USA - Boosting the Profits of Big Business with Public Money

May-Jun 2000

In Britain the USA is usually portrayed, at least by capitalist commentators, as the true realisation of a "free market" - where state interference just does not take place. However, this is pure nonsense. Ever since the return of the world crisis in the 1970s, just as in every other industrialised country, the US state has been channelling the country's resources towards private companies. And just as in Britain, the capitalist class has benefited from an enormous transfer of wealth, at the expense of the jobs, standard of living and working conditions of the population.

Occasionally US politicians indulge in demagogic attacks against this "corporate welfare", as John McCain and Bill Bradley, the Republican and Democratic underdogs, did this year during the US presidential primaries. Just before the Iowa primaries, Bradley unveiled a $125bn plan to get rid of what he called unneeded business breaks. In that same week, McCain outlined a plan to go after tens of billions of dollars in "corporate pork." Of course, the less chance McCain and Bradley had of winning their primaries, the freer each was to say whatever he wanted to attract a few votes.

Over the last several years, the issue of "unfair" corporate subsidies has been raised by other politicians, generally during elections. In 1994, when Democrats and Republicans were working together to cut welfare and other social programs, Clinton's then Secretary of Labour Robert Reich challenged the Republican dominated Congress to cut "aid to dependent corporations" as well. Obviously, this appeal was aimed at the Democratic Party's voting base amongst the unions and minorities and was meant to create the appearance of a difference between the Democrats and the supposedly more pro-business Republicans.

This call by Reich, however, was taken up by a few insurgent Republican politicians, most notably McCain in the Senate and Representative John Kasich of Ohio who, as head of the Budget Committee, had also been instrumental in engineering social spending cuts. McCain even introduced a bill into the Senate that would have created a commission to find ways to slash corporate subsidies. Kasich, the chairman of the House Budget Committee, held hearings on the matter in 1995, 1996 and 1999. These gestures were targeted at the Republican Party's petty bourgeois - voting base that is being squeezed by "big business" and "big government."

During the hearings and discussions on the bills, a very informal alliance of a few libertarian-sounding Republicans and liberal-sounding Democrats was formed. It was no surprise that nothing came out of this and no subsidies were cut. In fact, corporate subsidies have been increasing from one year to the next.

The dependence of the capitalists on the state

That the state turns out to be a moneyspinner for the big bourgeoisie is nothing new. Right from its earliest days, when the American state apparatus was very small and weak, it devoted what means it had, including military force, to help build and sustain capitalist interests.

In the early 19th century, this task was primarily carried out by the governments of the various states. For instance, the state of Massachusetts directly subsidised the fishing, ship-building and shipping industries. It advanced loans to businesses and awarded tax exemptions. It also secured most of the capital to finance Western Railroad, the state's first railway.

However with the outbreak of the Civil War in 1861, when eleven states broke away from the union to form the Southern Confederacy, the Federal government of the North stepped in to award contracts for the manufacture of weapons and other war materials, thus boosting whole new industries.

After the Civil War, the construction of railways really took off. But instead of undertaking the construction of this essential infrastructure as a public project, the Federal state gave private companies the contracts, heavily subsidising them into the bargain. This was done primarily by handing over to them huge stretches of public land. It is estimated that fully ten per cent of the public domain - almost 160 million acres - was so transferred, with states and localities contributing another 49 million acres.

Of course, it was during the Great Depression of the 1930s that state intervention reached new heights. However, contrary to popular mythology, it was first and foremost the various sections of the bourgeoisie who benefited. Massive subsidies were handed over to help bail them out. A government agency, the Reconstruction Finance Corporation, supplied working capital to the banks by buying their stock. The Federal Reserve provided loans and capital to industry. The huge public works projects, such as the Tennessee Valley Authority dam, bridges and tunnels were the excuse to pour billions of dollars into big construction companies and suppliers of steel and concrete. Yet all this, while the majority of the population had to survive hand-to-mouth on state or charitable relief or, if they were "lucky", on starvation wages.

World War II provided a new opportunity for even more massive handouts to big business. But the big bonanza for private capital came at the end of the war, when the factories and shipyards that the state had financed were "sold" for one dollar apiece! Of course, the state continued to subsidise the arms industry in the post-war period via the defence budget. And the construction of the interstate highway system provided further opportunities for the private construction industry to get state money. With the onset of the recessions of the 1970s and 80s, the government again increased its level of subsidies to support corporate profits.

