Boston Globe: The $150 Billion `Welfare’ Recipients: U.S. Corporations: First of three parts

By Charles M. Sennott,

It comes down to priorities.

And to understand the choices made every day by the federal government on who should benefit from taxpayers’ money, consider these stark examples:

Walt Disney Corp., whose profits in 1995 exceeded $1 billion, received $300,000 in federal assistance last year to perfect fireworks displays. But Joseph and Phyllis Fagone of East Boston, who are in their mid-80s and struggling on a fixed income, were among 1,000 state residents whose federally funded fuel assistance ran out before Christmas.

Kopin Corp., a Massachusetts technology company, has received $30 million in federal subsidies the last four years and tens of millions more in savings through the lease of a state-owned laboratory. Despite this huge public investment, the company plans to send more and more of its new manufacturing jobs overseas. Meanwhile, it looks like Derek Davis, 17, of Roxbury will be among the thousands of Boston youths who won’t get summer jobs due to limited federal and state funding. He was hoping to save money for college.

Every year, an estimated $150 billion – in the form of direct federal subsidies and tax breaks that specifically benefit businesses – is funneled to American companies. Critics call it “corporate welfare.”

The $150 billion for corporate subsidies and tax benefits eclipses the annual budget deficit of $130 billion. It’s more than the $145 billion paid out annually for the core programs of the social welfare state: Aid to Families with Dependent Children (AFDC), student aid, housing, food and nutrition, and all direct public assistance (excluding Social Security and medical care).

Now, a growing number of voices from both ends of the political spectrum question whether it is fair to provide such help to businesses while cutting back on aid to poor people – questions which at a minimum seek to frame corporate assistance as the missing piece of the national debate on welfare reform.

Stirrings on the corporate welfare issue have been set in motion by an unlikely coalition of politicians, policy makers and think tanks, ranging from Labor Secretary Robert Reich to Republican presidential candidate Pat Buchanan; from liberal Democrat Sen. Edward Kennedy to conservative Republican Sen. John McCain; and from the libertarian Cato Institute to the Progressive Policy Institute.

They feel that if the White House and Congress were sincere about achieving a balanced budget, they could begin by cutting billions of dollars in direct subsidies to giant multinational companies. The subsidies range from $1.4 billion annually in price supports for large sugar farming interests; to nearly $2 million to help McDonald’s market Chicken McNuggets in the Third World; to $20,000 for golf balls that defense manufacturer Lockheed Martin billed the federal government as an “entertainment” expense.

“Americans have been asked to tighten their belts across the board, from families who receive food stamps to our men and women in uniform,” said McCain of Arizona, who has challenged fellow Republicans on the issue. “We are morally obliged to ensure that the corporate sector shares in the sacrifice. The public cannot understand why we are shelling out billions of dollars to powerful corporate interests when we simply cannot afford such largesse.”

Robert Shapiro, an analyst for the Progressive Policy Institute, a think tank of the centrist Democratic Leadership Conference, said, “The hypocrisy on corporate welfare is glaring. We are in an era in which the Congress was able to find nearly a trillion dollars in cuts over seven years, the bulk of it from social services to the poor. But less than 2 percent of those cuts came from subsidies to industry.”

“I don’t blame the businesses for trying to get whatever they can. But I do blame the government for being willing to sacrifice the tax dollars of average people to satisfy these well-heeled and well-organized special pleaders,” adds Shapiro, who has researched federal subsidies. “We have encrusted the economy with layer upon layer of these subsidies to the point where it is having a profound impact on the economy and the allocation of limited resources.”

Said Gloria Larsen, who until recently was Gov. William F. Weld’s secretary of economic affairs and served as deputy director of the Federal Trade Commission under President Bush: “The personal responsibility argument is so readily tied to social welfare. Now it is time that it is tied to corporate welfare.”

Talk, but little action.

Despite such sentiments to cut back, corporate assistance continues. President Clinton’s administration, through Labor Secretary Reich, has used the bully pulpit against these expenditures, but done relatively little to actually prevent them. In some instances, Clinton has even sought to increase subsidies. The Republican-controlled Congress has been equally recalcitrant about any proposed changes to tax provisions that steer billions of dollars to big business. And in Massachusetts, Weld has endorsed an active policy of subsidizing business through trade missions, support services, tax breaks and state offices that guide businesses, big and small, on how to tap federal money.

