Will America Become Detroit, Part 5: Debt Will End Corporate Welfare as We Know It

"The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."
- "The Wealth of Nations" by Adam Smith

"Government is the great fiction through which everybody endeavors to live at the expense of everybody else."
- Frederic Bastiat

The coining of a new word, or the re-introduction of a long dormant word, can often advance our understanding of important issues. A prime example is the word "corporatism" that pervades much of current political discourse to derisively describe economic policies designed around the needs of the present leading corporations. A prime example of corporatism is the bank bailouts of 2008, a bi-partisan policy that eventually were condemned by both the Tea Party and the Occupy Wall Street movements.

Real Capitalism Versus Crony Capitalism

Before this word gained popularity, many ascribed the attributes of corporatism to free market economics. This is rather ironic: the eighteenth century term for the corporatist ideology is mercantilism. Adam Smith, the father of modern economics, strongly refutes the tenants of mercantilism in his opus "An Inquiry into the Nature and Causes of the Wealth of Nations". In a true free market, the government does not show favoritism to the elite corporations. It is the consumer, not the state, that picks winners and losers in a free market economy. Corporatism is not only a highly unfair public policy, it is also poor economic policy. A company favored by corporatism is shielded from competitive pressures, and hence does not make the improvements that the unprotected companies would. Competition has given us the iPhone and Android cell phone technology. Corporatism has given Bangladesh a typewriter industry that survived until this decade.

Corporate Welfare: Supported by Many, Liked by No One

The most outrageous form of corporatism is corporate welfare, where the government actually subsidizes particular businesses. This practice is denounced across the political spectrum, which raises the question as to why it is so prevalent. The problem is that welfare is in the eye of the beholder. Voters often fail to see that aid to the industries that they work in as welfare, and will cast their votes to save that aid.

A prime example of this is our agriculture subsidies, a program that protects farmers' income with price supports that keep domestic food prices artificially high. Our agricultural policy keeps U.S. sugar prices at twice the world level. As a result, candies such as Life-Savers are no longer made in this country. The high sugar prices have also forced American soft drink manufacturers to use high fructose corn syrup in place of sugar. The politically connected farm lobby have also pushed ethanol usage, a real boon for corn farmers but an expensive burden both at the pump and at the grocery store. Ethanol is not even good for the environment; producing ethanol uses more fossil fuel than it replaces, which is why Al Gore no longer endorses it. The only advantage to the ethanol program is that it makes farming more profitable.

Why, in a democracy, do these programs that benefit a few at the expense of the many stay alive for so long? The problem is that we do not directly vote on issues like this; instead, we vote for representatives, who will be voting on many issues. When choosing a representative, voters tend to focus on the few issues that are most important to them. Although most voters believe (correctly) that they would benefit from eliminating corporate welfare, very few voters have that as their top issue. The top issue for most voters is aid for their own industry, i.e. what is clearly corporate welfare to anyone outside that industry. This is why corporate welfare constantly wins elections, in spite of its unpopularity.

Putting Corporate Welfare on the Table

In the battle over corporate welfare, the debt crisis could be a game changer. The federal spend approximately $100 billion per year on corporate welfare, which is more than what it spent on welfare for individuals. When the nation's debt is called, these expenditures has to be on the table. We simply cannot afford to maintain all of these corporate welfare programs. At that point, how can one make a politically viable pitch for saving any of these programs?

In short, the debt crisis will force a type of welfare reform for corporations, similar to the Personal Responsibility and Work Opportunity Act of 1996. Proponents for the 1996 welfare reform act argued that recipients are better served by being transitioned to some form of self reliance when possible. Soon, it will be widely recognized that this same principle applies to corporations: they should not be dependent on the government.