Illustrated Getty Images, iStock. November 20, Business Politics. More From James Pethokoukis. Read All. Democrats' vintage lesson on inflation.
Democrats' agenda is decimated. And that's okay. Will Democrats give up tax hikes to save the world? Time to settle. While the tariffs themselves have a budgetary impact the federal revenue generated from the tariffs , the associated economic costs cannot be observed in the budget.
An example of a regulatory privilege whose costs cannot be discerned by looking at the federal budget is the Renewable Fuels Standard RFS. The RFS is a federal regulation mandating that petroleum refiners incorporate into their products a minimum volume of biofuels that increases over time. This policy benefits politically powerful corn producers by artificially increasing the demand for their product. The costs of the RFS are borne, in the form of higher prices, by consumers, livestock farmers who use corn-based feed for their animals, and oil refineries.
Resulting environmental damage is another cost. None of this shows up as a line-item in the federal budget. In sum, measuring what is more easily seen e. Affixing a price tag creates marketable headlines e. We address that claim in the next section. From a budgetary standpoint, it is true that corporate welfare expenditures are relatively small when compared to, say, entitlement programs e.
Economist Matthew D. Mitchell, our colleague, has been at the forefront of delineating the associated costs and consequences of government-granted privilege to commercial interests. We rely on his research and insights in the following enumeration of these costs and consequences. The list is not exhaustive. Shielded from the discipline of a competitive market, managers and workers at government-privileged businesses may exert less effort and may be less efficient than they would be under competitive circumstances.
Production costs in a privileged business, then, will tend to be greater than those of a nonprivileged business. Privileged businesses are also unlikely to be sufficiently attentive to consumer desires and will tend to produce lower-quality or less desired products. A privilege granted by the government to a business can be financially rewarding, at least initially. Such efforts are of no benefit to consumers and are, thus, a loss to society. Though it is very difficult to pin these sorts of costs down, the estimated annual cost to the US economy runs in the trillions of dollars.
It is widely understood that entrepreneurs drive innovation, which fuels economic growth. But government favoritism inhibits innovation because privileged businesses have less incentive to invest in productivity-enhancing endeavors. As the late economist William Baumol explained, when the government dispenses privileges, otherwise talented people will be less likely to engage in productive entrepreneurship and more likely to engage in unproductive or even counterproductive entrepreneurship that destroys wealth.
For example, society would be better off if the thousands of lobbyists and consultants on K Street in Washington, DC, were instead focused on creating innovative products and services for consumers or engaged in charity-driven pursuits.
The commercial interest receiving the government-granted privilege wins, at least for a time. So do complementary commercial interests e. The associated lobbyists, lawyers, and political consultants win. Today RUS underwrites service in wealthy resort areas and has expanded into broadband internet and even television service. The Federal Communications Commission has several programs to subsidize phone service. The Bureau of Land Management mis manages federal lands, subsidizing use of rangeland by ranchers, for instance.
There are federal subsidies to develop, finance, and promote fisheries. There are incentives for airline companies to serve small markets. Foreign Military Financing is presented as a national defense measure, but in most cases the chief beneficiaries are arms makers. Federal research and development outlays also offer bountiful benefit to business. Alas, Uncle Sam has a hideous record of choosing winners and losers.
Most often he chooses the politically influential, which can mean picking losers. Tesla is a major beneficiary. Some players enjoy multiple benefits. Trade and Development Agency, the U. Maritime Administration, and other agencies. Both tariffs and quotas allow domestic manufacturers to charge more for their products. Unfortunately, the cost of this form of corporate welfare is hidden from the public. Tax preferences are another means of corporate welfare.
Buried in the tax code, they often are difficult to identify. So the next time you hear conservatives railing against welfare handouts for the poor, remind them that we should really be cutting corporate welfare—unnecessary and unwarranted aid for dependent corporations.
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