Corporate welfare goes virtually unmentioned in political campaigns, where candidates like Clinton and Bob Dole square off on how to reform social welfare. Neither has proposed “two years and out” for corporations receiving federal assistance. And only recently has there been any policy debate on “personal responsibility” of corporations to the communities where they profit and receive public money.

Corporate welfare persists largely because of parochial politics. State by state, politicians are applauded for bringing home corporate pork with little regard for its drain on the national economy.

“Corporate welfare is a fashionable phrase inside the Beltway,” says Sheila Krumholz, research director for the Washington-based Center for Responsive Politics, which tracks campaign finance issues. “But when it comes to biting the hand that feeds them, politician after politician is walking away from their rhetoric. They cave in to each individual subsidy, every one of which … can be defended and rationalized.”

A Boston Globe examination of the issue has found:

A host of questionable federal giveaways, such as the $200 million a year Market Promotion Program which over the last two years gave Massachusetts-based Ocean Spray some $700,000 and California-based Gallo about $4 million to market “Cranapple” juice and wine all over the world. Hundreds of thousands of dollars more were given to Concord-based Welch’s and a Lynn-based company that makes marshmallow Fluff.

While many federal programs have the stated purpose of creating jobs, some subsidized companies are downsizing. AT&T,General Electric, Raytheon and Digital – among many large companies receiving federal assistance – have laid off about 100,000 workers among them. And defense contractor Lockheed Martin is expected to receive $1 billion to help defray the cost of its $10 billion merger, including more than $16 million in pay and performance bonuses for top executives while nearly 50,000 of the conglomerate’s employees have been laid off in the last five years.

Government subsidies to high-tech industries have resulted in tens of thousands of jobs going overseas. Federal officials and corporate chiefs boast about the promise of high-paying jobs created by “partnerships” with government. But they say little or nothing about the fact that many of the jobs created end up in Ireland, Malaysia, Singapore or Thailand because of low labor costs and taxes. The roughly $100 million a year Sematech consortium helped Digital Equipment Corp. and other semiconductor companies, but Digital still has shifted part of its workforce and capital to Ireland and Singapore.

There is little hard data and even less oversight of many federal programs, especially in the technology and science industries, to assess whether they are accomplishing their stated goals of creating jobs and stimulating the economy. In the Advanced Technology Program, for example, Massachusetts companies participated in $90 million worth of projects. But a state-funded study found that only 150 jobs were directly created as a result of the projects.

A rush by the federal government and states to accommodate business with favorable tax rates has created a historic shift in America’s tax burden. After World War II, the nation’s tax bill was roughly split between corporations and individuals. But after years of changes in the federal tax code and international economy, the corporate share of taxes has declined to a fourth the amount individuals pay, according to the US Office of Management and Budget. A parallel trend has occurred at the state level. In Massachusetts, corporations pay $900 million, or 8 percent, of the $13 billion in state tax revenue annually.

Many business leaders defend the tax breaks and subsidies they receive as necessary to create a “level playing field” in the global marketplace. Industries in most of Europe and Asia, they note, are heavily subsidized by their governments. Proponents of government partnerships argue that not just big business, but thousands of small startup companies rely on federal dollars to research and develop products with potential for great public benefit, products that would otherwise go unfunded. It is an issue of great import to Massachusetts, which by many accounts is the most dependent of all 50 states on federal research dollars. The hundreds of millions of dollars that pour into the state every year are the lifeblood of the commonwealth’s universities, hospitals and high tech firms.

Culture of dependency

Defenders of corporate subsidies and tax benefits also point to technological breakthroughs, such as the Internet, created through federal research and development programs and largely paid for by the US Defense Department. Others point out that because of agribusiness subsidies, Americans pay less for food than citizens of most other industrialized countries.

Joel Johnson, vice president of the Aerospace Industries Association and a top lobbyist for a business sector which every year receives billions of dollars in subsidies and tax breaks, defends the flow of public money to profitable companies.

