Where Cato Goes Wrong on Corporate Welfare

The Cato Institute has long been a critic of "corporate welfare," and over the years, it has directed fire at many worthy targets—from tax breaks for Big Oil to the military-industrial-complex. 

But Cato is also guilty of wildly stretching the definition of corporate welfare, applying this epithet to any number of smart public investments that Cato opposes as part of its blanket ideological rejection of nearly all forms of government involvement in the economy.

The term of corporate welfare suggests needless giveaways and perks to private business that serve no useful purpose. Yet in a recent report on corporate welfare in the federal budget by Tad Dehaven, Cato lumps together wasteful programs and tax breaks that benefit fat cats with such important government functions as aiding small business and improving the nation's infrastructure. 

Let's go through DeHaven's apples and oranges mix-up more closely. 

In alleging that the federal budget contains nearly $100 billion in annual corporate welfare, DeHaven criticizes the huge subsidies for agriculture and the highly profitable fossible fuel industry, which makes sense. But he also  picks on some curious targets that don't seem related to what most people would understand as corporate welfare. 

For example, DeHaven goes after loans to small businesses through the Small Business Administration, saying this a waste of money because "small businesses with sound business plans and solid prospects should be able to raise debt and equity capital through private means." But should is the key word in that sentence. In reality, a majority of small business owners regularly report that access to capital is a major problem, and that's been especially true lately. (See this 2012 poll, for instance.)

Anyway, does it really make sense to put a modest SBA loan to a struggling Subway franchise owner in the same basket as the tax breaks given to ExxonMobil—one of the most profitable corporations in world history? 

Or consider another of DeHaven's targets: federal investments in high-speed rail. DeHaven writes that this is an obvious boondoogle because "if high-speed rail made economic sense, the private sector would build it without government subsidies." And he notes disapprovingly: "Even in more densely populated areas, such as Europe and Japan, where high-speed rail might make sense, rail operators are dependent on government subsidies." 

What DeHaven ignores here, of course, is that, yes, many public goods don't make economic sense—which is precisely why we need government to step in. Enabling people to get around—whether within a city or between cities by rail, car, or air—is not always a profitable kind of enterprise for private businesses. But the easy movement of people is a massive benefit to all businesses that depend on workers being able come to work, or customers getting to stores, or executives being able to pitch new clients, and so on. 

This is why business leaders and conservatives have traditionally supported government spending on infrastructure. It's a perfect example of a proper role for government. And if the current political climate weren't so polarized, today's conservatives would also get behind high-speed rail as the next obvious step in building a modern transportation infrastructure in an era where air and road travel is overloaded and dependent on fossil fuels. The Chinese can see this future as clear as day, which is why they are investing in a state-of-the-art high-speed rail system to link together its major cities. 

Government support for medical research is another area that DeHaven criticizes as corporate welfare—and another example of the feds stepping in to pay for a publc good that the private market won't provide on its own. Certain kinds of basic research is simply not profitable for corporations, yet if such research can deliver huge benefits to all of U.S. society. That's why when President Obama announced a $100 million initiative to map the human brain, the proposal was met with rare bipartisan enthusiasm, including from House Majority Leader Eric Cantor. Imagine if that effort eventually helped find a cure to Alzheimer's? 

But, anyway, since when did research grants to neuroscientists at universities amount to "corporate welfare?" 

It's too bad that Tad DeHaven and Cato take such broad brush, ideological approach to government involvement in U.S. society, because there's actually a lot in the report that makes sense. DeHaven is right, for example, that subsidies can distort markets and can create corrupting relationships between business and politicians. And he's right that the corporate quest for subsidies, tax breaks, and perks is a big driver of money in politics and Washington's lobbying complex. 

Ultimately, though, the role of government investment is nuanced topic. It's a good news, bad news story. But in Cato's hands, that balanced truth gets swept away in favor of a libertarian fantasy in which the private market can and should solve every problem that faces humanity.