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Corporate welfare?

By Daniel M. Ryan
web posted October 27, 2008

Ever since the bank bailout was broached, not to mention rescue packages for other industries, we've been hearing the term "corporate welfare." It's a term used by critics of bailouts, whether they be from the Right or the Left. Although both use it with a certain relish, the Left has taken special delight in embellishing it with add-ons like "corporate welfare bums." As far as it being "welfare for the rich," however, there is a certain bipartisan consensus between the two groups.

"Corporate welfare" is a critical term, and as such is meant to shame anyone that otherwise would seek government money. As a stigma-term, though, it's losing its potency. The old shame and embarrassment that the corporate sector used to exhibit with respect to government bailouts, including avoidance behavior, has largely been drained. What stigma is left, from what I can see, is shown by now-old executives who are answering to the ghosts of executives that were old and in charge when today's corporate leaders were starting out. There seems to be more lip service paid to the stigma; fear of being seen as a "corporate welfare case" is largely fear of others' reaction to the news of it. Shame in ponying up for the aid seems to be residual.

This near-shamelessness could be seen as evidence of management gone decadent, but there's another reason for the old-time shame evaporating. In order to see what that reason is, a comparison between subsidies and real welfare is needed.

The standard welfare program provides a guarantee of minimal support from the government, enough to keep a person (or family) alive and in reasonably good condition. Most welfare system have some minimal responsibilities attached, such as job searching and honest declaring of any income, and the welfare support is less forthcoming as a welfare client earns a little income. It's rare for a welfare program to have no residency requirement nowadays. The perverse incentives in this set-up have long been studied, but there still is an overall expectation that welfare aid will be temporary. In a lot of cases, if not typically, it is temporary.

Note that there is no consideration attached to previous taxes paid in any welfare program extant.

As should be evident, the closest program to welfare for businesses would be straight cash grants to companies that are failing, for reasons that are analogous to the ones for plain welfare. In a company's case, it would basically be protecting jobs. Any government program that provides straight cash to companies fallen on hard times, which is later cut off when said companies show profits again, would be corporate welfare in the literal sense.

There aren't many programs like that around, and they tend to be ad hoc and done at the state or provincial level. Typical "aid business" spending programs don't resemble it that much, except for the ad-hockery of them. Instead of straight grants, it's more typical to provide either cut-rate loans or loan guarantees. A lot of what passes for "corporate welfare" is a lot like college-loan programs.

There is, however, a more accurate comparison....which also explains why the term "corporate welfare" stuck.

Libertarian-oriented conservatives are sometimes fond of calling Social Security, and similar pension schemes, another kind of welfare. This characterization carries an irony that's an attribute of many political talking points: at the time when it was most true, the people saying so were shunt aside and were therefore largely unheard. When Social Security was first set up, the first beneficiaries got so much, in return for so little in payments, that it might as well have been another kind of welfare. Those few who dared say so at the time, though, were given the Cassandra treatment (if not worse.) Now that the point has become semi-respectable to utter, it's largely untrue. With very few exceptions, every Social Security recipient has paid Social Security taxes for all of his or her working life. When the numbers are crunched, present-day Social Security – for the living – is a forced-savings scheme that delivers a subpar return except for the lucky. For the average Joe, after factoring in the time value of money, it's a net tax (though a slight one once all the benefits have been worked in.) The net-tax character of Canada's Social Security, the Canada Pension Plan, isn't quite universalized, because it started only 1967, but it soon will be.

People who are still working have another forced-savings plan that they pay into and, sometimes, get something out of: unemployment insurance. Although this scheme's sometimes called welfare, it's pretty far removed from direct aid. The typical setup of an unemployment-insurance program limits benefits if the individual contributor hasn't contributed much; many programs also have special time limits and other restrictions. Despite the tales told and heard about UI, an accountant can confirm that it was hard to make a profit out of unemployment insurance even in North America's most leftish times. Nowadays, it's effectively impossible. On the other hand, it is quite possible to secure a net gain, albeit a small one, from straight welfare.

Corporations pay taxes. Big corporations typically pay a lot of taxes. If the benefits from "corporate welfare" programs are tallied up and compared to the taxes each recipient has had to pay over its lifetime, we don't get a cost/benefit comparison that's like welfare at all. It far more resembles the cost/benefit comparison of UI, in part because the deductibility of earlier losses only kicks in to the extent of the losses.

That's what we have: an informal, largely ad hoc, system of corporate unemployment insurance. To use a Canadian moniker, it's corporate pogey.

It should be clear now why the "corporate welfare bums" are showing so little shame about drawing from the government. In fact, it's an easy prediction that the former shame will be replaced by something akin to the righteousness shown by the typical pogeyer. "I paid into the system – plenty - so I durn well have the right to draw on it a little." If anything, the current corporate-governance trend towards greater fidelity to fiduciary duties will accelerate this change of heart. ESR

Daniel M. Ryan is a regular columnist for LewRockwell.com, and has an undamaged mail address here.

 

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