Do government subsidies work?
By Joe Noser
The Supreme Court’s 5-4 decision in Citizens United v. FEC has had a profound impact on what Congress chooses to subsidize.
The ruling – which held that corporations are afforded First Amendment protections for political speech, that money is a form of speech, and therefore corporations cannot have their expenditures on political campaigns restricted – caused an explosion in spending on political campaigns. From 2011-2021, non-political-party-affiliated outside groups spent $4.5 billion on federal elections, up from the $750 million they spent over the previous two decades combined. Almost $1 billion was spent by dark money groups, who by definition do not disclose their donors.
Corporations and wealthy individuals spend this kind of money to influence local, state, and federal lawmakers. That influence is used, at least in part, to convince lawmakers to subsidize the work in which the influencers are engaged. These subsidies come in many forms. In agriculture and energy – two of America’s most subsidized industries – the federal government leases or sells federal land at below-market rates to reduce costs for farmers and energy companies. It also enacts tariffs to drive the price of foreign energy or food up in order to keep domestic producers competitive.
“It’s obvious government subsidies work great for business. For government? It’s harder to tell.”
The simplest form of subsidy is direct cash payment. This method is usually incorporated to pay for services rendered to the government. But that’s not always the case – for example, when farm commodity prices fall dramatically, the federal government will directly pay farmer-producers to offset that loss. The U.S. Department of Agriculture (USDA) also grants farmers little-to-no-interest loans with zero penalties for default whenever their yields are lower than expected. While these loans are essentially free money, they’re not technically a handout, just as Payroll Protection Program (PPP) loans were only a handout if borrowers didn’t meet the criteria for loan forgiveness.
Why subsidize?
There’re legitimate reasons why legislators subsidize certain businesses. The government only has so many tools to influence the private sector. Its primary tool is subsidization, which is a form of wealth redistribution. If those in government want to promote electric cars, they throw electric car manufacturers and electric car buyers bones in the form of subsidies.
There’s another reason America subsidizes private industry. In the government’s eyes, some industries are too important or too big to fail. The most famous example of this phenomenon is the Troubled Assets Relief Program, or TARP, which saw Congress appropriate $700 billion to bail out banks and the automotive industry during the 2008-09 financial crisis. Of that $700 billion, about $444 billion will actually be used, and after benefits back to the government are taken into account, TARP will cost the government about $31 billion, according to the Congressional Budget Office. TARP was much maligned because it looked like a program that rewarded big bank’s collective greed with a bailout, but justice was never part of TARP’s purpose. TARP did what it was intended to do; it stabilized America’s banking system and automotive industry.
Who gets the money?
Other subsidy programs create significant obligations for American taxpayers, albeit more gradually. In the last decade, America’s farms received an average of $16 billion a year in subsidies. Appropriated via the Farm bill – an omnibus-type bill Congress has updated once every five years or so since it was first passed in 1933 – farming subsidies go to almost 40% of America’s approximately 2 million farms. According to Environmental Working Group (EWG), America doled out $424.4 billion in farming subsidies from 1995-2020.
At about $16 billion a year, agriculture business ranks 25th on the list of most subsidized industries according to non-profit Good Jobs First. Since 2011, “utilities and power generation” tops the list at $47.76 billion, while “aerospace and military contracting” follows at $28.24 billion and “motor vehicles” come in at $27.98 billion. “Electrical/electronic equipment” and “diversified” (a category mostly for financial institutions) rounds out the top five. Subsidy reporting has a problem with transparency, as 38% of total subsidies have no public disclosure at all (these kinds of subsidies are not tracked by Good Jobs First). It’s likely, therefore, that these industries have received more money than reported. It’s also difficult to get subsidy numbers to align across sources because definitions of what makes a subsidy differ.
What industries are giving money to politics?
According to opensecrets.org, a non-profit that tracks spending on political campaigns, the financial sector (which includes insurance companies, securities, and investment firms) tops the list for money donated to political campaigns and parties for the 2022 cycle. It’s followed by the health care industry, the communications/electronics industry, the energy industry, and the construction industry. Three of the top five industries for political contributions receive top-five dollar amounts in subsidies – and defense and the automotive industry aren’t far behind in their campaign contributions.
Does the giving pay off for business?
It’s not easy to accurately calculate the return on investment (ROI) business gets from political contributions, but we’ll take a shot with some very rough math. Back in 1997, before Citizens United and the explosion in corporate giving to political campaigns, the conservative Cato Institute estimated that the federal government spent $75 billion a year on corporate subsidies (“welfare” in Cato parlance). Corporate political giving in 1997 was somewhere around $35 million a year. That’s a return of $2,000 for every dollar invested in political contributions. This helps explain why corporate political giving grew approximately 60 times after Citizen’s United: giving has a great ROI.
What does government get from subsidies?
If political contributions create a positive return in subsidies to business, does government get a positive return when it gives the money out? In the case of TARP, the answer appears to be yes. The collapse of America’s banking system would have had a devastating impact on the domestic and global economy, and the program ultimately prevented that from happening. But what about in the case of farming subsidies? The answer depends on whom you ask.
About 1.3% of the employed population of America works in farming, but agriculture and its related industries (the industries that rely on American agricultural inputs to contribute value) made up 5% of GDP in 2020. Farming on its own contributed just 0.6% to GDP, and it’s the farms themselves that receive agricultural subsidies – not the downstream bars, textile mills, restaurants, etc. that rely on them. $16 billion a year in what essentially equates to free money is a lot for an industry with agriculture’s direct economic contribution, but agriculture has many indirect contributions to American power and the quality of life for its citizens.
TARP may have done what it was designed to do, but it sent a chilling message to many Americans: some industries are so powerful that the federal government will save them when they screw up, even if those screwups are illegal. And in the case of farms, the money they receive allows America to retain its agricultural heritage and provide half of all global food aid. Being a net exporter of food is a critical part of national security. The negative impact of TARP and the positive impacts of farming subsidies are difficult to quantify because they are indirect.
In another post, I’ll explore the psychology behind government subsidies in greater detail – including how the states most propped up by the federal government often don’t reflect that fact with their respective policy choices.