PLEASE TAKE TIME TO GLANCE THROUGH WHAT I KNOW IS BORING PUBLIC POLICY---IT REALLY HELPS TELL WHEN CLINTON/OBAMA NEO-LIBERALS ARE LYING TO VOTERS.
The American people need to remember the value of history in knowing when politicians are lying, cheating, in order to steal. This is why today's Race to the Top education privatization and reform is about killing humanities and liberal arts----it tells history.
When we listen to Greenspan---the free market cheerleader for Reagan/Clinton/Bush we heard him stating what people knowing history knew was untrue---markets and especially Wall Street do not regulate themselves.
THAT WAS THE LESSON FROM THE MASSIVE WALL STREET FRAUDS THAT BROUGHT THE GREAT DEPRESSION.
Greenspan simply took the playbook from this last massive looting of American society and replayed it word for word....as did Reagan and Clinton. They all knew in 1980s where all this deregulation would end----with the movement of all American wealth to the same 1%.
It was planned for goodness sake.
The rich always sell the idea that more jobs will be created---more small businesses successful is only all those pesky laws keeping corporations in check were removed. Republican voters fall for it every time---they have this small government mentality drilled into them----but Democratic voters should have known better---and it took lots of capture of national labor and justice organizations to keep the Democratic base in the dark.
So, Greenspan is the biggest criminal in US history---as are of course the Clinton neo-liberals and Bush neo-cons who aided and abetted---this is why global pols are desperate to keep control---and social Democrats to regain control.
'In his testimony, Greenspan said that, in light of a crisis he characterized as "a once-in-a-century financial tsunami," he was wrong to think financial markets could police themselves. He incorrectly had expected the discipline of the market would prevent financial institutions from taking life-threatening risks'.
'Once in a century tsumani' means-----the rich can only pull off this massive fraud of all of American wealth once a century---they have to give time for Americans to rebuild public wealth.
Greenspan shocked at failure of free markets
Former Fed chief says his faith in the system was misplacedSam Zuckerman, Chronicle Staff Writer
Published 4:00 am, Friday, October 24, 2008
Photo: Lawrence Jackson, AP
Former Federal Reserve Chairman Alan Greenspan arrives on Capitol Hill in Washington, Thursday,Oct. 23, 2008, to testify before the House Oversight and Government Reform Committee.(AP Photo/Lawrence Jackson)It was a remarkable moment: Former Federal Reserve Chairman Alan Greenspan, a lifelong champion of free markets, publicly questioning the philosophy that guided him throughout his years as the world's most powerful economic policymaker.
The dramatic act of contrition came Thurssay at a hearing of the House Committee on Oversight and Government Reform looking into the responsibilities of federal regulators for the near breakdown of the financial system. In his testimony, Greenspan said that, in light of a crisis he characterized as "a once-in-a-century financial tsunami," he was wrong to think financial markets could police themselves. He incorrectly had expected the discipline of the market would prevent financial institutions from taking life-threatening risks.
Those mistakes raised questions about his most fundamental beliefs, he acknowledged.
Asked by committee Chairman Henry Waxman, D-Los Angeles, whether his free-market convictions pushed him to make wrong decisions, especially his failure to rein in unsafe mortgage lending practices, Greenspan replied that indeed he had found a flaw in his ideology, one that left him very distressed. "In other words, you found that your view of the world, your ideology was not right?" Waxman asked.
"Absolutely, precisely," replied Greenspan, who stepped down as Fed chief in 2006 after more than 18 years as chairman. "That's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well."
Greenspan offered his re-examination as decisionmakers and the public are broadly questioning the deregulatory trend that dominated federal policymaking circles for three decades. Many now have concluded that lax oversight permitted bad housing loans to overwhelm the financial system. Even Republican presidential candidate John McCain vows much stricter regulation of Wall Street.
Fed watchers said they were stunned by Greenspan's mea culpa. For his whole adult life, the former Fed chairman has been a devotee of the philosophy of Ayn Rand, who celebrated free-market capitalism as the world's most moral economic order and advocated a strict laissez-faire approach to government regulation of the marketplace.
"Alan Greenspan has been one of the stalwarts in arguing for free markets and he was backpedaling today," said Brian Wesbury, chief economist with the Illinois investment firm First Trust Portfolios.
Others were struck by the fall from grace of the 82-year-old economist, once lionized as the greatest central banker of his time.
"When I watched him this morning, I actually found myself feeling a little bit sorry for him," said Betty Blecha, an economist at San Francisco State University. "When ideologues find their ideology crashing around them, it's something to see."
Blecha said Greenspan's reassessment impressed her.
"He was intellectually honest about admitting the failings of an ideology he's believed in all his adult life. I think personally this has been a very difficult period for him."
Greenspan said his mistake was thinking that financial institutions would act in their own self-interest to avoid the kind of risky lending that could bankrupt them.
"Free markets did break down," he testified. "That, as I said, shocked me. I still do not fully understand what happened."
In his prepared remarks, Greenspan said the surge in bad home loans was fueled by demand of investors around the world for mortgage securities. Rating agencies failed to appreciate the risks in the inflated housing market and investors convinced themselves that the mortgage securities were safe. To accommodate investor demand, mortgage lenders stepped up their volume, with little regard for the safety of the loans they were handing out.
As a result, "the whole intellectual edifice" of risk management collapsed, Greenspan said.
The trauma experienced by financial markets makes a significant rise in unemployment unavoidable, Greenspan forecast. He sees a "marked retrenchment of consumer spending" because of tight credit, job insecurity and losses in the value of homes and investments. Recovery won't occur until housing prices stabilize, which is at a minimum still many months in the future, he noted.
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To add insult to criminality-----WE THE PEOPLE are now listening to the same Clinton neo-liberal and Bush neo-cons 'free-market' globalists tell us that corporate subsidy-----not public subsidy is not only OK----but needs to be done in massive fashion these several years all under the guise of the same free market speak on deregulation------
CORPORATIONS CREATE JOBS----NOT GOVERNMENT!!!!
Well, the first law of free market is NO ONE CORPORATION IS GIVEN SUBSIDY OVER ANOTHER. To be truly free-market there would be no corporate subsidy or any Federal/state/local pre-approved list for government contracting.
THE ENTIRE GOVERNMENT BIDDING SYSTEM WHEN FULL OF FRAUD AND CORRUPTION HAS NOTHING TO DO WITH FREE-MARKET.
Since the Reagan/Clinton/Bush/Greenspan crowd all knew there was no such thing as free-market----they simply wanted to move all wealth to the top----they say now that we are exposed----ANYTHING GOES.
All Baltimore City would have to do to end all of this mess is to go local with the economy----take the power of corporations from local and state economies----reinstate Rule of Law and oversight and accountability and VOILA----small business and regional business WILL REALLY grow and be stable.
Below you see where total disregard to anything free-market comes with Congressional Clinton neo-liberals deregulating more financial policy making the working poor fair game for any corporation that wants to take them----from allowing fraud of Federal, state, and local funds---to open fleecing by pay-day lenders and predatory landlords. So, how is this free-market? It is good business to drive even those businesses wanting to act responsibly to lie-cheat-steal to stay in business?
March 30, 2013
Big Business believes in taxpayer subsidies, not "free markets"
David Cay Johnston, former NY Times reporter and now Syracuse professor, writes about the thing that most journalists don't bother to (or are told not to) write about--the way that Big Business successfully lobbies legislators and regulatory agencies to write the rules to favor Big Business, at the expense of ordinary Americans, all under the false claim that they are pushing de-regulation for the good of competition and ordinary consumers. Johnston, Missing the Story, American Journalism Review (March 2013).
Johnston describes a number of ways that state legislatures, Congress and state and federal regulatory agencies have made life easy-street for Big Business at the cost of ordinary consumers. He notes it is often discussed as "deregulation" but that "is a misnomer because, literally, no such thing exists in commerce....Everything in business is regulated in some fashion, and has been since long before the first nearly full set of laws we have.... [Thus, d]eregulation typically means reregulation under new rules that favor business interests." Id.
Businesses claim that the 'deregulation' they seek is just another step towards their ideal of "free markets" to help competitiveness. Not so, Johnston replies. The regulatory climate that results is almost always one that creates "moats" making competition much harder for small businesses and allowing duopolies or monopolies to arise that can set prices as high as they wish. And often the captured regulatory agencies allow the most absurd subsidies imaginable.
The Bush Treasury did that in spades. One example is the changes the pro-business Treasury under Paulsen made in the regulations under section 368 governing corporate reorganizations, in which the Bush Treasury (many officials of whom are still part of the Obama Treasury) promulgated rules that provide, for the first time, the possibility of a loss recognition by shareholders in the nonrecognition reorg exchange. Settled law at the time said no such loss could be recognized. And the Bush Treasury also did it in setting up (through regulations) yet another tax subsidy of Big Oil (as an add-on to an already ridiculous subsidy enacted by Congress when it allowed Big Oil to operate as limited partnerships). Here's how Johnston describes this.
The simple story is that Congress in 1986 exempted monopoly pipelines from the corporate income tax if they organized themselves as Master Limited partnerships. The George W. Bush administration then let these pipelines include the nonexistent tax in the rates they charge.
The cost of this fake tax is both tiny and huge.
The pipelines raise prices to cover the cost of the tax, which in turn means they have to raise prices even more to cover the taxes on the extra earnings, known as "grossing up." A 42 percent tax on profits, grossed up, means a pipeline gets to earn its profit plus 75 percent for taxes. These higher costs are then built into prices people pay for gasoline and natural gas to heat homes. Paying this fake tax costs each American less than three cents per day, about $10 per year, I calculate. That is the tiny part. The huge part is that collecting just a penny a day from everyone in America adds up to $1.1 billion in a year — or $3.3 billion at three cents per day per American. Id. (emphasis added).
Note, folks. That's an unnecessary $3.3 billion subsidy provided to already-profitable businesses that comes entirely at the cost of ordinary Americans. It is a subsidy put into law entirely through Big-Busienss-friendly tax administrators in ways that most Americans do not see it--or, if they see it, they believe it is a "real" tax cost of the businesses rather than just another theft subsidy.
This is another aspect of the problem of the way the media treats any discussion of "free markets." The fundamentalist approach to free markets (that I have sometimes labeled "free marketarianism" or "friedmania") claims to believe that deregulation helps people by increasing competition and opening up markets. In fact, it is usually the opposite. Deregulation helps Big Business by decreasing competition and allowing the development of powerful oligarchs and powerful monopolies or near-monopolies. Brute capitalism, that is, allows those who hold capital to hold power, and those who hold power act against the interests of ordinary people in order to consolidate their power. Another blog addressed this well:
A free market requires that everybody plays nice and follows the rules. Guess what. There’s always someone who will do whatever evil they think is required to make money. Once you realize that, you know there can be no such thing as the free market.