Not surprisingly, there are no accurate figures on the subsidies forked out to business over the years. The few official and semi-official studies undertaken by the Congressional Budget Office completely downplay their size and importance, and for good reason. This is one of many secrets that the government and the corporations jealously keep from the population which must pay the bill day in and day out. But judging from the figures that the government does provide, the corporations' total annual subsidies are probably not less than $250bn per year. And with that amount, enough jobs could be created to cut the official unemployment figure of 5.7 million to zero.

The giveaways: land, water, air

One of the oldest means used by the bourgeois state to support business was to give away the land and other natural resources which the Federal government supposedly "holds in trust for the people." This giveaway continues to this day.

Indeed, the 1872 Mining Law, which allows mining companies to extract minerals from public land for a fee fixed at an upper limit of $5 per acre still stands. Over the years, an estimated $240bn dollars worth of minerals have been extracted on this basis. Currently, a large mining company called American Barrick is busy extracting more than $10bn in gold from land in Nevada. Its "rent" comes to a grand total of... $5,190!

Yet the mining companies have left behind - on public land, this "trust held for the people" - unreclaimed ore pits, polluted groundwater and 12,000 miles of ruined streams. The bill to repair all the destruction done to public land, including abandoned mines is handed over to taxpayers to pay!

Similar rules apply to other natural resources. The Bureau of Land Management and the U.S. Forest Service lease out 256 million acres of grazing land at such a low price that the government loses $200m every year. Meanwhile these companies often sublet the land to smaller ranchers at a substantial profit.

Lumber companies which cut down trees in the National Forests pay only a few dollars for each tree that they take out, that is, when they are not stealing the trees outright. The government loses about $500m per year on the National Forest. In effect, it is paying the lumber companies to cut down the national forests.

In order to provide the water which big agribusiness uses to irrigate its land in the West, the government has built a massive system of dams, canals and waterways that required vast outlays of capital. By charging agribusiness as little as 5% of the cost of the water, the government is in effect making up the difference by turning to the urban users of water and the taxpayers.

To the few big conglomerates which own most of the broadcasting system, the government gives free use of the air waves. In 1996, under the new omnibus Telecommunications Act, Congress presented these media giants with the sole right to use an additional part of the spectrum for new digital transmissions - at no charge, of course. In 1936, the Communications Act had declared that "the air waves belong to the people." Ordinary people, however, have never been given access to, nor control over the air waves. Instead, the state gives it all away to a few big monopolies, a "gift" estimated at $100bn!

Research and development

Public money also pays for the research and development of products which private companies market for their own benefit. The primary beneficiaries are the biggest companies, involved in the aerospace, pharmaceutical and automotive industries.

Moreover, in the last 50 years, government-funded research and experimentation has underwritten the development of entire new industries: nuclear power, biotech, computers, and the famous Internet, for example. In other instances, research for the military or NASA has allowed contractors to spin off new technological breakthroughs and designs for their own benefit. Boeing's development of the first successful commercial jet, the 707, was an adaptation of a bomber paid for by the Air Force.

To facilitate the transfer of the results of research and development to private business, the government sometimes bankrolls a public-private partnership. In the semi-conductor industry, for example, a public-private company called Sematech was formed for the benefit of 14 big computer companies. In auto, the "Big 3" auto companies and the U.S. government formed a public-private company called "Partnership for a New Generation of Vehicles" to transfer the property rights from the laboratories of seven different government agencies to the auto companies.

In other cases, the government simply gives corporations the right to patent the findings of research for which the government itself has footed the bill. Although this has always been a common practice, it was formalised by a Presidential Order in 1981 and the 1986 Federal Technical Transfer Act, which authorizes Federal laboratories to enter into exclusive contracts with corporations to develop and market inventions originating in government labs.

Of course, the marketing of these products is left up to the companies, which have always placed their profits above the interests of humanity. It was a government laboratory, for example, which developed the drug Taxol for the treatment of cancer. But it gave the license to manufacture and sell it to Bristol-Myers Squibb, which today sells Taxol at a mark-up of 20 times the manufacturing cost.

