Image by William Banzai
In previous installments, we’ve noted that we could more than offset the need for the “sequestration” budget cuts by doing any one or combination of the following:
- Stopping the counter-productive quantitative easing by the Fed
Liberals and conservatives agree that we should stop subsidizing the fatcats. For example, the conservative Cato Institute points out that corporate welfare amounts to almost $100 billion per year. Cato notes:
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.
While corporate welfare may be popular with policymakers who want to aid home-state businesses, it undermines the broader economy and transfers wealth from average taxpaying households to favored firms. Corporate welfare also creates strong ties between politicians and business leaders, and these ties are often the source of corruption scandals in Washington. Americans are sick and tired of “crony capitalism,” and the way to solve the problem is to eliminate business subsidy programs.
Cato also notes:
The federal government continues to subsidize some of the biggest companies in America. Boeing, Xerox, IBM, Motorola, Dow Chemical, General Electric, and others have received millions in taxpayer-funded benefits …. In addition, the federal crop subsidy programs continue to fund the wealthiest farmers.
(Indeed, the Federal Reserve threw money at hedge funds, McDonald’s, Harley-Davidson, “several billionaires and tens of multi-millionaires”, including Christy Mack, the wife of Morgan Stanley’s John Mack, billionaire businessman H. Wayne Huizenga, and Michael Dell, co-founder of reports that corporate welfare dwarfs individual welfare:
Welfare Spending Nearly Half What U.S. Forked Out In Corporate Subsidies In 2006: Study
Welfare queens may actually look more like giant corporations.
Charles Koch, the CEO of Koch Industries, argued in a Wall Street Journal op-ed earlier this month that crony capitalism is a “destructive force” for business and government. [Both conservatives and liberals hate crony capitalism.]
Conservative Senator Tom Coburn has documented that many wealthy and famous people receive huge tax and other subsidies.
The liberal New Yorker magazine notes:
In recent decades, what you could call the corporate welfare state has become bigger. Energy companies lease almost forty million acres of onshore land in the U.S. and more than forty million offshore, and keep the lion’s share of the profits from the oil and natural gas that they pump out.
In 1996, for instance, the government temporarily lowered royalties on oil pumped in the Gulf of Mexico as a way of encouraging more drilling at a time of low oil prices. But this royalty relief wasn’t rescinded when oil prices started to rise, which gave the oil companies a windfall of billions of dollars. Something similar happened in the telecom industry in the late nineties, when the government, in order to encourage the transition to high-def TV, simply gave local broadcasters swathes of the digital spectrum worth tens of billions of dollars. In the mining industry, meanwhile, thanks to a law that was passed in 1872 and never rewritten, companies can lease federal land for a mere five dollars an acre, and then keep all the gold, silver, or uranium they find; we, the people, get no royalty payments at all. Metal prices have soared in the last decade, but the only beneficiaries have been the mine owners.
U.S. sugar companies benefit from the sweetest boondoggle in business: an import quota keeps American sugar prices roughly twice as high as they otherwise would be, handing the industry guaranteed profits.
The tax code, too, is a useful tool for helping businesses. Domestic manufacturers collectively get a tax break of around twenty billion dollars a year. State and local governments give away seventy billion dollars annually in tax breaks and subsidies in order to lure (or keep) companies. The strategies make sense for local communities keen to generate new jobs, but, from a national perspective, since they usually just reward companies moving from one state to another, they’re simply giveaways.
A New York Times investigation found that the number is even larger:
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards.
A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States.
For many communities, the payouts add up to a substantial chunk of their overall spending, the analysis found. Oklahoma and West Virginia give up amounts equal to about one-third of their budgets, and Maine allocates nearly a fifth.
Nationwide, billions of dollars in incentives are being awarded as state governments face steep deficits. Last year alone, states cut public services and raised taxes by a collective $156 billion ….
But this isn’t just a state issue. As the Times notes, “20 percent of state and local budgets come from federal spending.”