“There are business leaders and political leaders who recognize that the only way the government – whether it is the Defense Department or the Energy Department – can afford the new technology is if it works with business,” he says. “But that is a partnership, not welfare.”

Still, critics insist that if social welfare has created a “culture of dependency,” so too has corporate America grown reliant on federal help. Many benefits seem to remain entrenched in legislation for decades, even though their purpose has become anachronistic. Many agriculture subsidies, for example, were adopted as post-Depression safeguards against famine.

Putting a precise dollar figure on corporate welfare depends on how it is defined. The Cato Institute considers corporate welfare to be the 125 Cabinet-level programs that provide direct subsidies to individual industries. Cato’s estimate, generally regarded as conservative, is that such subsidies total $75 billion in 1996.

Ralph Nader’s Center for the Study of Responsive Law offers a more expansive defnition that includes federal tax breaks, many of which are designed to funnel money to specific industries. The center estimates total corporate aid at $167 billion annually, a figure most experts consider high.

The big money in corporate welfare comes in the subsidies to agribusiness, the oil industry and energy plants. Comparatively, Massachusetts companies are smaller players, but the commonwealth is considered the leading recipient per capita of federal research and development money, specifically subsidies to the defense, technology, science and medical industries.

Historically, the movement of technology from federal laboratory to the marketplace was commercial kismet. It was often a byproduct of defense research, but the government played a passive role. Market forces and competitive corporations took the federal research and turned it into everything from television to Tang.

But there has been a profound change in the seven years since the end of the Cold War. Now, Washington wants to play an active role in bringing government research into the marketplace. This has spawned an array of programs, including Small Business Innovative Research, the Advanced Technology Program and the Technology Reinvestment Program – all aimed at creating partnerships with business. In total, these partnerships with government provide an estimated $6 billion a year to industry giants in what critics have dubbed “techno-pork.”

Some programs, such as Cooperative Research and Development Grants, go largely unregulated, with little expert evaluation of the validity of the proposed work and great criticism of the process used to select commercial partners. Although the Office of Science and Technology keeps track of the number of projects, critics point out there is almost no accounting of the return on this investment, or whether it is in the public interest.

The Department of Energy’s own advisory board reported in February 1995 that Cooperative Research and Development Grants, while valuable, leave federal laboratories “vulnerable to charges that the selection process is flawed and that the competitive playing field is unfairly titled toward the labs’ chosen partners.”

In other words, the government ends up picking winners and losers in the marketplace. Tom Glynn, president of Maine-based Lighthouse Software is angry that the federal government has given about $40 million to help Icon Industrial Controls Corp. of Louisiana develop a product that Lighthouse already manufactures.

Says Glynn, whose company makes software to control robots in the machine tool industry, a growing international market: “I’m furious as a businessman and I’m furious as a taxpayer that the federal government is funding my competition.”

An incentive to leave

Corporate dependence on federal dollars may be distorting the free-market system. Many critics, including conservative economists and free-marketeer chief executives, believe some tax-code loopholes and many subsidies have created damaging incentives for companies to send jobs and capital overseas. They have kept management focused on maintaining federal funding rather than increasing market share.

Says Stephen Moore, who has written a series of reports on corporate welfare for the Cato Institute: “The point is, we have very efficient capital markets in this country. The government has never been good at picking winners and losers. The Commerce Department and Congress are influenced by lobbying more than the market. That makes for a corruption of the market. And this in the long run is bad for the national economy.”

Moore says he knows the growing attack on corporate welfare has struck a raw nerve within American business. Since he wrote a much-discussed and controversial report on the issue last year in response to a challenge by Secretary Reich, he says, “IBM and the big guys want to have lunch with us a lot lately. They are dying to tell us how important these programs are.”

“But what people need to know is who gets hurt. And that is the small business owners, who don’t have lobbyists in Washington and trade associations bringing them billions of federal dollars. And they certainly aren’t in Washington taking us out to lunch.”

This story ran on page 1 of the Boston Globe on 07/07/96.

Next in the series…

Tax code gives companies a lift