Government contracts

The government also subsidises corporations by awarding them contracts which allow them to charge much higher prices than they could in the private marketplace.

The largest of these contracts come from the Pentagon. Not only is the official Pentagon budget immense, currently about $300bn or over 25% of Federal discretionary spending; significant parts of it are top secret. So, of course, this budget provides tremendous possibilities for corporations to increase their profits. Some estimates are that defence contractors charge the government prices that are 30 to 50% above their costs. The biggest benefits of course go to the biggest contractors: Lockheed-Martin, Boeing and Raytheon. But many other big and even medium-sized corporations benefit.

If a company with government contracts is exposed for pricing abuses or charged with fraud, the government will go through the motions of an investigation and sometimes even levy a fine. But this changes nothing. After all, overcharging and cheating is the name of the game. And what happens with Pentagon contractors is symptomatic of practices throughout the government, whether they be big highway projects or smaller operations like purchases of supplies for government offices. Government contracts are a significant means for the state to funnel tens of billions of dollars free and clear to companies every year. But given the veil of secrecy surrounding these deals it is impossible to have any clear idea of how much money is thus given away.

The ultimate insurance policy

The government is also in the business of bailouts, that is, writing cheques to very big companies or providing guarantees for loans when they claim to be in trouble.

The modern bailout dates back to the early years of the current economic crisis. In 1971, the government bought out the Penn Central Railroad after the owners had run it into the ground. In other words, the government paid for a bunch of old tracks, locomotives and cars that were worth almost nothing. This ushered in one more round of big subsidies to many other railway companies. Then in 1974, the government bailed out Lockheed by guaranteeing its bank loans. And in 1979, the government bailed out Chrysler, not only by guaranteeing bank loans, but more importantly by attaching the condition that it would guarantee the loans only if the Chrysler workers would accept major concessions. These concessions proved to be the wedge that opened up the era of concessions for the entire working class.

Up until now, the biggest bailout has been that of the savings and loan (S&L) industry in 1989. The collapse of the S&L's reflected a much wider weakness and instability in the entire bloated financial system. Several large banks had already collapsed, including Franklin National, Penn Square, Continental Illinois, and there was a danger that much larger banks could go under.

With the deposit insurance fund for the S&L's exhausted, the government stepped in, directing the recovery efforts for the S&L system and financing these efforts with taxpayers' money. Justifying this as the only way to save small depositors, the government, in fact, used the bailout to safeguard the enormous profits already made by the S&L's. After the state took over the bankrupt S&L's and paid off their bad loans, it then practically gave them away, along with big tax breaks, to such companies as Ford, as well as companies owned by some of the biggest speculators and corporate raiders.

The cost for this S&L bailout is being paid by taxpayers over a 30-year period. Estimates put the total amount to be paid by taxpayers as low (!) as $500bn - or as much as $1,500bn - depending on interest rates over the period. Whichever stupendous figure it finally turns out to be, this is an enormous transfer of wealth from the population to the financial system.

In 1995, the government gave the whole banking industry an outright gift: no longer do the banks have to pay insurance premiums to the state-run Federal Deposit Insurance Corporation. Today, the Federal Government provides them with free insurance. Relieving the banks of the cost of paying for deposit insurance was simply another subsidy - worth billions every year to the banks.

Over the last five years, the U.S. state has also taken the leading role in several financial bailouts on an international level. Stepping in to rescue the big companies which speculated in Mexico in 1995, Asia in 1997 and Russia in 1998, the U.S. government made use of the IMF and World Bank, which the U.S. contributes to, as well as the Exchange Stabilization Fund, a $50bn off-budget account controlled by the Secretary of the Treasury.

As these bailouts demonstrate, not only has the U.S. government directed public money to support the profits of the biggest corporations; in so doing, it has consistently subsidised and contributed to the speculation carried out by these companies, speculation which has devastated the standard of living of the masses in the underdeveloped countries.

Subsidies take many forms

This does not exhaust the subsidies which the state so readily lavishes on the big corporations. On the federal level are included nuclear subsidies ($7.1bn per year), insurance loopholes ($7.2bn per year), aviation industry subsidies ($5.3bn per year), commercial ship subsidies ($1bn per year), etc.