The New Yorker continues:
More subtly, government boosts business profits via regulation. The most obvious example, perhaps, is the banking industry. The F.D.I.C. encourages people to deposit money in banks, and the biggest banks also benefit from the perception that the government will not allow them to fail, which enables them to borrow money at a low cost. Another leading beneficiary of regulation is the ethanol industry, a sacred cow of American politics. The government requires refiners to blend billions of gallons of ethanol into gasoline annually, and hands out an ethanol tax credit. As a result, forty per cent of corn acreage in the U.S. now goes to make ethanol. This jacks up food prices, since less corn is grown for feed and table, and the environmental benefit is dubious. But farmers and refiners benefit enormously, so the mandate stays in place. [Treehugger notes that – as of 2007 – 76% of all federal renewable energy support went to ethanol.] Vested interests of this kind also explain why so many states have onerous licensing regulations; Florida says that you need six years of training and apprenticeship to become an interior designer. Such regulations, which have grown precipitously in recent decades, are catnip to incumbent businesses worried about competition.
Perhaps the biggest boon that the government offers business is the benefit of copyright and patent protection. As the [liberal] economist Dean Baker shows in his book “The End of Loser Liberalism,” patent protection is worth hundreds of billions of dollars a year to the drug industry alone. And while most of us would find it hard to imagine doing without copyrights and patents, that doesn’t justify the huge expansion of intellectual-property rights we’ve seen of late: the length of copyright has been expanded eleven times since 1962, and the range of things that can be patented has increased hugely, even in areas where, as [conservative, free market advocate] Judge Richard Posner recently argued, there’s little or no economic benefit to society.
Forbes’ Doug Bandow – a conservative from the Cato institute – notes:
Most politicians want to cut the federal budget in theory. Few want to cut it in practice. So it is with corporate welfare, which is enthusiastically supported by Democrats and Republicans alike.
Among the most outrageous expenditures is corporate welfare. Desperate businesses now overrun Washington, begging for alms. Believing that profits should be theirs while losses should be everyone else’s, corporations have convinced policymakers to underwrite virtually every industry: agriculture, education, energy, housing, manufacturing, medicine, transportation, and much more.
Cutting business subsidies would be a good start to balancing the budget. Moreover, going after corporate welfare is essential to create a budget package that the public will see as fair. Corporate welfare reflects politics at its worst.
The largest single source of business subsidies is the Department of Agriculture, with $25.1 billion. For the most part crop payments go to large farmers, who are big businessmen.
Bondow notes that – notwithstanding mainstream Republican party rhetoric – narrowly-drafted tax loopholes are a form of subsidy:
Spending is the most obvious but not only form of corporate welfare. Tax preferences, often called “tax expenditures,” are the functional equivalent of direct outlays. Failing to tax is not the same as spending, since all income does not belong to the government. However, when the government provides a narrow exemption from general tax obligations it essentially is writing a check. While appropriations have some level of transparency, tax preferences often are obscurely drafted and dropped into larger bills, hidden from public view. Taxpayers then are unaware that they are being looted.
He also notes the hypocrisy of Republican politicians who talk about the free market, but enthusiastically dole out corporate pork:
The greater outrage is support for corporate welfare from the Right. Political conservatives wax poetic about the virtues of the free market, but conservative office-holders often are pro-business rather than pro-market.
Liberal writer Matt Stoller notes:
Here are eight corporate subsidies in the fiscal cliff bill that you haven’t heard of.
1) Help out NASCAR – Sec 312 extends the “seven year recovery period for motorsports entertainment complex property”, which is to say it allows anyone who builds a racetrack and associated facilities to get tax breaks on it. This one was projected to cost $43 million over two years.
2) A hundred million or so for Railroads – Sec. 306 provides tax credits to certain railroads for maintaining their tracks. It’s unclear why private businesses should be compensated for their costs of doing business. This is worth roughly $165 million a year.
3) Disney’s Gotta Eat – Sec. 317 is “Extension of special expensing rules for certain film and television productions”. It’s a relatively straightforward subsidy to Hollywood studios, and according to the Joint Tax Committee, was projected to cost $150m for 2010 and 2011.
