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.

Solving the Budget Crisis Through Theft

"If you steal from one author, it's plagiarism. If you steal from two, it's research."
- John Burke

"PlagiarizeLet no one else's work evade your eyes
Remember why the good Lord made your eyes
So don't shade your eyes
But plagiarize, plagiarize, plagiarize
Only be sure always to call it please 'research'"
- From "Lobachevsky" by Tom Lehrer.

The federal budget fight has been unusually acrimonious. On July 14, Obama walked out of the budget talks. On July 22, Boehner walked out of the budget talks. And throughout these talks, the American public has been walking out from both parties, and for good reason: neither party has been serious about tackling the debt crisis. Sure, both sides crow about how they have proposed drastic cuts, but these spending proposals are "cuts" only in a sense that is accepted no where else than Washington. What they mean by cuts is that they propose spending less than projected 2011 spending. Neither the "Cut, Cap, and Trade" proposal nor the president's most recent proposal would reduce 2011 spending to less than the previous year, even after adjusting last year's spending for inflation and population growth. The Republicans have been reluctant to really address the looming entitlement crisis. Congressional Democrats are even worse on this issue, threatening to block any entitlement program changes, while hypocritically complaining that the Republicans are too inflexible about taxes.

We need not worry the August 2 deadline, however. For starters, the default deadline is bogus anyways: the government need not default nor miss sending Social Security checks if the debt ceiling is not raised by August 2. But now that both sides have propped up this phony crisis, they will have to save face by coming up with some compromise before the "deadline". The bigger problem is that the compromise that the president and congress will likely fall far short of what is needed to reassure the rating services such as Standard and Poor's. They want to see creditable deficit reduction if U.S. government bonds are to retain their AAA ratings. If U.S. bonds are downgraded,

1. Bond holders will be hurt; and
2. The costs of U.S. borrowing will balloon.

So we may dodge the August 2 bullet, only to be hit with the S&P bond downgrade.

Dramatic action is required to prevent our bond rating dropping to AA. We need a deficit reduction plan, and fast. One effective approach would be to find a previous successful budget, and steal it. In short, we can solve our money problem by theft - not of money, but ideas.

I propose that the 2011 budget be based on the U.S. budget from 2000, one of the last budgets assembled before the 2 recent spendthrift administrations. This budget covered the basic government functions while spending less than the revenues collected. This budget was put together by a Democratic president working with a Republican congress - if they could do it, why can't we? When you adjust the 2000 budget for inflation and population growth, it comes out to $1,965,999 million. This would allow us to meet the S&P deficit reduction limits without taking the perilous action of raising taxes in a troubled economy. So one simple approach would be to adopt the 2000 budget, adjusted for inflation and population growth. This is the one sequel that we would all welcome.

Critics will immediately point out how the world has changed since 2000. We are now fighting 3 simultaneous wars, we have a slew of new agencies that have cropped up to fight the "War on Terror", a bunch of new Czars, not to mention ambitious new programs such as designing and building a whole new rail system. How could the 2000 budget cover these programs that did not exist 10 years ago? To this argument, I would reply that a large part of the reason we are in this mess is that we adopted expensive new programs without figuring out how to pay for them. We simply cannot afford all of them, so we need to prioritize. Given that we almost certainly cannot do both, should we engage in nation building in 3 middle east countries, or should we rebuild our own nation? Do we really need all these agencies that we were able to get along without for two centuries, and if so, could we pay for them by making cuts elsewhere in the 2000 prototype budget? If we really need the TSA, could we pay for it by eliminating the Import-Export bank or by cutting farm subsidies paid to millionaire farmers?

Real budget reform is possible. In fact, it is inevitable: the only real question is whether we fix the budget ourselves now or let our creditors decide how to fix it in the future. With the 200 budget austerity program, we can avoid default, avoid a credit downgrade, pay down the deficit, revive the economy, and then we can party like it's 1999.