Then, there is the classic subsidy which even politicians sometimes denounce: the one that goes to agribusiness in the form of crop support, quotas and crop insurance. In 1996, Congress passed a new reform bill under the catchy title, "The Freedom to Farm" Act. (Which would have been more accurately named the "reform" of the 1996 "Freedom to Plunder the Treasury" Act.) Despite ringing announcements when the bill was passed that it meant the beginning of the end to farm subsidies, in the almost four years since then, government payouts to agribusiness have quietly doubled to 22.7 billion dollars.

There are also all the export assistance programs which many government agencies have set up to provide still more cash to already rolling-in-dough companies, to the tune of about $2bn per year. The Defence Department spends millions at military air shows to hawk the arms makers' hardware, and it spends billions of dollars on loans, grants, credits and cash payments to enable foreign governments to buy U.S. weapons. Every other department has foreign market access programs. The U.S. Export-Import Bank, for example, provides so much credit and loan guarantees for the aircraft industry that it is known as the "Bank of Boeing".

There is no way to have a precise idea of how much all these subsidies taken together amount to. According to the Cato Institute, this whole series of subsidies amounts to more than $80bn. And the Cato Institute, the think tank organized by the Libertarian wing of the Republican Party, admits that these figures are, if anything, an underestimate. Certainly they do not count the overcharges by private companies, nor the price of the bailouts, both representing tens of billions of dollars each year, and probably much more than that. Nor do they count the subsidies written into the tax code.

The tax code labyrinth

Of all the means that the government uses to subsidise business, by far the most important is the tax code. As the Congressional Budget Office says, "The Federal Government's efforts to promote business are heavily weighted toward tax preferences..." The Citizens for Tax Justice has identified $87bn worth of corporate tax breaks, admitting at the same time that its list is only the tip of the iceberg.

For business, tax cuts and loopholes have one important advantage: they are hidden. The money which goes to the corporations in this fashion does not appear anywhere in the budget. The state simply reduces the tax obligations of the companies, thereby letting them pocket still more profit.

The effort to cut corporate taxes really took off in the 1970s, under the guise of stimulating investment during times of two big recessions. By 1981, in the depths of the deepest recession since the 1930s, Congress was really opening the floodgates. Since then, it has opened them wider still - even when it claimed it was closing loopholes. In 1996, the very House Budget Committee headed by John Kasich which had held hearings calling for cuts in "unnecessary business subsidies" ended up recommending, instead... cuts in taxes that business pays, worth $100bn!

Of course, the politicians explain that such tax cuts "encourage" and "promote" business to invest and hire more people. But the reality is that businesses get tax advantages for doing what they would ordinarily do anyway. When companies invest, they get investment tax credits. When they carry out research, they receive research-and-development credits. When they do business overseas, they get foreign-earned-income exclusions. If they buy equipment, they get to enjoy an accelerated depreciation allowance. When they hire people, they sometimes get targeted jobs tax credits. When oil companies pump oil, they get an oil depreciation allowance. When corporate executives eat at a restaurant, go to a sporting event or one of those gentlemen's bars, the government allows the company to take a 50% tax deduction. And when these companies cannot find a better way to avoid paying taxes, they establish offshore accounts.

The result of all this rewriting of the tax code is that the effective tax rate on corporate profits has been drastically decreased, going down from 44% the 1950s to 26.6% in 1994 to 21.3% in 1999. In the last fiscal year, federal corporate tax revenues actually fell from $188.6bn to $184.7bn, a drop of 2.5%, even though corporate profits had rocketed up by 8.9%. Reduced tax rates on profits have allowed corporations to pay a smaller and smaller share of federal general revenues, plunging from 31% in the 1950s to less than 15% today, leaving the greater burden on the backs of the ordinary taxpayer.

By far the biggest beneficiaries of all the tax breaks have been the largest companies, which usually pay at a much lower rate than the average, at 10 to 15%. And sometimes, companies that make billions in profits do not pay any taxes at all. In the mid-1980s, more than a quarter of the 250 largest companies paid no taxes for three years despite admitting to $50bn in profits. And some companies, making billions in profits, were even handed tax rebates. In 1983, for example, after GE reported $6.5bn profits, the government gave it back $283m in rebates. Boeing made $1.5bn profit, only to have $267m rebated. Dupont made $2.6bn, of which $132m was returned to it. In the years 1995-96, General Motors, the largest industrial company in the world, received $1.4bn in rebates despite reporting profits of $11.2bn.