4) Help a brother mining company out – Sec. 307 and Sec. 316 offer tax incentives for miners to buy safety equipment and train their employees on mine safety. Taxpayers shouldn’t have to bribe mining companies to not kill their workers.
5) Subsidies for Goldman Sachs Headquarters – Sec. 328 extends “tax exempt financing for York Liberty Zone,” which was a program to provide post-9/11 recovery funds. Rather than going to small businesses affected, however, this was, according to Bloomberg, “little more than a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp.” Michael Bloomberg himself actually thought the program was excessive, so that’s saying something. According to David Cay Johnston’s The Fine Print, Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds.
6) $9B Off-shore financing loophole for banks – Sec. 322 is an “Extension of the Active Financing Exception to Subpart F.” Very few tax loopholes have a trade association, but this one does. This strangely worded provision basically allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it. According to this Washington Post piece, supporters of the bill include GE, Caterpillar, and JP Morgan. Steve Elmendorf, super-lobbyist, has been paid $80,000 in 2012 alone to lobby on the “Active Financing Working Group.”
7) Tax credits for foreign subsidiaries – Sec. 323 is an extension of the “Look-through treatment of payments between related CFCs under foreign personal holding company income rules.” This gibberish sounding provision cost $1.5 billion from 2010 and 2011, and the US Chamber loves it. It’s a provision that allows US multinationals to not pay taxes on income earned by companies they own abroad.
8 ) Bonus Depreciation, R&D Tax Credit – These are well-known corporate boondoggles. The research tax credit was projected to cost $8B for 2010 and 2011, and the depreciation provisions were projected to cost about $110B for those two years, with some of that made up in later years.
Trillions In Subsidies to the Giant Banks Are Continuing to This Day
Preface: Bloomberg’s recent estimate that the big banks are subsidized to the tune of $83 billion dollars per year created tremendous controversy. But – as shown below – the real number is many times larger.
Chris Whalen is one of America’s top banking analysts.
Well-known economist Nouriel Roubini notes:
Chris Whalen is one of the leading independent analysts of the US banking and financial system.
Whalen notes today that the big American banks get a subsidy in excess of $780 billion dollars per year.
Specifically, Whalen estimates the following types of subsidies to the giant banks:
- $360 billion in Federal Reserve subsidies, by creating an artificial “spread” in interest rates (Bloomberg, Business Insider, Huffington Post, and many other publications have documented that the government is subsidizing big banks with artificial and guaranteed “spreads”, where the banks borrow cheaper than any consumer can, and then lend the money back to the government at much higher interest rates.)
- $120 billion in federal deposit insurance (through the FDIC, backed by the Treasury)
- At least $100 billion in government-guaranteed loans, especially mortgages
- At least $100 billion in monopolistic advantages in the secondary market for home mortgages. Specifically, the government subsidies the big banks to steal away fees earned from smaller banks, gain on sale into the TBA market and servicing. Whalen quotes a veteran banker explaining:
The smaller players lived on the bleeding edge of the mortgage market, but they were also far more efficient lenders than the large banks. Now, care of the Fed, we have a highly inefficient oligopoly in the US mortgage market that is built around the largest banks.
- More than $100 billion in fees in the over-the-counter (OTC) derivative market. Whalen explains
The lack of capital required in these transactions and other special dispensations from the Fed provide the zombie banks with unlimited leverage and almost no public scrutiny. The fact that OTC contracts are exempt from the automatic stay in bankruptcy is a huge subsidy. The bilateral market structure is another.
That totals $780 billion per year.
But Whalen notes that there are many other subsidies as well:
The above points are only a partial list of the subsidies and other flows that allow the members of the banking industry to pretend to be profitable, risk-taking organizations in a free market economy.
The bailouts of the big banks amount to trillions of dollars, are never-ending … and continue to this day. (Indeed, the government is arguably paying trillions of dollars more in unnecessary interest paymentsjust to have the banks “create” money, instead of creating it itself … as the Founding Fathers may have envisioned.)
