The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

United States:
Boosting the Profits of Big Business with Public Money

Apr 20, 2000

During this year's presidential primaries, John McCain and Bill Bradley, the Republican and Democratic underdogs, both attacked "corporate welfare" as part of their campaigns. Just before the Iowa primaries, Bradley unveiled a 125-billion-dollar 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 Labor Robert Reich challenged the Republican 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 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 the 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. Obviously, they were trying to appeal to 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. Not surprisingly, nothing concrete came of this effort. No subsidies were cut. In fact, corporate subsidies have been increasing from one year to the next.

Since the beginning of the economic crisis in the early 1970s, the bosses and their government have been imposing ever more sacrifices on the working population. At the same time, the government, be it Democratic or Republican, has been multiplying the ways to hand over more money to the bosses, helping them maintain their profits despite the crisis, and even to increase them spectacularly. While the bosses were laying workers off and worsening working conditions, while they were cutting the standard of living of the whole working class, they were benefitting from an enormous transfer of wealth to the detriment of the vast majority of the population.

The Dependence of the Capitalists on the State

That the state is an instrument serving the interests of the big bourgeoisie is nothing new. Even in its earliest days, when the American state apparatus was very small and weak, it devoted the means at its disposal to defend the interests of business, whether through military force or economic support.

In the early part of the 19th century, much of this task was carried out by the governments of the various states. The state of Massachusetts was fairly typical for this time period. It directly subsidized its main industries: fishing, ship building and shipping. It also advanced loans to many businesses and exempted others from taxes. A few years later, it secured most of the capital for the state's first railroad, called the Western Railroad.

With the Civil War, the federal government awarded enormous contracts for the manufacture of weapons and other war materials, giving a push to whole industries. After the Civil War, the government subsidized the construction of the most important industry, railroads, primarily through the transfer of prodigious amounts of public lands to private companies. It is estimated that fully ten percent of the public domain almost 160 million acres was so transferred, with states and localities contributing another 49 million acres. The Homestead Act of 1862, presented as the vehicle for distributing public lands to a small farming class, was also used by the government to aid the development of much larger landed interests as well as timber and mineral companies.

During the Great Depression of the 1930s, the state intervened massively with subsidies to bail out the different sections of the bourgeoisie. 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 government also began to directly pay farmers based on output, so that the biggest farmers got the bulk of the benefits. Huge public works projects, the Tennessee Valley Authority (TVA) and other dams, bridges and tunnels were the occasion to pour billions of dollars into the big construction companies and the suppliers of steel and concrete. At the same time, the bulk of the population was forced to survive hand to mouth on relief or starvation wages.

World War II provided the opportunity for even more massive subsidies and handouts. At the end of the war, the factories and shipyards that the state had paid for were turned over to private companies for one dollar. At the same time, the state continued to pay a high level of subsidies, first of all through the defense budget, and second through the construction of the interstate highway system.

With the onset of the recessions of the 1970s and 80s, the government once again stepped up its level of subsidies to support corporate profits.

Not surprisingly, there are no accurate estimates of how much money the government has been forking over to business. The few official and semi-official studies undertaken by the Congressional Budget Office completely downplay their size and importance, and for good reason. It 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 even given the figures that the government does provide, it's fair to say that the corporations' total annual subsidies are 250 billion dollars per year, if not much more than that. That amount of money could employ a lot of people working at workers' wages. With 250 billion dollars, the bulk of the unemployment, which officially stands at 5.7 million, could be practically wiped out.

But this system is not run to serve the interests of the population. It is run to make profits for a few.

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.

For more than a century and a quarter, Congress has let stand the Mining Law of 1872 which authorized mining companies to extract minerals from public land at a nominal price, never more than five dollars an acre. Over the years, an estimated 240 billion dollars worth of minerals have been extracted for almost nothing. Currently, a large mining company called American Barrick is in the process of extracting more than 10 billion dollars in gold from land in Nevada for the use of which it paid a grand total of ... $5,190!

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 the 52 abandoned mines which have been declared Superfund sites that, of course, is handed over to the 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 200 million dollars 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 often pay a few dollars for each tree that they take out, that is, when they are not stealing the trees outright. They do not pay anything for the road system on this land, which, at 360,000 miles, is the longest in the world. It, of course, is built and maintained by the Forest Service for sole use by the lumber companies. The government loses about half a billion dollars per year on the National Forest. In effect, the government 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. Charging agribusiness as little as five percent of the cost of the water, the government in effect is 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 or control over the air waves. Instead, the state gives it all away to a few big monopolies, a gift whose value is estimated to be worth up to 100 billion dollars.