***
That’s one of the primary reasons that uncontrolled capitalism has been such a gross failure since the Reagan/Thatcher “revolution”, leaving us with record inequality and damaged democracy, and bringing the world economy to the brink of total collapse that simply evaporated trillions of dollars. Random Notes from the Exasperation File, Class War In America.
I have often noted that the media treat the daily ups and downs of the stock market as though it is an accurate reflection of the entire economy. It is not. When the stock market is up, it is likely that one or another segment of Big Business is doing well or exceptionally well. That means the affluent--those in the top 30% who own most of the financial assets of this country, including Big Business's CEOs and board members, are doing well. So as the stock market has resurged after the 2007 financial crisis brought on by the excess of Big Financial Businesses, the wealthy who run and own those Big Businesses are doing mighty well indeed.
This is corporatism at its worst--the takeover of the economy and all of its institutions by a corporate mindset that favors the wealthy and the managers/owners of Big Business over ordinary people, leaving ordinary people's views unheard. It often is associated with class warfare, wherein the rich ensure that their money buys laws and regulations written by, for, and of the rich. Corporations pay less in taxes and ordinary workers pay more--either in direct taxes or in the indirect tax of wage and benefit loss that is a tax subsidy for the wealthy.
Those at the bottom of the economic distribution are of course the ones most hurt by the decline and by the class warfare policies of the rich. They are most likely still doing poorly or just barely getting by, mostly because those big profits at Big Business are taken at their expense--through constantly rising prices not reflected in increased quality or costs of production, or through increasingly unfair worker wages and benefits that have been cut in order to increase the rents to the owners/managers. And usually with the assistance of legislators and regulators.
Take a friend of mine, who was laid off from an auto parts manufacturer for almost three years and has been struggling to make a full-time living at it since he was reinstated--at a much lower salary then before the crash (conveniently for the company but not so good for the workers). He bought a new truck about a year before the financial crash. The payments were supposed to be around 250 a month. In the first months of the layoff he couldn't find any substitute work, and he fell behind in payments on the truck (his family depends on him as the sole breadwinner; his family has almost no assets and no liquid assets; he depends on the truck to allow him to take odd jobs when his job at the factory is on hiatus--often landscaping, mowing, etc.). The interest rate on the loan went up to 32% almost immediately. That would once have been treated as illegal usury. Not now, since "deregulation" has allowed financial firms to rip off their customers coming and going for their own profits. Now his payments are around $400 a month and he owes as much on the truck as he did several years ago in spite of all the payments he has worked hard to make since then. This Thursday he missed the payment again, after keeping up for most of the year. He missed it because his company began selectively laying off workers for a week or 3 days at a time during the winter, and he didn't work for about ten days of the month before the payment was due. On Wednesday he talked to his adviser at the financial firm that gave him the loan. It was a new "adviser". They replaced a more understanding one with one who was considerably harsher. The adviser told him on Wednesday that he would give him til Friday to make the next payment. On Thursday, however, he sent a repo man who took the truck. Friday my friend got a paycheck and could have made the payment (as he'd told the adviser on Wednesday). Instead, when he went to make the payment thinking he could get the truck back that day, the financial firm advised him that he now had to pay off the truck in full--as well as a bunch of additional charges due to the repossession. What would that be, he asked? He assumed he owed about $3500, in his calculations the amount still due on the original loan. Oh, no, the finance guy told him. You will have to pay $4975 on Monday, and that amount will increase by $25 a day for every day you do not pay. It's that much because of all the late fees we added on the bill. Oh, and we are charging you $400 for repo-ing the vehicle on Thursday (even though we had promised we would not do so).....
Again, deregulation of financial institutions has made these rent-seeking add-on charges customary for anyone in the lower part of the income distribution. Big Business sells it as competitive services for the underprivileged but it is really deregulated excess profits for the financial firms for acting like modern equivalents of plantation owners with a captive workforce unable to ever build up financial assets and always dependent on the firms' calculations as to what they owe or are owed.
How is my friend (who happens to be an African American) supposed to ever advance beyond the near-serfdom in which he currently exists? Lucky for him, we are willing to offer him a personal loan at market-rate interest so that he can finally pay off his overseer and begin to dig himself out of the hole that our deregulated, GOP-ideology-driven state puts most Detroit low-income residents in. Mass transit hardly operating and not permitted to expand as it should to permit low-income residents to commute easily to work in the region. White suburbs that cannot be annexed into the city, so continue their oblivious lives exploiting Detroit's assets while pitying the poor black residents that just can't seem to do anything right. Businesses that charge white folks in the suburbs less than black folks in the city. Insurance companies that rip off their Detroit clients. And on and on.
This is all happening in a world where white folks with money set all the rules and now, in Michigan, have made it very hard for any union to form and exert some worker-power on behalf of the employees. Michigan's new, so-called "right-to-work" law that the religiously right-wing Republican party of Michigan passed with no input at all from the people and with misinformation galore--all of the newspaper coverage talked about workers being "forced" to join a union unless you have "right-to-work" and how "right-to-work" would free them not to have to pay for the union and encourage more economic growth and more jobs. None of the newspaper articles or the legislators reported the fact that right-to-work states tend to have lower wages for their workers, less good jobs, and poorer economies. Of course, the information was wrong to start with--no one was forced to join a union without right-to-work laws--they were merely required to pay some amount (less than union dues) for the services that the union provides. Now, they can demand the same services and pay nothing. No Republican business would provide services on that basis, but Republican legislators serving their oligarchic base ensure that no true freedom exists for anybody without money.
Michigan, of course, has also just taken over the City of Detroit, with Gov. Snyder's appointment of an emergency manager. This is as undemocratic as it gets, given the state vote rejecting the last EM law and the fact that the EM will have dictatorial power to ignore the Mayor, the City Council and all other elected officials. Snyder is a right-wing tool, in office backed by a majority-GOP legislature that reflects the racism of most of the "upstate" part of Michigan and blames Detroit's problems on its predominately black residents. The legislature passed right-to-work to retaliate against unions for trying to get protection for workers' rights in the constitution. Apparently, the GOP thinks the constitution should only protect the wealthy, as it does by prescribing a flat tax, ensuring that the wealthy in Michigan get to choose what they support but are hardly taxed at all by the State. The rabid right in this state forget that what condemned Detroit was the "white flight" to the suburbs and Michigan's foolish state constitution which does not allow Detroit to take the suburbs into the city. So Royal Oak's mayor a few years ago could refuse to fund metropolitan buses because he didn't want Detroit's black population able to cross the border into Royal Oak and pollute the city by taking jobs there. And the wealthy residents of the 90% white suburbs of 80% black Detroit come into the city for its amenities--opera, plays, sports, museums--and its work, but take their pay out of the city to maintain their schools and shops and amenities while complaining about how awful Detroit is. We Detroit residents are very worried that the GOP's takeover of the Democratically elected city government will result in the rape of the city's assets--Belle Isle is a jewel in Detroit's crown that the state covets; Detroit's water system is another asset that the state--and the white suburbs--covet and want to control. The EM will be pressured by Snyder and the rest of the upstate Detroit haters to take over those assets and make Detroit pay for being a center of unionism and Democratic voters.
The Michigan passage of the so-called "right-to-work" law and the renewal of the emergency manager law AFTER it was defeated by the people in Novemberare perfect illustrations of the contempt that the current Republican party shows for ordinary people when it is in power in a state. And it also illustrates well the capture of legislators and agencies by oligarchs, monopolies and duopolies. This is, as Johnston notes, a sad state of affairs that will only get worse unless the press reinvigorates itself to inform rather than kiss Big Business's ass.
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The Republican policy think tanks have been as dishonest to Republican voters as Clinton neo-liberal have to Democratic voters. Below you see CATO Institute----hyper-conservative congratulating Reagan on what was the worst of free-market policy----and then below that it writes a paper that spells out all of what makes today's economy anything but.
Remember, Reagan sold his non-free-market policies by pretending it was all about grassroots small business development spurring local economies. Again, here's CATO pretending it is this Entrepreneur policy not corporate subsidy that is the answer to building free market.
Yet, as everyone knows by now------this entrepreneur policy is simply subsidizing global corporate profits by allowing these startups do all the work---spend all the money----fight to change all the laws----and then global corporations come in and take any successful start up=====AGAIN , THAT IS THE PLAN----it has nothing to do with building grassroots businesses to promote free-market economy. Today, not only do Republican voters have to listen to these lies------now, because the Democratic Party is Big Business say Wall Street global Clinton neo-liberals---so too are Democratic voters being sold all this entrepreneur and start up as free market
AND IT IS THE SAME CON AS THE DEREGULATION POLICY ------NONE OF THIS IS FREE MARKET.
'Ronald Reagan’s 100th Birthday
Ronald Reagan was the most eloquent spokesman for limited government of our time. Through 25 years of tirelessly "raising a banner of no pale pastels, but bold colors" of political principle, he succeeded in changing the climate of opinion in the United States and around the world. His conservatism involved making government smaller, not using big government for conservative goals. We miss that kind of conservatism in Washington today'.
THIS CURRENT ENTREPRENEUR/START UP POLICY SOLD AS FREE MARKET IS SIMPLY THE NEXT CON FOLLOWING THE DEREGULATION SCAM.
Disruptions: With No Revenue, an Illusion of Value
By
Nick Bilton
April 29, 2012 11:00 am BITS New York Times
*********************
Corporate Welfare Spending vs. the Entrepreneurial Economy
By Chris Edwards and Tad DeHaven
June 1, 2012
House Budget CommitteeMr. Chairman and members of the committee, thank you for the invitation to testify regarding corporate welfare, entrepreneurs, and economic growth. This testimony will address the problems caused by corporate welfare and discuss why spurring entrepreneurship is a better approach for generating economic growth.
Rising spending and huge deficits are pushing the nation toward an economic crisis. There is general agreement that policymakers need to find wasteful and damaging programs in the federal budget to terminate. One good place to find savings is spending on corporate welfare.
Some people claim that business subsidies are needed to help fix market failures in the economy. But corporate welfare is just as likely to create failures by misallocating resources and inducing businesses to spend time on lobbying rather than on making better products. Corporate welfare transfers wealth from average families to favored businesses, and it creates corrupting ties between government officials, politicians, and business leaders.
Policymakers are rightly concerned about the competitiveness of American businesses in the global economy. But the way to address that concern is not through subsidies, but through broad-based reforms such as permanent reductions to capital gains and corporate income tax rates.
