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M.D. Harmon: Are government subsidies to business a net benefit to the economy—or a net loss?

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Are government subsidies to business a net benefit to the economy—or a net loss?

A new study from a libertarian think tank sheds some light on that question. But, before we get to that, recall that one piece of evidence on the loss side I mentioned last week was that administration officials had said in sworn testimony that the Treasury Department had no role in denying pensions to 20,000 non-union members of Delphi Inc., a major parts supplier to General Motors, in the federal bailout of GM in 2009.

Emails discovered two weeks ago contradicted that testimony, saying that the two top aides to Treasury Secretary Timothy Geithner offering that testimony were directly involved in a plan to benefit unionized employees at the expense of other workers.

So, where’s the outrage from free Americans that their government is not even bothering to hide its use of taxpayer funds to reward its supporters and punish those who aren’t members of favored groups?

The sad tales of federal “green investments”, like Solyndra and other “clean-energy” fiascos, is well known and total in the billions in wasted taxpayer money. As just one example, the Treasury Department just upped its estimate of the total cost to taxpayers of the 2009 bailout of General Motors and Chrysler to $25.1 billion.

And how is it turning out for General Motors, whose CEO, Dan Ackerson, while billed as a Republican, has said he supports higher taxes? The company’s second-quarter net profits dropped 41 percent due to net losses in Europe and South America and lower profits in the United States.

As the Associated Press reported this week, “The company’s U.S. sales are only up 3 percent this year while the market is up 14 percent. Advertising hasn’t taken hold. Sales of the Chevy Cruze, a promising new compact car, were huge last year, but have faltered as Honda and Toyota recovered after an earthquake hobbled their factories. Cruzes are starting to pile up on dealer lots as car buyers opt for Civics and Corollas. Sales were down almost 40 percent last month.”

If GM had been allowed to declare bankruptcy and restructure itself under the same circumstances as any other mismanaged, floundering firm, there would have been no taxpayer dollars at risk and the consequences would have fallen on those who contributed to the problem instead.

The tactic of rewarding the politically connected, as it turns out, is widespread at the federal level, as practically the next thing I read after the GM story was a report from the Cato Foundation (www.cato.org), the prominent libertarian think tank, saying that direct federal government subsidies to business in the 2012 budget amounted to $100 billion.

It’s not the biggest outlay in the budget, nor is it anything new. Yet it continues to be depressing, because what it says is that the people who are supposed to be representing us all equally continue to spend tons of our money to support their selected favorites.

This has come to be called “corporate welfare” and “crony capitalism” and is often directed to businesses where CEOs return the favor by giving boodles of cash to the politicians voting to loot taxpayers’ wallets for their benefit.

Yes, I know all about how government spending stimulates “job creation” (except when it doesn’t, as the examples cited above show). But those stories don’t tell us about the jobs that would have been created if ordinary Americans had been allowed to keep that $100 billion and spend and invest it as they wished.

The report, authored by Tad DeHaven, a budget analyst for Cato, notes that “Policymakers claim that business subsidies are needed to fix alleged market failures or to help American companies better compete in the global economy. However, corporate welfare often subsidizes failing and mismanaged businesses and induces firms to spend more time on lobbying rather than on making better products. Instead of correcting market failures, federal subsidies misallocate resources and introduce government failures into the marketplace.”

Couldn’t have said it better myself.

As DeHaven points out, nowhere in the Constitution is government empowered to pick economic winners and losers, which it does in a variety of ways. Just giving money to one business in a competitive industry while not funding competitors is clearly unfair, but it is also possible to craft rules and regulations that favor certain firms over others, including using the tax code for subsidies and penalties, hiding the subsidy a bit more but making it none the less real.

“Federal business subsidies are not just bad economic policy; they also violate the bedrock American principle of equality under the law. Subsidies give advantage to selected interests at the expense of other businesses and taxpayers. The federal government’s proper role in the economy should be that of a neutral referee, with intervention limited to facilitating the free exchange of goods and services.”

It’s not as if there were no other way to support industry. Venture capitalists invest as much as $50 billion annually in business, and this figure might well be much higher if it weren’t for the displacement effect of federal funding, DeHaven says.

But government’s thumb on the scale can have even worse effects, he notes. It isn’t just the waste, it’s the opportunity for corruption that makes crony capitalism a bad idea.

“Business subsidies create an unhealthy—and sometimes corrupt—relationship between businesses and the government. The more that the government intervenes in the economy, the more lobbying activity is generated. The more subsidies that it hands out to businesses, the more pressure lawmakers face to hand out new and larger subsidies. As the ranks of lobbyists grow, more economic decisions are made on the basis of politics, more resources are misallocated, and the nation’s standard of living is harmed.”

This dynamic plays out in budget hearings, where industries flood committees with lobbyist testimony and the public interest has almost no defenders. DeHaven cites a Yale study of 14 committee sessions and found the imbalance of spending advocates to opponents was 1,014 to seven—a ratio of 145 to 1.

And he concludes by noting that with federal deficits running more than $1 trillion a year for four years now under President Obama’s “stewardship,” Congress is going to need to find someplace to cut substantial amounts of spending that go well beyond the nickels and dimes that are usually touted as “budget slashing.”

Despite all the lobbying and structural obstacles to reform, he says, “Congress is entirely capable of cutting spending and will have to do so in coming years to avoid an economic calamity. Financial markets will simply not allow the government to run trillion dollar deficits endlessly. When Congress does start cutting, corporate welfare should be high on the list.”

If it is, and if money starts being directed to businesses for reasons compatible with free-market economics and not crony capitalism, we will take the first steps toward returning to real economic growth.

M.D. Harmon, a retired journalist and military officer, is a free-lance writer and speaker. He can be contacted at:mdharmoncol@yahoo.com.

About M.D. Harmon

M.D. Harmon, a retired journalist and military officer, is a freelance writer and speaker. He can be contacted at: mdharmoncol@yahoo.com

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