Magazine | January 25, 2016, Issue

End Corporate Welfare

Republicans should give principle a try

A campaign against business subsidies — conservative warfare on corporate welfare — would present Republicans with an easy win: What other issue would energize free-market conservatives while stoking the sympathies of some traditional liberal Democrats, tapping into the new populist energy behind such figures as Donald Trump and Bernie Sanders while acting in the service of principled conservatism? None — so why can’t Republicans get their act together on corporate welfare?

The answer is three-part: farmers, national security, and inertia.

Paul Ryan did not have much to say about corporate welfare until the bailout fiasco of 2008–09, after which he approached the issue with “the zeal of a convert,” as Tim Carney of the Washington Examiner and the American Enterprise Institute put it. Since the dark days of the financial crisis, a great deal has happened for Representative Ryan, who would go on to chair the House Budget Committee and then the Ways and Means Committee, as well as appear on the doomed 2012 Republican presidential ticket with Mitt Romney, all on his way to becoming speaker of the House, the rarefied position in which he is today ensconced. Something else happened, too: He oversaw the reauthorization of the Export-Import Bank of the United States, a controversial federal agency that serves as the reification of American corporate welfare.

He wasn’t happy about it. He registered his “strong disapproval” during the debate and protested that reauthorizing the bank meant exporting “crony capitalism,” rather than the genuine article, to the rest of the world. The speaker is of course correct here, as a matter of substance: The Export-Import Bank does very little to contribute to the general welfare of these United States, though it does a great deal to contribute to the welfare of a small number of firms, Boeing prominent among them, by, e.g., arranging sweetheart financing on the very loosey-goosiest of terms for overseas entities interested in buying Boeing airplanes. It isn’t as though no other means of financing were available: When Congress last threatened to shut down Ex-Im for good, Boeing announced that it would finance some deals itself. And there’s no reason it shouldn’t: Big Boeing customers such as the Dubai-based Emirates airline, which is owned by the $160 billion sovereign-wealth fund of the United Arab Emirates, are eminently credit-worthy. But the Arab jet set prefers the generous terms offered by the Export-Import Bank.

It would be more honest and more transparent if the U.S. Treasury were simply to write Boeing a very large check every year, but we prefer an element of subterfuge in our corporate welfare. We give foreign firms money to buy products from American firms and call it trade policy; in much the same way, we give military aid to overseas governments, with the stipulation that almost all the money be spent procuring goods and services from U.S. military contractors, and call that foreign aid. Sometimes, the voters get a whiff of what’s going on, which is why only a small minority of Americans told pollsters they favored reauthorizing the Export-Import Bank, though most voters, perhaps bamboozled by scary-sounding trade-deficit figures, support in the abstract the idea of bolstering U.S. exporters. In any case, most voters don’t really know what the Export-Import Bank is or what it does, but they have heard that it is a corporate-welfare slush fund. Curiously, they heard that from Barack Obama, who apparently passed Paul Ryan on the road from Damascus: Once a trenchant critic of the agency, President Obama has experienced a conversion.

Paul Ryan’s impotence in the matter of the Export-Import Bank illustrates one of the counterintuitive facts of life in Washington. Everybody knows that doing the right thing when it is unpopular is very difficult for politicians, else we would have had entitlement reform and a simplified tax code decades ago. What’s strange is that doing the right thing can prove damned near impossible even when it isn’t unpopular — even when it’s a little bit popular. There are no Americans ready to hurl themselves upon barricades in defense of corporate subsidies for Boeing, General Electric, Caterpillar, and Bechtel. A Mercatus study found that, in fiscal year 2013, 76 percent of Ex-Im subsidies went to benefit only ten companies, those industrial giants among them, and, though they do excellent work, no one weeps for Applied Materials Inc.

But no one much cares, either, meaning that this presents one of the classic political-economy problems: the mismatch between concentrated benefits and dispersed costs. Few Americans know enough about Ex-Im to much care about what it does, and those who do know and care are the ones with a direct financial interest in the agency’s survival.

Ex-Im isn’t at the top of many agendas. But the thing of which it is a part — corporate welfare — is. It represents a bigger chunk of money than does foreign aid, but, as with foreign aid, the case against corporate welfare isn’t really about the money. We aren’t going to balance the budget or forestall the implosion of Social Security by eliminating corporate welfare. But Americans intuit that something crooked is here afoot, and, for once, the popular intuition is correct. Republicans occasionally are presented with a political opportunity in which the right side of an issue is also the winning side of an issue, though they blow those chances at least as often as they exploit them.

In 2009, Paul Ryan wrote a column for Forbes titled “Down with Big Business,” a nod to Robert Bartley’s famous 1979 Wall Street Journal piece detailing certain abusive practices undertaken by General Motors. As he reliably does, Ryan made a cogent, canny, and eloquent appeal for his fellow Republicans to get on the right side of corporate welfare as Americans recoiled from the spectacle of their government’s pouring billions after billions of dollars into firms that were, in the famous phrase, “too big to fail.”

