Site Map

CUTTING CORPORATE WELFARE

by Ralph Nader, 2000 by Ralph Nader
Foreword by Winona LaDuke, 2000 by Winona LaDuke

DOUBLE STANDARDS FOR THE POOR AND THE POWERFUL

Simply to acknowledge the existence of corporate welfare is to point to the enormous discrepancies in influence and allocation of resources in our country.

While President Clinton and the Congress have gutted the welfare system for poor people -- fulfilling a pledge to "end welfare as we know it" -- no such top-down agenda has emerged for corporate welfare recipients. The savage demagoguery directed against imaginary "welfare queens" has never been matched with parallel denunciations of gluttonous corporate welfare kings -- the DuPonts, General Motors and Bristol-Myers-Squibbs that embellish their palaces with riches taken from the public purse.

While the minimal government benefits still afforded the poor are provided only to the most impoverished, no such "means testing" is applied to corporate welfare beneficiaries. By and large, the bigger the company, the more it extracts in government supports. The many government programs to benefit small business -- some merited, some not -- do not come close to the subsidies lavished on large multinational corporations. When DaimlerChrysler threatens to move a factory expansion out of the city of Toledo unless the city effectively evicts an entire neighborhood, turns the land over to the automaker, and arranges hundreds of millions in federal, state and local tax benefits and other subsidies, Toledo rushes to comply. If "Joe's Garage" were to make such demands, the city would laugh. (In fact, in Toledo's desperate rush to please DaimlerChrysler, the city has undertaken what appears to be a campaign of harassment and intimidation designed to push a local auto body repair shop -- Kim's Auto Body -- out of business, and out of the way of DaimlerChrysler's plans to expand its grounds. Note the word choice: those are plans to expand the grounds, not the factory. Kim's and the surrounding neighborhood is located not where factory construction will take place, but where Chrysler would like to place shrubbery.)

The new welfare law sets strict time limits for how long poor people can receive government supports, but no such time limitations attach to government handouts to big business. When it comes to the myriad federal government subsidies, even the names of the beneficiaries are often unknown and almost never centrally compiled for the public, the media, or even government officials. Tax loopholes and tax subsidies generally renew themselves automatically, meaning corporations can take advantage of them into perpetuity (or at least until there is a periodic revamping of the entire tax code, and even such revisions of the tax code usually leave key loopholes in place), without the loophole ever being reexamined. While there are detailed reporting requirements for what remains of welfare for the poor, when it comes to corporate welfare, there are few organized, regular, and current reporting requirements and data compilations, easily accessible by the public.

The welfare law denies benefits even to legal immigrants in this country; corporate welfare, by contrast, is far more non-discriminating -- Uncle Sam subsidizes foreign corporations as well as domestic businesses. Can you imagine the Congress deciding to extend the welfare for people program to cover poor Canadians? Maybe not, but the federal government provides millions of dollars in subsidies to Canadian mining companies every year. Tax loopholes enable foreign multinationals doing business in the United States to pay proportionally less than their U.S. counterparts. Chrysler has become Daimler-Chrysler, with its headquarters, top executives and annual shareholder meetings in Germany, yet there is no abatement in Uncle Sam's corporate welfare payments to the company that in 1979 was saved from bankruptcy and collapse by a U.S. taxpayer bailout.

***

Third, the S&L crisis was triggered in large part by industry deregulation, specifically the Reagan Administration's decision to permit S&Ls to raise interest rates and to leave their area of competence (lending for housing) and venture into other uncharted, riskier waters. [39] And it was caused, to some considerable extent, by S&L criminal activity. This experience should be an important cautionary note for corporate welfare opponents, including conservatives who fancy themselves opposed to "Big Government": deregulation, underregulation and nonregulation pave the way for bailouts, especially in the financial sector. The non-regulated world of hedge funds, for example, contains all the warning signs of eventual crisis and a demand for bailouts. The perceived need for Federal Reserve intervention in the case of Long-Term Capital Management, and the possibility that losses to the firm could have been much more severe, highlights the potentially serious bailout possibilities that might be faced in the near future, absent newly imposed regulations.

Finally, strong antitrust policy and enforcement is a vital prophylactic against the emergence of too-big-to-fail institutions which, by their very size and importance to the national economy, are sure to benefit from a government bailout in the face of potential collapse.

The passage in 1999 of HR 10, which erased the line, established by the Glass-Steagall Act and the Bank Holding Company Act, preventing common ownership of banks, insurance companies and securities firms will exacerbate the too-big-to-fail syndrome. The removal of barriers to common ownership in the United States is triggering a global financial consolidation leading to the creation of giant financial conglomerates. Citigroup -- the product of the merger between Citibank and Travelers Insurance -- is the preeminent example. (The Citigroup merger occurred before the passage of HR 10, but became legal only with its enactment; the merged conglomerate had been operating on a temporary waiver of rules proscribing such a corporate marriage.)

With the new financial mergers, the bailout concerns extend beyond just the too-big-to-fail phenomenon. Regulators are likely to fear that permitting, say, an insurance company to fail would endanger the health of its conglomerate parent, which would in turn threaten a crisis of the entire financial sector, including taxpayer-insured banks. That will create strong pressure for a federal bailout. HR 10 will also effectively function to extend the federal safety net to non-bank affiliates of federally insured banks. If a bank with a failing insurance affiliate makes bad loans in order to bail out the insurance company, and then itself faces financial trouble as a result, federal deposit insurance will be there to back up the bank.

That insurance comes cheap. In 1995, the Federal Deposit Insurance Corporation (FDIC) stopped collecting deposit insurance premiums from banks. Today, all banks, except for a handful of the most risk-prone, receive free insurance from the federal government. As a result, the bank insurance fund at FDIC has only about $32 billion on hand to cover all contingencies for nearly 9,000 commercial banks with almost $3 trillion in deposits. And should FDIC come up short when banks fail in an economic downturn, it can turn to the U.S. treasury. In 1991, with the bank insurance fund in the red, Congress voted to establish a $30 billion contingency fund at the Treasury Department to be used in the event that FDIC ran out of deposit insurance money.

Table of Contents: