Zombie Corporate Welfare

Perhaps in anticipation of Halloween, two components of corporate welfare have been doing their best impression of a Hollywood monster that refuses to die.

The Export-Import Bank (Ex-Im) seems poised to come back from the grave, and promises have already been made to reverse the minor cuts to the crop insurance subsidy program agreed to in this week’s budget deal. These cases give some insight into just how difficult it is to actually get rid of corporate welfare.

Cato has long criticized both corporate welfare and crony capitalism, which benefit the few, the powerful, and the politically connected at the expense of everyone else. These policies introduce distortions into the market and limit competition, all at taxpayer expense. Despite their many harmful effects, the nature of these programs, with concentrated benefits and dispersed costs makes it hard to root out corporate welfare from the budget. The groups and companies that benefit are highly motivated to make sure they continue, while ordinary people who all bear a smaller share of the cost are more focused on other things like the practical concerns of providing for their families. This can explain part of why it’s so hard to end any of the many programs that make up the web of corporate welfare.

Ex-Im provides financing and loan guarantees for foreign customers of certain U.S. companies. While proponents argue that Ex-Im is critical to exports and helps American businesses, the vast majority of these benefits flow to a handful of major corporations, and roughly 98 percent of U.S. exports do not get any kind of Ex-Im assistance at all. As Cato’s Dan Ikenson has shown, these subsidies also harm “competing U.S. firms in the same industry, who do not get Ex-Im backing, and U.S. firms in downstream industries, whose foreign competition is now benefiting from reduced capital costs courtesy of U.S. government subsidies.” Given these inefficiencies and distortions, opponents of Ex-Im cheered when the bank’s charter lapsed this summer, but unfortunately that was not the last chapter in this saga. Earlier this week, the House, in a discouraging instance of bipartisanship, voted to reopen Ex-Im by a 331-118 margin. While it still has to get past the Senate, a similar bill passed that chamber earlier this year, and the measure will likely be included in the coming highway bill. So after a prolonged battle to shut down this one small component of corporate welfare, the hard-fought victory for Ex-Im opponents will probably be short-lived.

Tucked into this week’s very disappointing budget deal was one minor positive aspect: modest cost savings from making changes to the subsidized crop insurance program. In this program, farmers can purchase insurance from approved private insurance companies, and the federal government reimburses these insurance companies for administrative and operating costs in addition to reinsuring their losses. The tweak in the budget deal wouldn’t even achieve savings by increasing the insurance premiums paid by farmers, but by merely lowering the rate of return for the insurance companies from 14.5 percent of premiums to 8.9 percent.  It’s worth noting that the Congressional Budget Office estimated that this change would save about $3 billion through 2025, and that these savings would not really start to materialize until 2019. Perhaps unsurprisingly, Roll Call reports that “[f]arm-state lawmakers have been assured by leaders that a provision in the bipartisan budget deal that would trim the federal crop insurance subsidy program will be replaced down the road.” This modest change was years away from even taking effect and the savings were extremely modest over a decade, but there have already been promises to reverse them, citing the potential for “dramatic” consequences.

Past Cato research has analyzed the amount of corporate welfare in the federal budget, estimating that it consistently accounts for more than $100 billion (in inflation-adjusted dollars) each year.

Sources: Author’s calculations using Office of Management and Budget, “Public Budget Database, Outlays,” https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/outlays.xls and Office of Management and Budget, “The Appendix, Budget of the United States Government, Fiscal Year 2016,” https://www.whitehouse.gov/omb/budget/Appendix; Tad DeHaven, “Corporate Welfare in the Federal Budget,” Cato Institute Policy Analysis No. 703, July 25, 2012; Stephen Slivinski, “The Corporate Welfare State: How the Federal Government Subsidizes U.S. Businesses,” Cato Institute Policy Analysis No. 592, May 14, 2007.

The developments with Ex-Im and crop insurance subsidies are just the two most recent examples of why corporate welfare keeps coming back like a Hollywood monster, costing taxpayers and introducing economic distortions, year after year. Even so, opponents of corporate welfare need to continue to expose the flaws, costs and harmful effects of these programs, otherwise they will always be with us.