Ryan was prescient in seeing that bigness was becoming, in a way that it hadn’t been before, a factor in our politics, thanks in part to deep changes in the economy and changes in the political discourse related to the emergence of social media, talk radio, and other new forums. There is a very old populist tradition in the United States, but it was constrained by certain realities, especially by a media universe that was dominated by three networks, a handful of newspapers, and a couple of wire services. That cultural environment enabled a mode of politics that was dominated by political parties and their operatives.

Big Business and Big Government were very well suited to each other, and corporate welfare was a natural product of that symbiosis. But the balance of power has changed: For a generation now, the most important and profitable investments haven’t been made by Wall Street financial firms but by Sand Hill Road venture capitalists. Nobody wants to be the next GE: Everybody wants to be the next Facebook, to such an extent that GE’s most recent commercials all but disavow the firm’s manufacturing legacy and present it as a kind of software startup. Disruption is the order of the day: In the Republican presidential primary, the last thing anybody wants to be is the insider candidate, the establishment candidate, the party favorite, and thus the insane spectacle of sitting senators and a former chairman of the Republican Governors Association each insisting that he is more of an “outsider” than the next man.

Though neither group would be naturally inclined to see it that way, the tea-party populists and the progressive-leaning Silicon Valley disruptors are sides of a coin: the small and the new versus the large and the old, an emerging cultural and economic order at odds with long-entrenched incumbents. But Republicans are having a hell of a time moving to the right side of this issue, and the usual explanation — big campaign checks from a corporation-dominated “donor class” — doesn’t really tell the story.

For one thing, corporate welfare is tied up in national-security politics, where Republicans reliably find themselves wrong-footed as their instinctive (if partial and limited) libertarianism comes into conflict with their desire for an unparalleled military, which comes, naturally enough, at an unparalleled cost. Without here attempting to reconcile the Churchillian and the Taftian tendencies in the Republican party, it is worth noting that a lot of what we call “foreign aid” consists of shunting great rushing streams of federal money into the coffers of U.S.-based defense firms ranging from traditional armorers to aerospace enterprises. The procedure for doing this is relatively straightforward: We provide our friends and so-called friends abroad with large grants to develop their military capabilities, but we encumber those grants, requiring that some fixed proportion (say, 80 cents on the dollar) of that aid be spent with firms based in the United States. The United States certainly has a legitimate national interest in encouraging Israeli military capabilities — an interest that would be served whether the Israeli government went shopping for munitions in the United States or in Switzerland. The conditions we attach to those grants suggest very strongly that we are using legitimate national-security concerns as a cover for simple wealth transfers. Republicans could make a modest start on reform here by delinking military assistance from domestic business concerns.

Beyond national security, Republicans face a special challenge in reforming corporate welfare because the largest share of such spending — about 40 percent, by some estimates — goes to a single industry: agriculture. Agriculture and rural life hit Republicans where they live, both literally and figuratively, which is one of the reasons agriculture-subsidy “reform” keeps making farm subsidy more expensive: The new Agriculture Risk Coverage (ARC) program, which was sold to fiscal hawks as a more efficient alternative to traditional price supports, will add nearly $2 billion in farm-subsidy costs this year, according to a University of Missouri study. ARC payments to corn and soybean producers alone will come to nearly $3.4 billion in 2016, according to the Congressional Budget Office. These are not, in the main, mom-and-pop operations. Far from being Little House on the Prairie, modern corn and soy operations are multi-million-dollar factories. As special-interest groups go, farmers aren’t a numerical powerhouse: About 3.2 million Americans are employed in agriculture. If Republicans are as interested in the soccer-mom demographic as they claim to be, they might start by asking why they are spending billions of dollars in soccer moms’ taxes every year to make those soccer moms’ grocery bills higher while ruining their Volvos’ performance with ethanol.

Finally, people don’t really write checks for principle — they write checks for self-interest. Pro-life activists, who are famous for their passion, also are famous in Republican-campaign circles for their inability to find their wallets. Pro-market conservatives have the odd Koch brother on their side, but compared with the concentrated financial firepower of the U.S. Chamber of Commerce, the National Association of Realtors, etc., it’s a bear market for principle.

But that, too, is a surmountable obstacle. There is a great deal of money in angel-investors’ accounts and in venture-capital firms — and those firms are investing in new ideas and new markets, not in long-established industry dinosaurs with expensive K Street operations. And that is to whom Republicans should be making their case. But they aren’t. Having got themselves used to losing not only in California but in places culturally affiliated with it, such as Austin and Denver, Republicans haven’t found their voice on this issue. Instead, they’ve stuck to their familiar approaches — with familiar results. Being the party of Big Business hasn’t gotten the Republicans much — millions of conservatives see the Ex-Im reauthorization as yet another capitulation to Washington cronyism by a GOP too thick to appreciate that Wall Street went all-in for Barack Obama in 2008 and will do the same for the next Obama, whoever that may be.

Why not be the party of free enterprise and genuine principle? What do they have to lose, really, that isn’t already on its way to being lost?

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