Whalen notes that the big banks are not really profitable:
[These are] structural subsidies blessed by Congress and the Fed that make large banks look more profitable than they truly are. In fact, the TBTF banks are not really profitable at all.
The reality, sad to say, is that banks in 21st Century America are government sponsored enterprises ….
Indeed, they are government sponsored enterprises where all of the profits are privatized, and all of the losses socialized.
And the big banks are not helping – but are rather destroying – the economy. Indeed, failing to break up the big banks – and the malignant, symbiotic relationship between D.C. politicians and the banking giants – is destroying our country.
We’ve previously documented that even top nuclear executives admit that nuclear energy is expensive, and only survives due to massive government subsidies.
Time noted in 2008:
Lovins [a veteran energy expert and chairman of the Rocky Mountain Institute] notes that the U.S. nuclear industry has received $100 billion in government subsidiesover the past half-century, and that federal subsidies now worth up to $13 billion a plant — roughly how much it now costs to build one — still haven’t encouraged private industry to back the atomic revival. At the same time, the price of building a plant — all that concrete and steel — has risen dramatically in recent years, while the nuclear workforce has aged and shrunk. Nuclear supporters like Moore who argue that atomic plants are much cheaper than renewables tend to forget the sky-high capital costs, not to mention the huge liability risk of an accident ….
The conservative Cato Institute reported in 2003:
With federal government spending through the roof and projected deficits setting new records every day, it is perhaps surprising that the Bush administration and Congress want to use billions of taxpayer dollars to single-handedly resurrect the moribund nuclear industry. Old habits, however, die hard. The federal government has always maintained a unique public-private partnership with the nuclear industry, wherein the costs of nuclear power are shared by the public but the profits are enjoyed privately. [crony capitalism, anyone?]
A recent report by Scully Capital Services, an investment banking and financial services firm, commissioned by the Department of Energy (DOE), highlighted three federal subsidies and regulations — termed “show stoppers” — without which the industry would grind to a halt. These “show stoppers” include the Price Anderson Act, which limits the liability of the nuclear industry in case of a serious nuclear accident — leaving taxpayers on the hook for potentially hundreds of billions in compensation costs; federal disposal of nuclear waste in a permanent repository, which will save the industry billions at taxpayer expense; and licensing regulations, wherein the report recommends that the Nuclear Regulatory Commission further grease the skids of its quasi-judicial licensing process to preclude successful interventions from opponents. But even these long-standing subsidies are not enough to convince investors, who for decades have treated nuclear power as the pariah of the energy industry.
The most egregious proposal in the energy bill has the federal government providing loan guarantees covering 50 percent of the cost of building 8,400 Megawatts of new nuclear power, the equivalent of six or seven new power plants. The Congressional Research Service estimated that these loan guarantees alone would cost taxpayers $14 to $16 billion. The Congressional Budget Office believes “the risk of default on such a loan guarantee to be very high — well above 50 percent. The key factor accounting for the risk is that we expect that the plant would be uneconomic to operate because of its high construction costs, relative to other electricity generation sources.” But that’s not all. The bill also authorizes the federal government to enter into power purchase agreements wherein the federal government would buy back power from the newly built plants — potentially at above market rates.
Keeping this provision in the energy bill will result in a double taxation: once to build the plants and then to buy back the power from the newly built plants. This would be like paying for your kids’ education and then agreeing to pay them a salary once they graduate.
The Union of Concerned Scientists pointed out in 2010:
The nuclear power industry is seeking tens of billions in new subsidies and other incentives in federal climate and energy legislation that would shift massive construction, financing, operating and regulatory costs and risks from the industry and its financial backers to U.S. taxpayers. Congress should reject these overly generous subsidies to this mature industry whose history of skyrocketing costs and construction overruns already has resulted in two costly bailouts by taxpayers and captive ratepayers—once in the 1970s and 1980s when utilities cancelled or abandoned more than 100 plants, and again in the 1990s when plant owners offloaded their “stranded costs.” [The “stranded costs” totaled more than the entire Saving and Loan scandal.]