State and local shakedowns

But this is not the end of it. The subsidies and tax breaks on the Federal level are supplemented at state, county and local levels, as large companies pit states and municipalities against each other in bidding contests to get a new facility built, or at least keep one from shutting down. The net result of this whipsawing of localities has not been the creation of new jobs, nor even the saving of old ones; the result has been the looting of government treasuries and severe reductions in the tax bases for schools and local services.

While business has always sought out local subsidies and tax breaks, their use increased considerably, starting in the late 1970s, in conjunction with the Chrysler bailout, when workplaces were closing right and left. GM set the example when it chose the Poletown section of Detroit for a new Cadillac plant in 1980. GM demanded that an immense, 465-acre site in the middle of the city where 3,500 people lived, and where there were several schools, hospitals and hundreds of businesses that provided thousands of jobs, be cleared at public expense. The state and city rushed to meet GM's demands. GM also demanded - and got - $100m in tax reductions over the following 12 years.

This set the pattern. Intel received $300,000 for building a fabrication plant in New Mexico. Mercedes-Benz received $253m for building an assembly plant in Alabama. GM received 12-year tax abatements on $250m of new equipment and machinery at its Willow Run plant in Ypsilanti, Michigan. If a company had demanded the moon, some state would probably have tried to make sure the company got it!

Some companies got money supposedly for creating jobs. In Philadelphia, Kvaerner ASA, an engineering and construction company, received $307m for creating 950 jobs. That comes to $323,000 for each job created. But even when companies laid off workers, they were subsidised. In New York State, GM received $16.9m in grants and tax cuts to retool an existing plant, then cut employment by 200.

State and local governments have used tax cuts and subsidies to finance stadiums, sports arenas, casinos, shopping centres, headquarter buildings, theatres. Only last Christmas, the mayor of New York proudly announced that the city and state of New York would pay over $900m in tax relief, subsidised electricity and other benefits in order to keep that bastion of free enterprise, the New York Stock Exchange, from moving to New Jersey, which it had supposedly been considering.

A growing parasite

All these subsidies, grants, bailouts and tax breaks for corporations have not led to more jobs. In this last decade of supposedly unprecedented prosperity, the Fortune 500 companies, which have been the biggest beneficiaries of "corporate welfare", have continued to cut more jobs than they have created.

At the same time, the government has ruthlessly cut spending on vital public services. Unemployment insurance has been cut. Public hospitals and clinics have been shut. Social services for the poor, such as welfare, Medicaid and food stamps, have been slashed or done away with completely. The government has made it so hard for people to get the benefits that remain, that much of what is allotted goes unspent - at least on the program for which it was earmarked. Last year $1.25bn originally meant for food stamps was diverted to help cover the $15bn budget for the U.S. bombing of Kosovo - which says it all.

Twenty years ago, spending on public infrastructure was 0.8% of Gross Domestic Product (GDP). Today it stands at half that, at only 0.4% and going down. As for education, Federal money spent on public schools and training programs has effectively been cut. Every area of spending which would in some way benefit the population shows a drastic decline in spending.

Spending on the needs of the population is not being steeply cut like this because there is no state money available, as the long list of cash handouts to the bourgeoisie demonstrates.

The worst aspect of all of this channelling of public money to the capitalists is the fact that not only do they not actually need it, but that there is no compulsion on them to contribute anything to society at large. Today, with the possibility of doubling or trebling their wealth instantly by gambling on the world financial markets, the capitalists are not interested in the long term "risk" of investing in production, which would at the very least create jobs.

Thanks to direct state handouts and the state's laissez-faire attitude to its conduct, the capitalist class lives more and more as a parasite on society, to the detriment of the vast majority. If only a part of the vast subsidies handed out to the capitalists were instead put back where they originally came from - that is into the public sphere, the present decline in living standards of the working population and marginalisation of the poor could start to be reversed.

8 May 2000