The Taxpayer Cost of Corporate Welfare
A forthcoming Cato Institute study finds that federal business subsidies total almost $100 billion annually.1 That is a fairly broad measure of subsidies to small businesses, large corporations, and industry organizations. The subsidies are handed out from programs in many federal departments including Agriculture, Commerce, Energy, and Housing and Urban Development.
However, there is no precise measure of “corporate welfare.” As part of the national income accounts, the Bureau of Economic Analysis calculates that the federal government handed out $57 billion in business subsidies in 2010.2 A 1995 Congressional Budget Office Study put the total at $30 billion in spending subsidies for businesses at that time.3
Ending business subsidies would be one step toward reducing the federal deficit, but there would be other benefits as well. The following sections discuss the unfairness of corporate welfare, how it harms the economy and generates corruption, and why entrepreneur-led growth is a better alternative.
Corporate Welfare Is Unfair
The Constitution empowers the federal government to take steps to ensure an open national economy. The Commerce Clause gives the government the authority to “regulate Commerce… among the several States,” but the purpose was to remove barriers to trade, not to actively favor some businesses over other businesses and individuals.
People disagree on the meaning of “fairness,” but surely it includes supporting the bedrock American value of equality under the law. The government’s proper role should be that of a neutral referee in the economy facilitating the free exchange of goods and services. Yet corporate welfare advantages certain businesses at the expense of taxpayers, families, and other businesses, as some examples illustrate:
Farm Subsidies. Farm subsidies redistribute wealth from taxpayers to often well-off farm businesses and landowners. “Farm income stabilization” payments have recently fluctuated between about $13 billion and $33 billion annually. 4 This is a welfare hand-out like food stamps, yet it goes to higher-income households. In 2010, the average income of farm households was $84,400, or 25 percent above the $67,530 average of all U.S. households.5 Moreover, the great bulk of farm subsidies go to the largest farms.6
Sugar Subsidies. The federal government also enriches certain businesses in an off-budget manner, as sugar subsidies illustrate. The government runs a Soviet-style system of price supports, quotas, and import barriers for sugar. The effect is to push up the domestic price of sugar to the benefit of U.S. sugar producers while imposing extra costs on consumers.7 Artificially high sugar prices also hurt American businesses that use sugar, and numerous U.S. food companies have moved production to Canada and Mexico where sugar prices are lower.8
Economic Development. The government runs many so-called economic development programs that distribute corporate welfare. As one small example, the Community Development Block Grant program recently handed out $220,000 to a craft brewery in Michigan.9 Meanwhile the Value Added Marketing program hands out money to selected wineries across the country.10 These hand-outs are not fair to taxpayers or the breweries, wineries, and other businesses that don’t receive such special favors.
Polls show that the public understands the unfairness of corporate welfare, and most people want it cut. Most people are against the federal government providing loan guarantees to small businesses; only 29 percent think that the government should help large corporations finance their export sales; and a plurality (46 percent) think farm subsidies should be abolished.11 Polls have also found strong opposition to federal bailouts of financial institutions.12
Corporate Welfare Distorts the Economy
Some policymakers think that subsidies are needed to help U.S. businesses compete in the world economy. But the more we subsidize businesses, the more we weaken the market’s profit-and-loss signals, and the more we undermine America’s traditions of entrepreneurship and gutsy risk-taking by the private sector.
People argue that business subsidies are needed to fix market imperfections. But subsidies usually don’t work as intended, and they often distort markets rather than fixing them. Robert Novak once said that “the mind-set underlying corporate welfare is that of the central planner,” and yet we know that central planning does not work.13
Consider the energy industry, which Republicans and Democrats have been manipulating with subsidies for decades. An early subsidy effort was the Clinch River Breeder Reactor, which was an experimental nuclear fission power plant in Oak Ridge, Tennessee in the 1970s. This Republican-backed boondoggle cost taxpayers $1.7 billion and produced absolutely nothing in return.14
Then we had the Synthetic Fuels Corporation (SFC) approved by President Jimmy Carter in 1980, who called it a “keystone” of U.S. energy policy. The government sank $2 billion of taxpayer money into this scheme that funded coal gasification and other technologies before it was closed down as a failure. The SFC suffered from appalling mismanagement, huge cost overruns on its projects, political cronyism, and pork barrel politics in dishing out funding.15
Both parties have backed dubious “clean coal” projects for decades. The GAO found that many of these projects have “experienced delays, cost overruns, bankruptcies, and performance problems.”16 In a review of federal fossil fuel research, the Congressional Budget Office concluded: “Federal programs have had a long history of funding fossil-fuel technologies that, although interesting technically, had little chance of commercial implementation. As a result, much of the federal spending has not been productive.”17
With the poor record of energy subsidies over the decades, it is no surprise that the Obama administration is having trouble with its green energy activities. The administration’s failures keep piling up—Solyndra, Raser Technologies, Ecotality, Nevada Geothermal, Beacon Power, First Solar, Abound Solar, and Beacon Power.18 These subsidy recipients have either gone bankrupt or appear to be headed in that direction.
Why don’t business subsidies work very well? One reason is that political pressures undermine sound economic choices. The Washington Post found that “Obama’s green-technology program was infused with politics at every level.”19 The decision to approve the Solyndra loan, for example, appears to have been rushed along by high-level politics.
Perhaps more importantly, subsidies change the behavior of businesses. An economist recently quipped to me: “I don’t know whether the government is better at picking winners rather than losers, but I do know that losers are good at picking governments.” When the government starts handing out money, businesses with weak ideas get in line because the businesses with the good ideas can get private funding. Enron, for example, was able to grab huge federal support for its disastrous foreign investment schemes.
At recent House hearings on green energy subsidies, most witnesses lined up in favor of Department of Energy loan programs, except for one witness who heads a solar power firm that does not receive federal subsidies.20 James Nelson of Solar3D said that subsidizing green energy commercialization “is a wasteful mistake because it doesn’t work.”21 Here are some of the problems he pointed to:
The House hearing included testimony from green energy firms that had received subsidies. Their comments revealed how subsidies were eroding their focus on the bottom line. The firms stressed how many jobs they were creating and how their supplier chains covered many states—and thus many congressional districts. One solar firm bragged that it is “creating and maintaining jobs locally and across the nation,” while it is “procur(ing) from a supply chain that stretches across 17 states.”22 Another solar firm bragged that it “spent more than $1 billion with U.S. suppliers in 35 states.”23
Subsidy supporters at the hearing stressed the “nonfinancial objectives” of green subsidies, such as jobs.24 But as Nelson noted, “businesses are not made more successful by more jobs.”25 If businesses want to succeed in tough global competition, they need to minimize their labor and supplier costs, and subsidies erode that lean focus. Nelson concluded that success in the marketplace “requires brains, discipline, and grit. It is rarely aided, and often impeded by government involvement.”26
Another problem with business subsidies is that they can encourage investing in very dubious projects. That is the story of Enron’s international investments, which played an important role in the implosion of the firm. By one estimate, Enron received $2.4 billion in federal aid through the Export-Import Bank and the Overseas Private Investment Company between 1992 and 2000.27 Another study puts total federal government subsidies to Enron for its foreign schemes at $3.7 billion, plus Enron received subsidies from international agencies such as the World Bank.28 All these subsidies made possible Enron’s excessively risky foreign investments, which came crashing down at the same time that the firm’s accounting frauds were being revealed.29
Suppose that the government was capable of channeling subsidies only to well-managed companies with sensible ideas. Then the subsidies wouldn’t be needed because they would simply crowd out private investment. That seems to be the case with much of the $7 billion in subsidies for rural broadband in the 2009 stimulus bill, as one detailed study in 2011 found.30
Or consider the Department of Energy’s Advanced Technology Vehicles Manufacturing Loan Program, which provides subsidies to companies to develop green cars. A former executive with Tesla Motors, which received subsidies, concluded that “private fundraising is complicated by investor expectations of government support.”31 Subsidies distort the venture capital market, having “a stifling effect on innovation, as private capital chases fewer deals and companies that do not have government backing have a harder time attracting private capital.”32
A final problem with corporate welfare is that it can create broader distortions in the economy. For more than a century, the federal Bureau of Reclamation has subsidized irrigation in the 17 western states. About four-fifths of the water supplied by the bureau goes to farm businesses, and this water is greatly underpriced.33 Because farmers are receiving water at a fraction of the market price, they are over consuming it, which threatens to create water shortages in many areas in the West. Subsidized irrigation also causes environmental damage.
Corporate Welfare Generates Corruption
The creation of corporate welfare programs has spawned an expanding web of lobby groups that demand ever more favors from policymakers. The more that the government intervenes in the economy, the more lobbying activity is generated, and the more new subsidy programs get created. It’s a vicious cycle.
Corporate welfare doesn’t just create direct economic harm, it also erodes support for America’s free enterprise system. Businesses that become hooked on subsidies become tools of the state. They lose their independence, and they may focus more on gaining special benefits from Washington than on making good products. The more special breaks that businesses receive, the less willing they are to speak out against the expansion of big government.
While some people think that corporations lobby to slash government, they mainly do the opposite. Businesses often lobby in favor of federal intervention if it will benefit them and hurt their competitors. The major airlines, for example, were against airline deregulation in the 1970s because existing rules protected them from competition.34
Business subsidy programs attract corruption like garbage dumps attracts rats, and that has always been the case in Washington. For example, federal subsidies for the first transcontinental railroad, the Union Pacific, led to the Credit Mobilier scandal of the 1870s, which involved payoffs to dozens of members of Congress. In recent decades, scandals stemming from corporate welfare have been a bipartisan problem, as these examples illustrate:
HUD Subsidies under Reagan. President Ronald Reagan’s Department of Housing and Urban Development overflowed with corruption in the 1980s under Secretary Sam Pierce.35 Pierce routinely dished out grants, loans, and other sorts of subsidies to friends and business associates. And HUD created programs that involved large subsidies to mortgage lenders, developers, and other businesses, with Republican Party contributors as frequent beneficiaries.
