guy Gets Crunched', found that some legislation's provides tax-free profits:
'Last December, President Clinton signed into law the Ticket to Work and Work Incentives Improvement Act, hailing the legislation as providing "the most significant advancement for people with disabilities since the Americans with Disabilities act almost a decade ago." He called it "a genuinely American bill." Indeed so. For it also provided something quite unrelated to disabilities: a lucrative tax break for banks, insurers and financial-service companies.
A provision woven into the legislation allowed the foreign subsidiaries of these businesses to extend the income-tax-free status of foreign earnings from the sale of securities, annuities and other financial holdings. Among the big winners: American International Group Inc., an insurance giant, as well as the recently formed Citicorp. Overall, the tax break will cost the U.S. Treasury $1.5 billion in the next two years, just as it did in the past two years. The amount is equivalent to all the income taxes paid over four years by 300,000 individuals and families that earn between $25,000 and $30,000 a year'.
TAXES: There has been a general reduction in the proportion of taxes corporations pay the federal government. Researcher Robert Holhut points out that: 'In the 1980s, the U.S. tax code was rewritten to drastically reduce corporate income taxes. In the 1950s and '60s, corporate taxes provided 25 percent of all federal government revenues. By 1991, that figure was only seven percent. The theory behind the tax cuts was that corporations would take the money they saved in taxes and invest it back into their businesses. It rarely if ever happened'.
It is estimated that corporations will receive tax exemptions to the tune of $394 billion between 2000 to 2004 (Nader). There are a variety of ways corporations can reduce their taxes:
Time Magazine in ' Special Report/Corporate Welfare: GENERAL ELECTRIC', November 16, 1998 points out how General Electric by taking advantage of corporate welfare was able to reduce its taxes while it reduced its work force 43% (123,000 jobs) between 1986 to 1997:
'GE's corporate strategy or its success, it is fair to question the government's continued use of taxes from the rest of us to make GE's hefty profits even greater. Part of GE's corporate welfare came from its FSC, which has allowed the company to skip payment of more than a half billion dollars in taxes since 1986. The rest comes from business tax credits, deductions and other incentives....
The global strategy has paid off brilliantly for the company. GE's shareholder value spiraled 515%, from $39 billion in 1986 to $240 billion in 1997. During that same period, profits shot up 228%, from$2.5 billion to $8.2 billion, while the company's income tax payments to the U. S. Treasury rose a modest 27%, from $1.1 billion to $1.4 billion. In the process, GE pared the U.S. portion of its income tax bill from 84% to 52%. At the same time, GE's income tax payments to foreign governments shot up 550%, from $200 million to $1.3 billion.'
PERKS OUTSIDE THE NATIONAL ARENA: Corporate pork is not the exclusive domain of Washington. There are a variety of ways for corporations to gain favor at the local or international level. Some of these are:
1) State tax relief.
Local real estate tax relief.
Foreign taxes- as just noted by Time Magazine, GE was able to reduce its domestic tax bill by paying more in foreign taxes.
Foreign corporations not paying their fair share. In the rush to bring jobs to America have we given away the store? Citizens for Tax Justice, 'GAO Report: Big foreign-Controlled Firms Operating in U. S. Pay Lower Taxes than American Companies', April 14, 1999:
'According to GAO's analysis, the 15,363 large American companies studied paid an average of $8.1 million in federal income taxes in 1995. In contrast, the 2,676 foreign-controlled corporations paid an average of only $4.2 million in Federal income taxes that year-only half what the U. S. companies paid. This was true even though the average amount of gross receipts reported by the foreign-controlled companies was about the same as the amount reported by the American firms.'
SUBSIDIES: The government provides a variety of subsidies to corporations. Greenpeace ( a non-profit environmental group) estimates that energy subsidies amounted to $18 billion in 1992. The Cato Institute found that Archer Daniel's Midland Corporation to be one of the major beneficiaries of corporate welfare subsidies. Cato Policy Analysis No. 2451, September 26, 1995 'Archer Daniel's Midland: A case Study in Corporate Welfare: 'The Archer Daniel's Midland Corporation (ADM) has been the most prominent recipient of corporate welfare in recent U. S. history. ADM and its chairman Dwayne Andreas have lavishly fertilized both political parties and million of dollars in handouts and in return have reaped billion-dollar windfalls from taxpayers and consumers. Thanks to federal protection of the domestic sugar industry, ethanol subsidies and subsidized grain exports, and various other programs, ADM has cost the American economy billions of dollars since 1980 and has directly cost Americans tens of billions of dollars in higher prices and higher taxes over that same period. At least 43 percent of ADM's annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM's corn sweetener operation costs consumers $10, and every $1 of profits earned by its ethanol operation costs taxpayers $30.'
OVERCHARGES, RIPOFFS: Quite often the government pays too much! The proverbial $500 toilet seat resonates in the mind of voters. The 'Financial Times of London', "Drug Pricing in the Spotlight', noted for ' 50mg of Leucovorin Calcium, which is used to treat colon cancer, Medicare reimburses $17.52, although the provider only pays $2.75.'.
Not only is the government vulnerable to overcharges, the Cato Institute questions the types and kinds of charges in 'Strong "Defense" Wins in Corporate Welfare Battles' :
'Two years ago a congressional investigative team found that several defense contractors had been sending federal taxpayers the bill for millions of dollars in entertainment, recreation and party expenses. Defense contractor Martin Marietta, for instance, charged the taxpayers $263,000 for a Smokey Robinson concert, $20,000 for golf balls, $13,000 for volleyball and softball officials, and $7,500 for a Christmas party."
Rip-offs and overcharges can and often are criminal. The New York Times reported, May 19, 2000,"Hospital Company Agrees to Pay $745 Million in U.S. Fraud Case: 'The Columbia/HCA Healthcare Corporation, the nation's largest health care company, has agreed in principle to pay $745 million in civil penalties to settle part of a broad government inquiry into whether its success was achieved in part by cheating federal health programs.'
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