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.

Should Someone Take the Fall for the Central Falls Pension Mess?

"Liberty means responsibility. That is why most men dread it."
- George Bernard Shaw, "Man and Superman" (1903)

"With great power comes great responsibility."
- Stan Lee / Steve Ditko / David Koepp, "Spiderman" (2002)

Many state and local governments are burdened with unfunded pension liabilities. Recently it was revealed that Central Falls, Rhode Island, a small, impoverished city, has a pension obligation of $80 million. This is more than the city could possibly pay, so Central Falls is looking into filing for municipal bankruptcy. The backup plan is to go into receivership.

I wonder if this rash of municipal pension problems is caused in part because there is no one individual who is legally liable when a municipality makes pension agreements that are not fully funded. Private company officials have done the "perp walk" for not funding their pension obligations. But who will go to jail for Central Falls' pension promises that cannot be met? The mayor? City councilors? The city's union contract negotiators? And who, if anybody, should go to jail for the California pension mess?

Please contribute your thoughts: who, if anyone, should be held liable if a municipality does not properly fund its pension obligations? And if we do not hold any one person liable, what is the best way to prevent future pension crises? Feel free to also discuss the mothers of all unfunded liabilities, social security and medicare.

Government Greed

"Be on your guard against all kinds of greed; for one’s life does not consist in the abundance of possessions."
- Luke 12:15"

Money, so they say
Is the root of all evil today
But if you ask for a rise
It's no surprise
That they're giving none away"
- From "Money" by Roger Waters

In many an economic debate, you will find one participant who feels that all our troubles can be boiled down to one word: greed. You've heard this argument before: greed is what drives the profit motive, the basis of free market economies, and that this dependence on one of the seven deadly sins accounts for all our society's ills, including oil spills, stock market crashes, and lousy "Star Wars" sequels. If I had a dime for every time someone given this one word diagnosis, I'd be, well, a successful capitalist.

This one word critique of free market economics is quite emotionally satisfying, but it does not hold up to scrutiny for a number of reasons. The world economic environment is extremely complex, and one word diagnoses generally do not apply to systems more complicated than a food processor. The greed critique of the private sector also seems to make the assumption that, in the absence of profits, people behave in a less greedy fashion. But a number of recent news stories confirm that the public sector succumbs to greed at least as often as the private sector.

For example, many cities and towns use special cameras to ticket drivers who run red lights. These are there for our safety, or so we are told. But multiple studies have recently shown that red light cameras actually increases accidents. When drivers spot the cameras, they frequently slam on the brakes, and this causes more accidents than are prevented by the cameras. In fact, a Dutch city has discovered that they can decrease accidents by a re-design of their roads that does not use traffic lights at all. So how many cities have dropped the red light cameras in light of these studies? Whenever this question is posed to city officials, it is amazing how quickly the topic is changed from safety to how could we possibly replace the lost ticket revenue. So are these cameras used because of safety, or because of greed?

Consider the recent pay scandal in Bell, California, a small, lower middle working class suburb of Los Angeles. The median family income in Bell is only $30,504, but the city residents pay some of the highest property tax rates in the country. When city officials insisted that these taxes needed to be raised even further to keep the city solvent, investigative reporters looked from the L. A. Times looked into city finances. They found that Bell was dramatically overpaying its officials. The Bell police chief earned 33% more than the police chief of Los Angeles. The city manager's base salary was $800,000, almost twice as much as what we pay the president of the United States, and bonuses and other benefits raised his total compensation for last year to $1.5 million dollars. To the poor, over-taxed families of Bell, this looks like greed.

Another case to ponder: in 1992, Massachusetts passed a ballot initiative to increase tobacco taxes, and to use the additional revenue for tobacco prevention programs. Starting in 1993, the state had created an effective anti-smoking ad campaign. The most popular of these ads featured the saga of Pam Laffin, a young woman who was dying of emphysema. The ads traced her various diagnoses, her vain attempt to get a lung transplant, and finally her death that left her two young daughters without a mother. The ads had quite an impact: the number of smokers in the state dropped off faster than the national average. And yet, this successful ad campaign dropped less than a decade later.

Now why did the state drop a program that was actually helping smokers quit? Too expensive, of course. Forget the promise to voters that the tobacco tax money would go to tobacco prevention, the legislators decided that they had better uses for the money. Don't worry that the tobacco tax is highly regressive, for smokers are a politically unpopular group. When tobacco companies benefit from the unhealthful addiction of smokers, we call that greed. So when the state over-taxes these same smokers, why isn't that greed?

These and other examples of government avarice show that the public sector effort to eliminate greed is about as successful as the Puritan effort to eliminate lust. It's not clear if , greed is an integral part of human nature. It is not an issue of whether "Greed is good", the main point is that "Greed is". One virtue of free markets is that they harness greed to some positive ends. For all the moral posturing, It was greed that propelled the tremendous improvements in our PC's (Moore's Law), in our cars, and in our home entertainment (from LP's to CD's to MP3's, from VHS to DVD to Blue Ray).

So the next time you hear someone sanctimoniously boiling down a complex issue to one word ("Greed"), feel free to accuse him of one of the other deadly sins: sloth.