Commerce Subsidies under Clinton. President Bill Clinton’s Commerce Secretary, Ron Brown, used federal business subsidies as a fund-raising tool for the Democratic Party in the 1990s. Corporate executives who played the game were given access to export promotion trips and loans from OPIC.36 In subsequent investigations, U.S. District Judge Royce Lamberth found that Commerce officials concealed and destroyed documents relating to the scandal, and he compared the officials to “con artists” and “scofflaws.37
Enron Subsidies under Clinton and Bush. Enron Corporation is a poster child for the harm of business subsidies, particularly with regard to its disastrous foreign investments. Enron lobbied government officials to expand export subsidy programs, and it received billions of dollars in aid for its foreign projects from the Ex-Im Bank, OPIC, the U.S. Trade and Development Agency, the U.S. Maritime Administration, the Commerce Department, and the U.S.-backed World Bank. As noted, Enron received about $3.7 billion in financing through federal government agencies.38 These subsidies induced Enron to make exceptionally risky foreign investments, and the resulting losses were an important factor in the company’s implosion.39
During the Clinton and early Bush administrations, high-level officials went to great lengths to aid Enron on an Indian power plant deal.40 The Washington Post noted, “President Bush’s National Security Council led a ‘working group’ with officials from various Cabinet agencies to resolve Enron’s troubles over a power plant venture.”41 We saw similar high-level involvement in the failed Solyndra investment by the Obama administration. Top government officials should be spending their time on policies in the general interest of all Americans, not on helping individual companies earn higher profits.
Green Subsidies under Obama. The Washington Post found, “Obama’s green-technology program was infused with politics at every level.”42 The $535 million loan guarantee for Solyndra, is a prime example. The DOE approved the loan after receiving pressure from White House officials to move ahead so that the vice president could announce it at a groundbreaking for the company’s factory.43 President Obama visited Solyndra and called the firm an “engine of economic growth,” but later it collapsed.44
President Obama’s green energy programs illustrate how corporate welfare creates corrupting relationships between businesses and politicians. The Washington Post found that “$3.9 billion in federal [energy] grants and financing flowed to 21 companies backed by firms with connections to five Obama administration staffers and advisers.”45 It also noted that the “main players in the Solyndra saga were interconnected in many ways, as investors enjoyed access to the White House and the Energy Department.”46 According to the New York Times, Solyndra “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House.”47
American businesses, of course, have a right to lobby the federal government. But given that reality, Congress throws fuel onto the corruption fire by creating business subsidy programs. When subsidy money flows out the door from Washington to businesses at the same time that money flows back from businesses to Washington for lobbying, it’s no surprise that we get influence-peddling. Corporate welfare undermines honest and transparent governance, and Americans are sick and tired of the inevitable scandals.
Long-Term Growth Depends on Entrepreneurs
Most of America’s technological and industrial advances have come from innovative private businesses in competitive markets. Indeed, it is probably true that most of our long-term economic growth has come not from existing large corporations or governments, but from entrepreneurs creating new businesses and pioneering new industries. Such entrepreneurs have often had to overcome barriers put in place by dominant businesses and governments.
Economic historians Nathan Rosenberg and L.E. Birdzell found that “new enterprises, specializing in new technologies, were instrumental in the introduction of electricity, the internal-combustion engine, automobiles, aircraft, electronics, aluminum, petroleum, plastic materials, and many other advances.”48 We can update that list to include cell phones, personal computers, biotechnology, and all kinds of Internet businesses.
If policymakers want to get U.S. economic growth back on track, they should put entrepreneurs front-and-center in their thinking about policy. Here are some of the ways that entrepreneurs generate growth:
Entrepreneurs are Radical Innovators. Their advances are usually unexpected and disruptive to existing businesses.49 Personal computers were pioneered in the 1970s by new companies such as Apple. The opportunity was missed both by leading computer firms and by government planning agencies such as Japan’s MITI.50 Big corporations were focused on mini and mainframe computers, while the U.S. government was subsidizing supercomputers. Governments and big companies often overlook niche products that later become revolutionary. In the 1970s, microcomputers were an obscure hobbyist activity, and software for microcomputers—which Bill Gates helped pioneer—was a niche within a niche. The small-scale innovations of entrepreneurs in niches often create huge, unforeseen changes.
Entrepreneurs Generate Competition. Another crucial role of entrepreneurs is that they challenge dominant firms and governments. One great story is the rise of MCI Corporation in the 1970s and 1980s. MCI helped destroy the AT&T monopoly, which paved the way for the modern telecommunications revolution. Another innovator was Fred Smith of Federal Express. Today we take overnight letter delivery for granted, but it was Smith who battled federal regulatory roadblocks in the 1970s and provided new competition for the U.S. Postal Service by proving that there was an untapped demand for rapid delivery.
Entrepreneurs Turn Inventions into Innovations. America’s long-run growth is often portrayed as a steady process of accumulating new inventions. Many people seem to think that the government can simply pump money into research and the economy will grow. But that “science push” theory of growth is incorrect. Economies grow because of innovations, which are inventions that are packaged and tested in the marketplace by entrepreneurs.
The modern economy is steeped in uncertainty. No one can predict the future, not even the best scientists, engineers, and economists in big companies and the government. Many experts have made hugely off-base prognostications about the economy.51 Two decades ago, many pundits and policymakers were convinced that Japan was taking over the global economy. Professor and pundit Robert Reich thought that “chronic entrepreneurialism” was undermining the U.S. economy. And past predictions about the computer industry have been laughable, such as this comment in 1977 by the founder of Digital Equipment Corporation: “There is no reason for any individual to have a computer in his home.”
Luckily, expert predictions don’t drive the economy. Rather, successful market economies work by having swarms of entrepreneurs freely testing new ideas. Entrepreneurs are the economy’s guinea pigs. They have the guts to act in the face of uncertainty, and they learn from their mistakes and keep trying until they find ideas that work and generate profits.
By contrast, government plans to stimulate the economy are often based on ideologies and rigid ideas. Some policymakers believe that particular energy technologies are THE solution to America’s problems, and they support ongoing subsidies year after year regardless of marketplace realities. By contrast, in competitive and unsubsidized markets, mistakes are usually quickly exposed and businesses cut their losses short and change direction.
It appears that the unexpected fall in solar panel prices helped to sink Solyndra. Perhaps businesses that are tethered to governments are slower to make the changes needed to survive. The government tends to work at a turtle’s pace, which doesn’t sync well with the fast-paced modern economy. We saw a comparison of the government turtle with the private-sector gazelle during the first sequencing of the human genome in the late 1990s. The government’s lavishly funded Human Genome Project was a lengthy multi-year research project, but it was upstaged when entrepreneur Craig Venter launched Celera Genomics to complete the job at a fraction of the time and cost.
What are the policy lessons from America’s great entrepreneurial history? One lesson is that because markets have high levels of uncertainty, government agencies and dominant companies cannot be relied upon to secure our economic future. Instead, we should remove hurdles to entrepreneurship every way we can—by tax reforms, by repealing barriers to entry into industries, and by reducing financial industry barriers to private risk financing.
While it has become fashionable to criticize Wall Street, the financial industry has been crucial to funding waves of innovation in the U.S. economy. Risk capital was integral to the railroad and telegraph booms of the 1800s, and the radio, electricity, and automobile booms of the early 20th century. J.P. Morgan Chase has garnered negative headlines in recent weeks, but J.P. Morgan was the company that provided seed capital for Thomas Edison’s Edison Electric Illuminating Company, which became General Electric.52
In recent decades, high-yield bonds, venture capital, and angel investment have played key roles in growing new industries. Today, U.S. venture capital and angel investors pump more than $50 billion annually into young companies.53 Tax policy influences investment flows, and funding for high-growth ventures is affected by the tax treatment of capital gains in particular. One step for policymakers would be to create investment certainty by permanently extending the 15 percent federal capital gains tax rate. Also, the corporate tax rate should be cut to spur greater capital investment—new capital equipment usually embodies technological advances.
Policymakers should put aside the idea that some sort of big intervention can permanently “win the race” for some particular goal, such as energy independence, solar power dominance, or beating China. In the recent House testimony, an energy consultant said, “clean energy has been targeted by our major international competitors (including China and Germany) as a critical, and perhaps the critical, future growth and export industry… whether the U.S. wins or loses in this race matters because the outcome will have a large impact on future U.S. employment and economic strength.”54 At the same hearing, a solar company executive said that America could “win in the long run” with a particular solar technology.55
However, those sorts of prognostications are refuted by U.S. economic history. There is never any final “win” in the marketplace. Look at how leadership in cell phones and smart phones has shifted from firm to firm and country to country, from Nokia, to RIM Blackberry, to Apple and others. Technologies and markets are always changing, so the only way for America to permanently “win” in the struggle for economic growth is to have the best climate for investing, innovating, and building entrepreneurial companies.
We’ve mainly focused on subsidies to new industries such as green energy. But withdrawing corporate welfare from older, established industries could spur innovation as well. Consider farm subsidies. New Zealand ended virtually all its farm subsidies in 1984, which was a bold stroke because that country is much more dependent on farming than is the United States. The changes were initially resisted, but New Zealand farm productivity, profitability, and output have soared since the reforms.56 Faced with new financial realities, New Zealand’s farmers innovated—they cut costs, diversified their land use, sought nonfarm income, and developed new markets.
Thus rather than looking for new ways to subsidize businesses, policymakers should be looking for places to withdraw subsidies and deregulate in order to spur innovation. For example, just as the break-up of the AT&T monopoly in the 1980s helped to generate growth in the telecommunications industry, ending the U.S. Postal Service monopoly today would spur innovation in that industry. Europe is moving in that direction, with Germany and the Netherlands already privatizing their postal systems.57
The transportation sector is another area where innovation could be spurred by the reduction of federal subsidies. For example, Amtrak is doomed to inefficiency as a government-run business pumped full of subsidies and shackled with regulations. It should be privatized.58 Other countries are ahead of the United States in privatizing transportation infrastructure, or at least in bringing private investment into infrastructure.59
The United States subsidizes its air traffic control system, but it doesn’t need to. Canada privatized its air traffic control system in 1996, and it operates as a self-funded nonprofit corporation. It has been a big success.60 Another ripe area to cut subsidies and bring the private sector in is space flight. The recent success of the SpaceX flight and the 2004 success of SpaceShipOne indicate that the private sector is entirely capable of bold and risky technological ventures.
To sum up, the way to spur economic growth is not through business subsidies, but through breaking down barriers to entrepreneurs. Let’s give entrepreneurs a crack at postal services, air traffic control, passenger trains, and other monopoly industries. Let’s pursue tax and regulatory reforms to maximize the flow of financing to new and growing businesses. And let’s stop demonizing entrepreneurs who succeed and the financial system that allows them to grow. If we want to exorcize some demons, we should end the corporate welfare system that is corrupting our government and the American economy.
Thank you for holding these important hearings.
The American people need to remember the value of history in knowing when politicians are lying, cheating, in order to steal. This is why today's Race to the Top education privatization and reform is about killing humanities and liberal arts----it tells history.
When we listen to Greenspan---the free market cheerleader for Reagan/Clinton/Bush we heard him stating what people knowing history knew was untrue---markets and especially Wall Street do not regulate themselves.