Too late …
Beyond Nuclear reports:
In 2005, the Energy Policy Act provided another $13 billion of subsidies, tax incentives and other support for the nuclear power industry. It also created the energy loan guarantee program.
In December 2007, Congress and George W. Bush approved $20.5 billion in nuclear loan guarantees under this program ($18.5 billion for new atomic reactors, $2 billion for new uranium enrichment facilities).
During the week of May 25, 2009, the US House approved a “Clean Energy Bank” that would include nuclear power loans, loan guarantees, and other subsidies.
Physicians for Social Responsibility – which won the Nobel Peace Price – noted that – as of 2010 – nuclear companies received tens of billions of dollars in new subsidies, including:
Research and Development
- Generation IV program to develop new reactor designs
- Research and development of radioactive waste reprocessing and transmutation technologies
- Investment in human resources and infrastructure in the nuclear sciences and engineering fields through fellowships and visiting scientist programs; student training programs; collaborative research with industry, national laboratories, and universities; upgrading and sharing of research reactors; and technical assistance
- Nuclear Power 2010, a taxpayer-industry cost-share program to fund Nuclear Regulatory Commission licensing of new reactors, as well as the certification of Generation 3.5 reactor designs
- One-step construction and operation license application process that limits public participation
Construction subsidies ~ $3.25 billion + $18.5 billion in loan guarantees
- $18.5 billion in loan guarantees for new reactors. According to the Congressional Budget Office, the default rate is “very high – well above 50 percent.”
- Authorization of $2 billion in “risk insurance” to pay the industry for any delays in construction and operation licensing for 6 new reactors, including delays due to the Nuclear Regulatory Commission or litigation. The payments would include interest on loans and the difference between the market price and the contractual price of power.
- Authorization of more than $1.25 billion for a nuclear reactor in Idaho to generate hydrogen fuel
Operating subsidies ~ $5.7 billion + Limited Liability
- Reauthorization of the Price-Anderson Act, extending the industry’s liability cap to cover new nuclear power plants built in the next 20 years
- Incentives for “modular” reactor designs (such as the pebble bed reactor, which has never been built anywhere in the world) by allowing a combination of smaller reactors to be considered one unit, thus lowering the amount that the nuclear operator is responsible to pay under Price-Anderson
- Production tax credits of 1.8-cent for each kilowatt-hour up to 6,000 megawatts of nuclear-generated electricity from new reactors during the first 8 years of operation, costing $5.7 billion in revenue losses to the U.S. Treasury through 2025
Radioactive waste subsidies ~ $22 billion thus far + guaranteed waste removal
- DOE-utility contracts guaranteeing that the nuclear waste will be removed from the site within 10 year of shutdown or the US taxpayer pays for spend fuel storage costs
- One mil (one-tenth of one cent) per kilowatt-hour paid by ratepayers receiving electricity from nuclear reactors to pay for a geologic repository for the spent fuel; the Nuclear Waste Fund currently has $22 billion
Shut-down subsidies ~ $1.3 billion
- Changes the rules for nuclear decommissioning funds that are to be used to clean up closed nuclear plant sites by repealing the cost of service requirement for contributions to a fund and allowing the transfer of pre-1984 decommissioning costs to a qualified fund, costing taxpayers $1.3 billion
The government has paid out substantial sums in new subsidies – including loan guarantees – for expensive new reactors at Vogtle. The reactors are already way over budget … and are plagued bySolyndra-like issues of cronyism, secretive non-disclosure, and mismanagement.
Moreover, the American government has been wholly subsidizing the nuclear industry for decades through its concerted campaign to hide the dangers of radiation … and to cover up the number and scope of accidents. That’s a subsidy worth … as much as all nuclear profits ever. In other words, trillions.
And politicians – including Obama – are also subsidizing the American nuclear industry by lobbying foreign countries like India to impose American-style government insurance for their reactors.
The bottom line is that if we want to reduce the debt, we should stop all nuclear subsidies.
Important Note: Claims that nuclear is good for the environment and reduces climate change areentirely false claims pushed by the nuclear lobby.