Corporate Subsidies Are Killing the Economy


One of the most important and debated topics in American politics is the influence that large corporations have on American culture, economy, and public policy. What seems to be overlooked, however, is how corporate welfare and subsidies contribute to and influence public legislation and why this has damaging effects on our political process and on the entire economy.

The recent case of California solar energy company Solyndra has dominated headlines. Ignoring signs that the company was in trouble, the Obama administration loaned Solyndra over half of a billion dollars and hailed Solyndra as a model for the future businesses. However, Solyndra was doomed to fail, as it was not accountable to the pricing feedback in the market and instead relied on government subsidies and loans.

The conservative press jumped all over the story, accusing the Obama administration of corruption, dirty politics, rewarding friends with taxpayer dollars, and the supposed impracticality of using “alternative energy” resources. But given that Solyndra’s loan represents a mere fraction of a percentage of the federal budget, there is much more to this story than partisan attacks.

At the heart of the Solyndra scandal is the idea — propagated by both liberals and conservatives — that the federal government should tax American citizens in order to subsidize the business interests of their choosing. This idea, often called corporatism, is absolutely antithetical to a free economy, lasting job creation, and real wealth production. Furthermore, it creates incentives for politicians to pander to corporate donors over their grassroots supporters.

For example, in a recent story for Alternet, Nick Turse points out that since 9/11, the U.S. government has spent $8 trillion on defense. When one looks at how this money was spent, it really is just one large welfare transfer from the American people to politically popular corporations. Aside from the usual Pentagon contractors like Raytheon, Lockheed Martin, and Boeing receiving lavish subsidies, companies like Pepsi, FedEx, Dell, and Kraft are finding that their biggest and best customer is the U.S. government.

It is fairly apparent what these kinds of subsidies do to the economy and for the average American. Corporate welfare of this magnitude gives large businesses an unearned advantage over their smaller competitors, cartelizes the economy, and creates a business environment where government contracts, not average customers, are the highest priority. This means that many large companies spend valuable time and effort catering to the whims of politicians over investing in R&D, labor, new markets, or any number of ways to benefit consumers.

This process also affects politics and legislation; federal regulations tend to be created, written, and lobbied for by large corporations that find it easier to ask government for protection as opposed to turning to the discipline of the competitive and free marketplace. Wal-Mart supports government medicine and minimum wage laws, and the pharmaceutical and insurance industries helped pass Obamacare, which included a mandate to purchase their services. Our system of institutionalized corporatism creates legislation that claims to serve the “public interest”, but in fact does the opposite by making smaller and new companies jump through thousands of hoops. When regulations are written by the same industries they are supposed to be protect us from, it is the average American and thousands of small business that lose.

Although it is tempting to believe that electing noble representatives to counter corporate interests will solve this problem, it is simply the nature of big business and big government to collude for mutual benefit. The real problem is political power, which is exemplified by a large federal government. Without the government there to subsidize them, large companies would be forced to actually provide services people value in the competitive market.

The Cato Institute’s many studies on the energy sector help provide a template, they argue that the federal government should neither subsidize nor heavily regulate the energy industry. This means ending ethanol subsidies, restrictions on oil drilling, as well as the oil industry’s largest customer — the U.S. government — and let consumers in the free market decide which source of energy is best. Companies would only do well by providing the best possible service at the lowest possible price. A simple application of a real free market in the energy industry would make government-business mischief like Solyndra far less likely.

And why not apply this principle to other industries as well?

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