THAT WAS THE LESSON FROM THE MASSIVE WALL STREET FRAUDS THAT BROUGHT THE GREAT DEPRESSION.
Greenspan simply took the playbook from this last massive looting of American society and replayed it word for word....as did Reagan and Clinton. They all knew in 1980s where all this deregulation would end----with the movement of all American wealth to the same 1%.
It was planned for goodness sake.
The rich always sell the idea that more jobs will be created---more small businesses successful is only all those pesky laws keeping corporations in check were removed. Republican voters fall for it every time---they have this small government mentality drilled into them----but Democratic voters should have known better---and it took lots of capture of national labor and justice organizations to keep the Democratic base in the dark.
So, Greenspan is the biggest criminal in US history---as are of course the Clinton neo-liberals and Bush neo-cons who aided and abetted---this is why global pols are desperate to keep control---and social Democrats to regain control.
'In his testimony, Greenspan said that, in light of a crisis he characterized as "a once-in-a-century financial tsunami," he was wrong to think financial markets could police themselves. He incorrectly had expected the discipline of the market would prevent financial institutions from taking life-threatening risks'.
'Once in a century tsumani' means-----the rich can only pull off this massive fraud of all of American wealth once a century---they have to give time for Americans to rebuild public wealth.
Greenspan shocked at failure of free markets
Former Fed chief says his faith in the system was misplacedSam Zuckerman, Chronicle Staff Writer
Published 4:00 am, Friday, October 24, 2008
Photo: Lawrence Jackson, AP
Former Federal Reserve Chairman Alan Greenspan arrives on Capitol Hill in Washington, Thursday,Oct. 23, 2008, to testify before the House Oversight and Government Reform Committee.(AP Photo/Lawrence Jackson)It was a remarkable moment: Former Federal Reserve Chairman Alan Greenspan, a lifelong champion of free markets, publicly questioning the philosophy that guided him throughout his years as the world's most powerful economic policymaker.
The dramatic act of contrition came Thurssay at a hearing of the House Committee on Oversight and Government Reform looking into the responsibilities of federal regulators for the near breakdown of the financial system. In his testimony, Greenspan said that, in light of a crisis he characterized as "a once-in-a-century financial tsunami," he was wrong to think financial markets could police themselves. He incorrectly had expected the discipline of the market would prevent financial institutions from taking life-threatening risks.
Those mistakes raised questions about his most fundamental beliefs, he acknowledged.
Asked by committee Chairman Henry Waxman, D-Los Angeles, whether his free-market convictions pushed him to make wrong decisions, especially his failure to rein in unsafe mortgage lending practices, Greenspan replied that indeed he had found a flaw in his ideology, one that left him very distressed. "In other words, you found that your view of the world, your ideology was not right?" Waxman asked.
"Absolutely, precisely," replied Greenspan, who stepped down as Fed chief in 2006 after more than 18 years as chairman. "That's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well."
Greenspan offered his re-examination as decisionmakers and the public are broadly questioning the deregulatory trend that dominated federal policymaking circles for three decades. Many now have concluded that lax oversight permitted bad housing loans to overwhelm the financial system. Even Republican presidential candidate John McCain vows much stricter regulation of Wall Street.
Fed watchers said they were stunned by Greenspan's mea culpa. For his whole adult life, the former Fed chairman has been a devotee of the philosophy of Ayn Rand, who celebrated free-market capitalism as the world's most moral economic order and advocated a strict laissez-faire approach to government regulation of the marketplace.
"Alan Greenspan has been one of the stalwarts in arguing for free markets and he was backpedaling today," said Brian Wesbury, chief economist with the Illinois investment firm First Trust Portfolios.
Others were struck by the fall from grace of the 82-year-old economist, once lionized as the greatest central banker of his time.
"When I watched him this morning, I actually found myself feeling a little bit sorry for him," said Betty Blecha, an economist at San Francisco State University. "When ideologues find their ideology crashing around them, it's something to see."
Blecha said Greenspan's reassessment impressed her.
"He was intellectually honest about admitting the failings of an ideology he's believed in all his adult life. I think personally this has been a very difficult period for him."
Greenspan said his mistake was thinking that financial institutions would act in their own self-interest to avoid the kind of risky lending that could bankrupt them.
"Free markets did break down," he testified. "That, as I said, shocked me. I still do not fully understand what happened."
In his prepared remarks, Greenspan said the surge in bad home loans was fueled by demand of investors around the world for mortgage securities. Rating agencies failed to appreciate the risks in the inflated housing market and investors convinced themselves that the mortgage securities were safe. To accommodate investor demand, mortgage lenders stepped up their volume, with little regard for the safety of the loans they were handing out.
As a result, "the whole intellectual edifice" of risk management collapsed, Greenspan said.
The trauma experienced by financial markets makes a significant rise in unemployment unavoidable, Greenspan forecast. He sees a "marked retrenchment of consumer spending" because of tight credit, job insecurity and losses in the value of homes and investments. Recovery won't occur until housing prices stabilize, which is at a minimum still many months in the future, he noted.
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To add insult to criminality-----WE THE PEOPLE are now listening to the same Clinton neo-liberal and Bush neo-cons 'free-market' globalists tell us that corporate subsidy-----not public subsidy is not only OK----but needs to be done in massive fashion these several years all under the guise of the same free market speak on deregulation------
CORPORATIONS CREATE JOBS----NOT GOVERNMENT!!!!
Well, the first law of free market is NO ONE CORPORATION IS GIVEN SUBSIDY OVER ANOTHER. To be truly free-market there would be no corporate subsidy or any Federal/state/local pre-approved list for government contracting.
THE ENTIRE GOVERNMENT BIDDING SYSTEM WHEN FULL OF FRAUD AND CORRUPTION HAS NOTHING TO DO WITH FREE-MARKET.
Since the Reagan/Clinton/Bush/Greenspan crowd all knew there was no such thing as free-market----they simply wanted to move all wealth to the top----they say now that we are exposed----ANYTHING GOES.
All Baltimore City would have to do to end all of this mess is to go local with the economy----take the power of corporations from local and state economies----reinstate Rule of Law and oversight and accountability and VOILA----small business and regional business WILL REALLY grow and be stable.
Below you see where total disregard to anything free-market comes with Congressional Clinton neo-liberals deregulating more financial policy making the working poor fair game for any corporation that wants to take them----from allowing fraud of Federal, state, and local funds---to open fleecing by pay-day lenders and predatory landlords. So, how is this free-market? It is good business to drive even those businesses wanting to act responsibly to lie-cheat-steal to stay in business?
March 30, 2013
Big Business believes in taxpayer subsidies, not "free markets"
David Cay Johnston, former NY Times reporter and now Syracuse professor, writes about the thing that most journalists don't bother to (or are told not to) write about--the way that Big Business successfully lobbies legislators and regulatory agencies to write the rules to favor Big Business, at the expense of ordinary Americans, all under the false claim that they are pushing de-regulation for the good of competition and ordinary consumers. Johnston, Missing the Story, American Journalism Review (March 2013).
Johnston describes a number of ways that state legislatures, Congress and state and federal regulatory agencies have made life easy-street for Big Business at the cost of ordinary consumers. He notes it is often discussed as "deregulation" but that "is a misnomer because, literally, no such thing exists in commerce....Everything in business is regulated in some fashion, and has been since long before the first nearly full set of laws we have.... [Thus, d]eregulation typically means reregulation under new rules that favor business interests." Id.
Businesses claim that the 'deregulation' they seek is just another step towards their ideal of "free markets" to help competitiveness. Not so, Johnston replies. The regulatory climate that results is almost always one that creates "moats" making competition much harder for small businesses and allowing duopolies or monopolies to arise that can set prices as high as they wish. And often the captured regulatory agencies allow the most absurd subsidies imaginable.
The Bush Treasury did that in spades. One example is the changes the pro-business Treasury under Paulsen made in the regulations under section 368 governing corporate reorganizations, in which the Bush Treasury (many officials of whom are still part of the Obama Treasury) promulgated rules that provide, for the first time, the possibility of a loss recognition by shareholders in the nonrecognition reorg exchange. Settled law at the time said no such loss could be recognized. And the Bush Treasury also did it in setting up (through regulations) yet another tax subsidy of Big Oil (as an add-on to an already ridiculous subsidy enacted by Congress when it allowed Big Oil to operate as limited partnerships). Here's how Johnston describes this.
The simple story is that Congress in 1986 exempted monopoly pipelines from the corporate income tax if they organized themselves as Master Limited partnerships. The George W. Bush administration then let these pipelines include the nonexistent tax in the rates they charge.
The cost of this fake tax is both tiny and huge.
The pipelines raise prices to cover the cost of the tax, which in turn means they have to raise prices even more to cover the taxes on the extra earnings, known as "grossing up." A 42 percent tax on profits, grossed up, means a pipeline gets to earn its profit plus 75 percent for taxes. These higher costs are then built into prices people pay for gasoline and natural gas to heat homes. Paying this fake tax costs each American less than three cents per day, about $10 per year, I calculate. That is the tiny part. The huge part is that collecting just a penny a day from everyone in America adds up to $1.1 billion in a year — or $3.3 billion at three cents per day per American. Id. (emphasis added).
Note, folks. That's an unnecessary $3.3 billion subsidy provided to already-profitable businesses that comes entirely at the cost of ordinary Americans. It is a subsidy put into law entirely through Big-Busienss-friendly tax administrators in ways that most Americans do not see it--or, if they see it, they believe it is a "real" tax cost of the businesses rather than just another theft subsidy.
This is another aspect of the problem of the way the media treats any discussion of "free markets." The fundamentalist approach to free markets (that I have sometimes labeled "free marketarianism" or "friedmania") claims to believe that deregulation helps people by increasing competition and opening up markets. In fact, it is usually the opposite. Deregulation helps Big Business by decreasing competition and allowing the development of powerful oligarchs and powerful monopolies or near-monopolies. Brute capitalism, that is, allows those who hold capital to hold power, and those who hold power act against the interests of ordinary people in order to consolidate their power. Another blog addressed this well:
A free market requires that everybody plays nice and follows the rules. Guess what. There’s always someone who will do whatever evil they think is required to make money. Once you realize that, you know there can be no such thing as the free market.
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That’s one of the primary reasons that uncontrolled capitalism has been such a gross failure since the Reagan/Thatcher “revolution”, leaving us with record inequality and damaged democracy, and bringing the world economy to the brink of total collapse that simply evaporated trillions of dollars. Random Notes from the Exasperation File, Class War In America.
I have often noted that the media treat the daily ups and downs of the stock market as though it is an accurate reflection of the entire economy. It is not. When the stock market is up, it is likely that one or another segment of Big Business is doing well or exceptionally well. That means the affluent--those in the top 30% who own most of the financial assets of this country, including Big Business's CEOs and board members, are doing well. So as the stock market has resurged after the 2007 financial crisis brought on by the excess of Big Financial Businesses, the wealthy who run and own those Big Businesses are doing mighty well indeed.
This is corporatism at its worst--the takeover of the economy and all of its institutions by a corporate mindset that favors the wealthy and the managers/owners of Big Business over ordinary people, leaving ordinary people's views unheard. It often is associated with class warfare, wherein the rich ensure that their money buys laws and regulations written by, for, and of the rich. Corporations pay less in taxes and ordinary workers pay more--either in direct taxes or in the indirect tax of wage and benefit loss that is a tax subsidy for the wealthy.
Those at the bottom of the economic distribution are of course the ones most hurt by the decline and by the class warfare policies of the rich. They are most likely still doing poorly or just barely getting by, mostly because those big profits at Big Business are taken at their expense--through constantly rising prices not reflected in increased quality or costs of production, or through increasingly unfair worker wages and benefits that have been cut in order to increase the rents to the owners/managers. And usually with the assistance of legislators and regulators.
Take a friend of mine, who was laid off from an auto parts manufacturer for almost three years and has been struggling to make a full-time living at it since he was reinstated--at a much lower salary then before the crash (conveniently for the company but not so good for the workers). He bought a new truck about a year before the financial crash. The payments were supposed to be around 250 a month. In the first months of the layoff he couldn't find any substitute work, and he fell behind in payments on the truck (his family depends on him as the sole breadwinner; his family has almost no assets and no liquid assets; he depends on the truck to allow him to take odd jobs when his job at the factory is on hiatus--often landscaping, mowing, etc.). The interest rate on the loan went up to 32% almost immediately. That would once have been treated as illegal usury. Not now, since "deregulation" has allowed financial firms to rip off their customers coming and going for their own profits. Now his payments are around $400 a month and he owes as much on the truck as he did several years ago in spite of all the payments he has worked hard to make since then. This Thursday he missed the payment again, after keeping up for most of the year. He missed it because his company began selectively laying off workers for a week or 3 days at a time during the winter, and he didn't work for about ten days of the month before the payment was due. On Wednesday he talked to his adviser at the financial firm that gave him the loan. It was a new "adviser". They replaced a more understanding one with one who was considerably harsher. The adviser told him on Wednesday that he would give him til Friday to make the next payment. On Thursday, however, he sent a repo man who took the truck. Friday my friend got a paycheck and could have made the payment (as he'd told the adviser on Wednesday). Instead, when he went to make the payment thinking he could get the truck back that day, the financial firm advised him that he now had to pay off the truck in full--as well as a bunch of additional charges due to the repossession. What would that be, he asked? He assumed he owed about $3500, in his calculations the amount still due on the original loan. Oh, no, the finance guy told him. You will have to pay $4975 on Monday, and that amount will increase by $25 a day for every day you do not pay. It's that much because of all the late fees we added on the bill. Oh, and we are charging you $400 for repo-ing the vehicle on Thursday (even though we had promised we would not do so).....
Again, deregulation of financial institutions has made these rent-seeking add-on charges customary for anyone in the lower part of the income distribution. Big Business sells it as competitive services for the underprivileged but it is really deregulated excess profits for the financial firms for acting like modern equivalents of plantation owners with a captive workforce unable to ever build up financial assets and always dependent on the firms' calculations as to what they owe or are owed.
How is my friend (who happens to be an African American) supposed to ever advance beyond the near-serfdom in which he currently exists? Lucky for him, we are willing to offer him a personal loan at market-rate interest so that he can finally pay off his overseer and begin to dig himself out of the hole that our deregulated, GOP-ideology-driven state puts most Detroit low-income residents in. Mass transit hardly operating and not permitted to expand as it should to permit low-income residents to commute easily to work in the region. White suburbs that cannot be annexed into the city, so continue their oblivious lives exploiting Detroit's assets while pitying the poor black residents that just can't seem to do anything right. Businesses that charge white folks in the suburbs less than black folks in the city. Insurance companies that rip off their Detroit clients. And on and on.
This is all happening in a world where white folks with money set all the rules and now, in Michigan, have made it very hard for any union to form and exert some worker-power on behalf of the employees. Michigan's new, so-called "right-to-work" law that the religiously right-wing Republican party of Michigan passed with no input at all from the people and with misinformation galore--all of the newspaper coverage talked about workers being "forced" to join a union unless you have "right-to-work" and how "right-to-work" would free them not to have to pay for the union and encourage more economic growth and more jobs. None of the newspaper articles or the legislators reported the fact that right-to-work states tend to have lower wages for their workers, less good jobs, and poorer economies. Of course, the information was wrong to start with--no one was forced to join a union without right-to-work laws--they were merely required to pay some amount (less than union dues) for the services that the union provides. Now, they can demand the same services and pay nothing. No Republican business would provide services on that basis, but Republican legislators serving their oligarchic base ensure that no true freedom exists for anybody without money.
Michigan, of course, has also just taken over the City of Detroit, with Gov. Snyder's appointment of an emergency manager. This is as undemocratic as it gets, given the state vote rejecting the last EM law and the fact that the EM will have dictatorial power to ignore the Mayor, the City Council and all other elected officials. Snyder is a right-wing tool, in office backed by a majority-GOP legislature that reflects the racism of most of the "upstate" part of Michigan and blames Detroit's problems on its predominately black residents. The legislature passed right-to-work to retaliate against unions for trying to get protection for workers' rights in the constitution. Apparently, the GOP thinks the constitution should only protect the wealthy, as it does by prescribing a flat tax, ensuring that the wealthy in Michigan get to choose what they support but are hardly taxed at all by the State. The rabid right in this state forget that what condemned Detroit was the "white flight" to the suburbs and Michigan's foolish state constitution which does not allow Detroit to take the suburbs into the city. So Royal Oak's mayor a few years ago could refuse to fund metropolitan buses because he didn't want Detroit's black population able to cross the border into Royal Oak and pollute the city by taking jobs there. And the wealthy residents of the 90% white suburbs of 80% black Detroit come into the city for its amenities--opera, plays, sports, museums--and its work, but take their pay out of the city to maintain their schools and shops and amenities while complaining about how awful Detroit is. We Detroit residents are very worried that the GOP's takeover of the Democratically elected city government will result in the rape of the city's assets--Belle Isle is a jewel in Detroit's crown that the state covets; Detroit's water system is another asset that the state--and the white suburbs--covet and want to control. The EM will be pressured by Snyder and the rest of the upstate Detroit haters to take over those assets and make Detroit pay for being a center of unionism and Democratic voters.
The Michigan passage of the so-called "right-to-work" law and the renewal of the emergency manager law AFTER it was defeated by the people in Novemberare perfect illustrations of the contempt that the current Republican party shows for ordinary people when it is in power in a state. And it also illustrates well the capture of legislators and agencies by oligarchs, monopolies and duopolies. This is, as Johnston notes, a sad state of affairs that will only get worse unless the press reinvigorates itself to inform rather than kiss Big Business's ass.
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The Republican policy think tanks have been as dishonest to Republican voters as Clinton neo-liberal have to Democratic voters. Below you see CATO Institute----hyper-conservative congratulating Reagan on what was the worst of free-market policy----and then below that it writes a paper that spells out all of what makes today's economy anything but.
Remember, Reagan sold his non-free-market policies by pretending it was all about grassroots small business development spurring local economies. Again, here's CATO pretending it is this Entrepreneur policy not corporate subsidy that is the answer to building free market.
Yet, as everyone knows by now------this entrepreneur policy is simply subsidizing global corporate profits by allowing these startups do all the work---spend all the money----fight to change all the laws----and then global corporations come in and take any successful start up=====AGAIN , THAT IS THE PLAN----it has nothing to do with building grassroots businesses to promote free-market economy. Today, not only do Republican voters have to listen to these lies------now, because the Democratic Party is Big Business say Wall Street global Clinton neo-liberals---so too are Democratic voters being sold all this entrepreneur and start up as free market
AND IT IS THE SAME CON AS THE DEREGULATION POLICY ------NONE OF THIS IS FREE MARKET.
'Ronald Reagan’s 100th Birthday
Ronald Reagan was the most eloquent spokesman for limited government of our time. Through 25 years of tirelessly "raising a banner of no pale pastels, but bold colors" of political principle, he succeeded in changing the climate of opinion in the United States and around the world. His conservatism involved making government smaller, not using big government for conservative goals. We miss that kind of conservatism in Washington today'.
THIS CURRENT ENTREPRENEUR/START UP POLICY SOLD AS FREE MARKET IS SIMPLY THE NEXT CON FOLLOWING THE DEREGULATION SCAM.
Disruptions: With No Revenue, an Illusion of Value
By
Nick Bilton
April 29, 2012 11:00 am BITS New York Times
*********************
Corporate Welfare Spending vs. the Entrepreneurial Economy
By Chris Edwards and Tad DeHaven
June 1, 2012
House Budget CommitteeMr. Chairman and members of the committee, thank you for the invitation to testify regarding corporate welfare, entrepreneurs, and economic growth. This testimony will address the problems caused by corporate welfare and discuss why spurring entrepreneurship is a better approach for generating economic growth.
Rising spending and huge deficits are pushing the nation toward an economic crisis. There is general agreement that policymakers need to find wasteful and damaging programs in the federal budget to terminate. One good place to find savings is spending on corporate welfare.
Some people claim that business subsidies are needed to help fix market failures in the economy. But corporate welfare is just as likely to create failures by misallocating resources and inducing businesses to spend time on lobbying rather than on making better products. Corporate welfare transfers wealth from average families to favored businesses, and it creates corrupting ties between government officials, politicians, and business leaders.
Policymakers are rightly concerned about the competitiveness of American businesses in the global economy. But the way to address that concern is not through subsidies, but through broad-based reforms such as permanent reductions to capital gains and corporate income tax rates.
The Taxpayer Cost of Corporate Welfare
A forthcoming Cato Institute study finds that federal business subsidies total almost $100 billion annually.1 That is a fairly broad measure of subsidies to small businesses, large corporations, and industry organizations. The subsidies are handed out from programs in many federal departments including Agriculture, Commerce, Energy, and Housing and Urban Development.
However, there is no precise measure of “corporate welfare.” As part of the national income accounts, the Bureau of Economic Analysis calculates that the federal government handed out $57 billion in business subsidies in 2010.2 A 1995 Congressional Budget Office Study put the total at $30 billion in spending subsidies for businesses at that time.3
Ending business subsidies would be one step toward reducing the federal deficit, but there would be other benefits as well. The following sections discuss the unfairness of corporate welfare, how it harms the economy and generates corruption, and why entrepreneur-led growth is a better alternative.
Corporate Welfare Is Unfair
The Constitution empowers the federal government to take steps to ensure an open national economy. The Commerce Clause gives the government the authority to “regulate Commerce… among the several States,” but the purpose was to remove barriers to trade, not to actively favor some businesses over other businesses and individuals.
People disagree on the meaning of “fairness,” but surely it includes supporting the bedrock American value of equality under the law. The government’s proper role should be that of a neutral referee in the economy facilitating the free exchange of goods and services. Yet corporate welfare advantages certain businesses at the expense of taxpayers, families, and other businesses, as some examples illustrate:
Farm Subsidies. Farm subsidies redistribute wealth from taxpayers to often well-off farm businesses and landowners. “Farm income stabilization” payments have recently fluctuated between about $13 billion and $33 billion annually. 4 This is a welfare hand-out like food stamps, yet it goes to higher-income households. In 2010, the average income of farm households was $84,400, or 25 percent above the $67,530 average of all U.S. households.5 Moreover, the great bulk of farm subsidies go to the largest farms.6
Sugar Subsidies. The federal government also enriches certain businesses in an off-budget manner, as sugar subsidies illustrate. The government runs a Soviet-style system of price supports, quotas, and import barriers for sugar. The effect is to push up the domestic price of sugar to the benefit of U.S. sugar producers while imposing extra costs on consumers.7 Artificially high sugar prices also hurt American businesses that use sugar, and numerous U.S. food companies have moved production to Canada and Mexico where sugar prices are lower.8
Economic Development. The government runs many so-called economic development programs that distribute corporate welfare. As one small example, the Community Development Block Grant program recently handed out $220,000 to a craft brewery in Michigan.9 Meanwhile the Value Added Marketing program hands out money to selected wineries across the country.10 These hand-outs are not fair to taxpayers or the breweries, wineries, and other businesses that don’t receive such special favors.
Polls show that the public understands the unfairness of corporate welfare, and most people want it cut. Most people are against the federal government providing loan guarantees to small businesses; only 29 percent think that the government should help large corporations finance their export sales; and a plurality (46 percent) think farm subsidies should be abolished.11 Polls have also found strong opposition to federal bailouts of financial institutions.12
Corporate Welfare Distorts the Economy
Some policymakers think that subsidies are needed to help U.S. businesses compete in the world economy. But the more we subsidize businesses, the more we weaken the market’s profit-and-loss signals, and the more we undermine America’s traditions of entrepreneurship and gutsy risk-taking by the private sector.
People argue that business subsidies are needed to fix market imperfections. But subsidies usually don’t work as intended, and they often distort markets rather than fixing them. Robert Novak once said that “the mind-set underlying corporate welfare is that of the central planner,” and yet we know that central planning does not work.13
Consider the energy industry, which Republicans and Democrats have been manipulating with subsidies for decades. An early subsidy effort was the Clinch River Breeder Reactor, which was an experimental nuclear fission power plant in Oak Ridge, Tennessee in the 1970s. This Republican-backed boondoggle cost taxpayers $1.7 billion and produced absolutely nothing in return.14
Then we had the Synthetic Fuels Corporation (SFC) approved by President Jimmy Carter in 1980, who called it a “keystone” of U.S. energy policy. The government sank $2 billion of taxpayer money into this scheme that funded coal gasification and other technologies before it was closed down as a failure. The SFC suffered from appalling mismanagement, huge cost overruns on its projects, political cronyism, and pork barrel politics in dishing out funding.15
Both parties have backed dubious “clean coal” projects for decades. The GAO found that many of these projects have “experienced delays, cost overruns, bankruptcies, and performance problems.”16 In a review of federal fossil fuel research, the Congressional Budget Office concluded: “Federal programs have had a long history of funding fossil-fuel technologies that, although interesting technically, had little chance of commercial implementation. As a result, much of the federal spending has not been productive.”17
With the poor record of energy subsidies over the decades, it is no surprise that the Obama administration is having trouble with its green energy activities. The administration’s failures keep piling up—Solyndra, Raser Technologies, Ecotality, Nevada Geothermal, Beacon Power, First Solar, Abound Solar, and Beacon Power.18 These subsidy recipients have either gone bankrupt or appear to be headed in that direction.
Why don’t business subsidies work very well? One reason is that political pressures undermine sound economic choices. The Washington Post found that “Obama’s green-technology program was infused with politics at every level.”19 The decision to approve the Solyndra loan, for example, appears to have been rushed along by high-level politics.
Perhaps more importantly, subsidies change the behavior of businesses. An economist recently quipped to me: “I don’t know whether the government is better at picking winners rather than losers, but I do know that losers are good at picking governments.” When the government starts handing out money, businesses with weak ideas get in line because the businesses with the good ideas can get private funding. Enron, for example, was able to grab huge federal support for its disastrous foreign investment schemes.
At recent House hearings on green energy subsidies, most witnesses lined up in favor of Department of Energy loan programs, except for one witness who heads a solar power firm that does not receive federal subsidies.20 James Nelson of Solar3D said that subsidizing green energy commercialization “is a wasteful mistake because it doesn’t work.”21 Here are some of the problems he pointed to:
- Firms that receive subsidies become spendthrift. Nelson contrasted his firm’s lean operations with Solyndra’s wasteful ways, which included building a fancy factory in a high-cost location. Nelson noted that the “most powerful driver in our industry is the relentless reduction in cost.” Yet government intervention rarely works to drive down costs in any activity.
- Subsidies aren’t driven by actual market demands. Nelson noted that U.S. adoption of solar energy lags behind several other nations. But he said, “this should not bother us if it means that the other countries are investing in technology that is not economically viable.” In other words, if other countries are misallocating resources, that won’t hurt us. The good news, he said, is that America is the leader in market-driven private venture capital for “clean tech.”
- Subsidies distort business decisions. Nelson noted that “giving companies money to set up manufacturing in the U.S. may doom them to failure by financing them into a strategically uncompetitive position.” In other words, if subsidies induce U.S. firms to put more production in the United States than is efficient, it will disadvantage them in the marketplace.
- Venture capitalists have already funded the best projects, leaving the dogs for the government. If venture capitalists “reject a project, it is difficult to believe that the government could do a better job of picking a winner,” argues Nelson.
The House hearing included testimony from green energy firms that had received subsidies. Their comments revealed how subsidies were eroding their focus on the bottom line. The firms stressed how many jobs they were creating and how their supplier chains covered many states—and thus many congressional districts. One solar firm bragged that it is “creating and maintaining jobs locally and across the nation,” while it is “procur(ing) from a supply chain that stretches across 17 states.”22 Another solar firm bragged that it “spent more than $1 billion with U.S. suppliers in 35 states.”23
Subsidy supporters at the hearing stressed the “nonfinancial objectives” of green subsidies, such as jobs.24 But as Nelson noted, “businesses are not made more successful by more jobs.”25 If businesses want to succeed in tough global competition, they need to minimize their labor and supplier costs, and subsidies erode that lean focus. Nelson concluded that success in the marketplace “requires brains, discipline, and grit. It is rarely aided, and often impeded by government involvement.”26
Another problem with business subsidies is that they can encourage investing in very dubious projects. That is the story of Enron’s international investments, which played an important role in the implosion of the firm. By one estimate, Enron received $2.4 billion in federal aid through the Export-Import Bank and the Overseas Private Investment Company between 1992 and 2000.27 Another study puts total federal government subsidies to Enron for its foreign schemes at $3.7 billion, plus Enron received subsidies from international agencies such as the World Bank.28 All these subsidies made possible Enron’s excessively risky foreign investments, which came crashing down at the same time that the firm’s accounting frauds were being revealed.29
Suppose that the government was capable of channeling subsidies only to well-managed companies with sensible ideas. Then the subsidies wouldn’t be needed because they would simply crowd out private investment. That seems to be the case with much of the $7 billion in subsidies for rural broadband in the 2009 stimulus bill, as one detailed study in 2011 found.30
Or consider the Department of Energy’s Advanced Technology Vehicles Manufacturing Loan Program, which provides subsidies to companies to develop green cars. A former executive with Tesla Motors, which received subsidies, concluded that “private fundraising is complicated by investor expectations of government support.”31 Subsidies distort the venture capital market, having “a stifling effect on innovation, as private capital chases fewer deals and companies that do not have government backing have a harder time attracting private capital.”32
A final problem with corporate welfare is that it can create broader distortions in the economy. For more than a century, the federal Bureau of Reclamation has subsidized irrigation in the 17 western states. About four-fifths of the water supplied by the bureau goes to farm businesses, and this water is greatly underpriced.33 Because farmers are receiving water at a fraction of the market price, they are over consuming it, which threatens to create water shortages in many areas in the West. Subsidized irrigation also causes environmental damage.
Corporate Welfare Generates Corruption
The creation of corporate welfare programs has spawned an expanding web of lobby groups that demand ever more favors from policymakers. The more that the government intervenes in the economy, the more lobbying activity is generated, and the more new subsidy programs get created. It’s a vicious cycle.
Corporate welfare doesn’t just create direct economic harm, it also erodes support for America’s free enterprise system. Businesses that become hooked on subsidies become tools of the state. They lose their independence, and they may focus more on gaining special benefits from Washington than on making good products. The more special breaks that businesses receive, the less willing they are to speak out against the expansion of big government.
While some people think that corporations lobby to slash government, they mainly do the opposite. Businesses often lobby in favor of federal intervention if it will benefit them and hurt their competitors. The major airlines, for example, were against airline deregulation in the 1970s because existing rules protected them from competition.34
Business subsidy programs attract corruption like garbage dumps attracts rats, and that has always been the case in Washington. For example, federal subsidies for the first transcontinental railroad, the Union Pacific, led to the Credit Mobilier scandal of the 1870s, which involved payoffs to dozens of members of Congress. In recent decades, scandals stemming from corporate welfare have been a bipartisan problem, as these examples illustrate:
HUD Subsidies under Reagan. President Ronald Reagan’s Department of Housing and Urban Development overflowed with corruption in the 1980s under Secretary Sam Pierce.35 Pierce routinely dished out grants, loans, and other sorts of subsidies to friends and business associates. And HUD created programs that involved large subsidies to mortgage lenders, developers, and other businesses, with Republican Party contributors as frequent beneficiaries.
Commerce Subsidies under Clinton. President Bill Clinton’s Commerce Secretary, Ron Brown, used federal business subsidies as a fund-raising tool for the Democratic Party in the 1990s. Corporate executives who played the game were given access to export promotion trips and loans from OPIC.36 In subsequent investigations, U.S. District Judge Royce Lamberth found that Commerce officials concealed and destroyed documents relating to the scandal, and he compared the officials to “con artists” and “scofflaws.37
Enron Subsidies under Clinton and Bush. Enron Corporation is a poster child for the harm of business subsidies, particularly with regard to its disastrous foreign investments. Enron lobbied government officials to expand export subsidy programs, and it received billions of dollars in aid for its foreign projects from the Ex-Im Bank, OPIC, the U.S. Trade and Development Agency, the U.S. Maritime Administration, the Commerce Department, and the U.S.-backed World Bank. As noted, Enron received about $3.7 billion in financing through federal government agencies.38 These subsidies induced Enron to make exceptionally risky foreign investments, and the resulting losses were an important factor in the company’s implosion.39
During the Clinton and early Bush administrations, high-level officials went to great lengths to aid Enron on an Indian power plant deal.40 The Washington Post noted, “President Bush’s National Security Council led a ‘working group’ with officials from various Cabinet agencies to resolve Enron’s troubles over a power plant venture.”41 We saw similar high-level involvement in the failed Solyndra investment by the Obama administration. Top government officials should be spending their time on policies in the general interest of all Americans, not on helping individual companies earn higher profits.
Green Subsidies under Obama. The Washington Post found, “Obama’s green-technology program was infused with politics at every level.”42 The $535 million loan guarantee for Solyndra, is a prime example. The DOE approved the loan after receiving pressure from White House officials to move ahead so that the vice president could announce it at a groundbreaking for the company’s factory.43 President Obama visited Solyndra and called the firm an “engine of economic growth,” but later it collapsed.44
President Obama’s green energy programs illustrate how corporate welfare creates corrupting relationships between businesses and politicians. The Washington Post found that “$3.9 billion in federal [energy] grants and financing flowed to 21 companies backed by firms with connections to five Obama administration staffers and advisers.”45 It also noted that the “main players in the Solyndra saga were interconnected in many ways, as investors enjoyed access to the White House and the Energy Department.”46 According to the New York Times, Solyndra “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House.”47
American businesses, of course, have a right to lobby the federal government. But given that reality, Congress throws fuel onto the corruption fire by creating business subsidy programs. When subsidy money flows out the door from Washington to businesses at the same time that money flows back from businesses to Washington for lobbying, it’s no surprise that we get influence-peddling. Corporate welfare undermines honest and transparent governance, and Americans are sick and tired of the inevitable scandals.
Long-Term Growth Depends on Entrepreneurs
Most of America’s technological and industrial advances have come from innovative private businesses in competitive markets. Indeed, it is probably true that most of our long-term economic growth has come not from existing large corporations or governments, but from entrepreneurs creating new businesses and pioneering new industries. Such entrepreneurs have often had to overcome barriers put in place by dominant businesses and governments.
Economic historians Nathan Rosenberg and L.E. Birdzell found that “new enterprises, specializing in new technologies, were instrumental in the introduction of electricity, the internal-combustion engine, automobiles, aircraft, electronics, aluminum, petroleum, plastic materials, and many other advances.”48 We can update that list to include cell phones, personal computers, biotechnology, and all kinds of Internet businesses.
If policymakers want to get U.S. economic growth back on track, they should put entrepreneurs front-and-center in their thinking about policy. Here are some of the ways that entrepreneurs generate growth:
Entrepreneurs are Radical Innovators. Their advances are usually unexpected and disruptive to existing businesses.49 Personal computers were pioneered in the 1970s by new companies such as Apple. The opportunity was missed both by leading computer firms and by government planning agencies such as Japan’s MITI.50 Big corporations were focused on mini and mainframe computers, while the U.S. government was subsidizing supercomputers. Governments and big companies often overlook niche products that later become revolutionary. In the 1970s, microcomputers were an obscure hobbyist activity, and software for microcomputers—which Bill Gates helped pioneer—was a niche within a niche. The small-scale innovations of entrepreneurs in niches often create huge, unforeseen changes.
Entrepreneurs Generate Competition. Another crucial role of entrepreneurs is that they challenge dominant firms and governments. One great story is the rise of MCI Corporation in the 1970s and 1980s. MCI helped destroy the AT&T monopoly, which paved the way for the modern telecommunications revolution. Another innovator was Fred Smith of Federal Express. Today we take overnight letter delivery for granted, but it was Smith who battled federal regulatory roadblocks in the 1970s and provided new competition for the U.S. Postal Service by proving that there was an untapped demand for rapid delivery.
Entrepreneurs Turn Inventions into Innovations. America’s long-run growth is often portrayed as a steady process of accumulating new inventions. Many people seem to think that the government can simply pump money into research and the economy will grow. But that “science push” theory of growth is incorrect. Economies grow because of innovations, which are inventions that are packaged and tested in the marketplace by entrepreneurs.
The modern economy is steeped in uncertainty. No one can predict the future, not even the best scientists, engineers, and economists in big companies and the government. Many experts have made hugely off-base prognostications about the economy.51 Two decades ago, many pundits and policymakers were convinced that Japan was taking over the global economy. Professor and pundit Robert Reich thought that “chronic entrepreneurialism” was undermining the U.S. economy. And past predictions about the computer industry have been laughable, such as this comment in 1977 by the founder of Digital Equipment Corporation: “There is no reason for any individual to have a computer in his home.”
Luckily, expert predictions don’t drive the economy. Rather, successful market economies work by having swarms of entrepreneurs freely testing new ideas. Entrepreneurs are the economy’s guinea pigs. They have the guts to act in the face of uncertainty, and they learn from their mistakes and keep trying until they find ideas that work and generate profits.
By contrast, government plans to stimulate the economy are often based on ideologies and rigid ideas. Some policymakers believe that particular energy technologies are THE solution to America’s problems, and they support ongoing subsidies year after year regardless of marketplace realities. By contrast, in competitive and unsubsidized markets, mistakes are usually quickly exposed and businesses cut their losses short and change direction.
It appears that the unexpected fall in solar panel prices helped to sink Solyndra. Perhaps businesses that are tethered to governments are slower to make the changes needed to survive. The government tends to work at a turtle’s pace, which doesn’t sync well with the fast-paced modern economy. We saw a comparison of the government turtle with the private-sector gazelle during the first sequencing of the human genome in the late 1990s. The government’s lavishly funded Human Genome Project was a lengthy multi-year research project, but it was upstaged when entrepreneur Craig Venter launched Celera Genomics to complete the job at a fraction of the time and cost.
What are the policy lessons from America’s great entrepreneurial history? One lesson is that because markets have high levels of uncertainty, government agencies and dominant companies cannot be relied upon to secure our economic future. Instead, we should remove hurdles to entrepreneurship every way we can—by tax reforms, by repealing barriers to entry into industries, and by reducing financial industry barriers to private risk financing.
While it has become fashionable to criticize Wall Street, the financial industry has been crucial to funding waves of innovation in the U.S. economy. Risk capital was integral to the railroad and telegraph booms of the 1800s, and the radio, electricity, and automobile booms of the early 20th century. J.P. Morgan Chase has garnered negative headlines in recent weeks, but J.P. Morgan was the company that provided seed capital for Thomas Edison’s Edison Electric Illuminating Company, which became General Electric.52
In recent decades, high-yield bonds, venture capital, and angel investment have played key roles in growing new industries. Today, U.S. venture capital and angel investors pump more than $50 billion annually into young companies.53 Tax policy influences investment flows, and funding for high-growth ventures is affected by the tax treatment of capital gains in particular. One step for policymakers would be to create investment certainty by permanently extending the 15 percent federal capital gains tax rate. Also, the corporate tax rate should be cut to spur greater capital investment—new capital equipment usually embodies technological advances.
Policymakers should put aside the idea that some sort of big intervention can permanently “win the race” for some particular goal, such as energy independence, solar power dominance, or beating China. In the recent House testimony, an energy consultant said, “clean energy has been targeted by our major international competitors (including China and Germany) as a critical, and perhaps the critical, future growth and export industry… whether the U.S. wins or loses in this race matters because the outcome will have a large impact on future U.S. employment and economic strength.”54 At the same hearing, a solar company executive said that America could “win in the long run” with a particular solar technology.55
However, those sorts of prognostications are refuted by U.S. economic history. There is never any final “win” in the marketplace. Look at how leadership in cell phones and smart phones has shifted from firm to firm and country to country, from Nokia, to RIM Blackberry, to Apple and others. Technologies and markets are always changing, so the only way for America to permanently “win” in the struggle for economic growth is to have the best climate for investing, innovating, and building entrepreneurial companies.
We’ve mainly focused on subsidies to new industries such as green energy. But withdrawing corporate welfare from older, established industries could spur innovation as well. Consider farm subsidies. New Zealand ended virtually all its farm subsidies in 1984, which was a bold stroke because that country is much more dependent on farming than is the United States. The changes were initially resisted, but New Zealand farm productivity, profitability, and output have soared since the reforms.56 Faced with new financial realities, New Zealand’s farmers innovated—they cut costs, diversified their land use, sought nonfarm income, and developed new markets.
Thus rather than looking for new ways to subsidize businesses, policymakers should be looking for places to withdraw subsidies and deregulate in order to spur innovation. For example, just as the break-up of the AT&T monopoly in the 1980s helped to generate growth in the telecommunications industry, ending the U.S. Postal Service monopoly today would spur innovation in that industry. Europe is moving in that direction, with Germany and the Netherlands already privatizing their postal systems.57
The transportation sector is another area where innovation could be spurred by the reduction of federal subsidies. For example, Amtrak is doomed to inefficiency as a government-run business pumped full of subsidies and shackled with regulations. It should be privatized.58 Other countries are ahead of the United States in privatizing transportation infrastructure, or at least in bringing private investment into infrastructure.59
The United States subsidizes its air traffic control system, but it doesn’t need to. Canada privatized its air traffic control system in 1996, and it operates as a self-funded nonprofit corporation. It has been a big success.60 Another ripe area to cut subsidies and bring the private sector in is space flight. The recent success of the SpaceX flight and the 2004 success of SpaceShipOne indicate that the private sector is entirely capable of bold and risky technological ventures.
To sum up, the way to spur economic growth is not through business subsidies, but through breaking down barriers to entrepreneurs. Let’s give entrepreneurs a crack at postal services, air traffic control, passenger trains, and other monopoly industries. Let’s pursue tax and regulatory reforms to maximize the flow of financing to new and growing businesses. And let’s stop demonizing entrepreneurs who succeed and the financial system that allows them to grow. If we want to exorcize some demons, we should end the corporate welfare system that is corrupting our government and the American economy.
Thank you for holding these important hearings.
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