Research, Experimentation and Development

Public money pays for the research and development of products which private companies market for their own private benefit. The biggest companies in the country, in such industries as aerospace, pharmaceutical and automotive, are among the beneficiaries of this largess.

Over the last 50 years, government-funded research and experimentation has underwritten the development of entire new industries: the nuclear power industry, 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 labs 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 formalized in a presidential order in 1981 and in 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. A government lab, for example, developed the drug Taxol which is supposed to help in the treatment of uterine cancer. But it gave the license to manufacture and sell it to Bristol-Myers Squibb, which today sells Taxol at a mark-up 20 times the manufacturing cost.

Government Contracts

The government also subsidizes business by giving corporations rich contracts under which contractors can 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 300 billion dollars 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 defense contractors charge the government prices that are 30 to 50% above their costs. The biggest benefits go to the biggest contractors: Lockheed-Martin, Boeing and Raytheon. But many other big and even medium-sized corporations also profit greatly.

Sometimes a business with government contracts is hit by scandal over assorted pricing abuses or charges of fraud. The government goes through the motions of an investigation and sometimes even levies a fine. But this changes nothing. After all, overcharging and cheating are at the core of the entire system.

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 very important means through which the state funnels tens of billions of dollars free and clear to companies every year. The very nature of overpricing makes it 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 checks to very big companies or providing guarantees for loans, the equivalent of co-signing the 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 it had gone through a long decline, with the owners running 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 railroad 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 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 the much larger banking system 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 taxpayer 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 Motors, as well as companies owned by some of the biggest speculators and corporate raiders, including Ron Perleman and the Bass brothers. In so doing, it was ensuring future profits.

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 half a trillion dollars or as much as one and a half trillion dollars 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 the 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 50-billion-dollar 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 subsidized 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 All with the Same Goal

This does not exhaust the subsidies which the state so readily lavishes on the big corporations. On the federal level, we should also include nuclear subsidies (7.1 billion dollars per year), insurance loopholes (7.2 billion dollars per year), aviation industry subsidies (5.3 billion dollars per year), commercial ship subsidies (1 billion dollars 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 supports, quotas and crop insurance. In 1996, Congress passed a new reform bill under the catchy title, "The Freedom to Farm" Act. (If Congress had had an eye to accuracy, it would have called the "reform" of 1996 "The 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 two billion dollars per year. The Defense 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 often 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 80 billion dollars. 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: The Biggest Subsidy of Them All

Of all the means the government uses to subsidize 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 87 billion dollars worth of corporate tax breaks, admitting at the same time that its list has not begun to touch all the breaks.

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 100 billion dollars!

Of course, the politicians explain that such tax cuts have been written so as to "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 from 44% in the 1950s to 26.6% in 1994 to 21.3% in 1999. Last year, fiscal 1999, federal corporate tax revenues actually fell from 188.6 billion to 184.7 billion, 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 corporations, 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 50 billion dollars in profits. And some companies, making billions in profits, were even handed tax rebates. In 1983, for example, after GE reported 6.5 billion dollars in profits, the government gave it back 283 million dollars in rebates. Boeing made 1.5 billion in profits, only to have 267 million rebated. Dupont made 2.6 billion, of which 132 million was returned to it. In the years 1995-96, General Motors, the largest industrial company in the world, received 1.4 billion dollars in rebates despite reporting profits of 11.2 billion dollars.

State and Local Shakedowns

But this is not the end of it. The subsidies and tax breaks on the Federal level are supplemented on the 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 100 million dollars in tax reductions over the following 12 years.

This set the pattern. Intel received one-third of a million dollars for building a fabrication plant in New Mexico. Mercedes-Benz received 253 million dollars for building an assembly plant in Alabama. GM received 12-year tax abatements on 250 million dollars of new equipment and machinery at its Willow Run plant in Ypsilanti, Mich. 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 307 million dollars for creating 950 jobs. That comes to $323,000 for each job created. But even when companies laid off workers, they were subsidized. In New York State, GM received 16.9 million dollars 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 centers, headquarters buildings, theaters. Only last Christmas, the mayor of New York proudly announced that the city and state of New York would pay over 900 million dollars in tax relief, subsidized 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 downsize, erasing more jobs than they have created.

At the same time, the government has ruthlessly cut spending on vital services for the rest of the population and the country as a whole. Unemployment insurance has been cut. Public hospitals and clinics have been shut. Social services for the poor, such as welfare, Medicaid, 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 1.25 billion dollars of money originally earmarked for food stamps was diverted to help cover the 15- billion-dollar budget for the U.S. bombing of Kosovo a fitting commentary on what has been going on.

Public services have been slashed. Twenty years ago, spending on public infrastructure was .8% of the Gross Domestic Product (GDP). Today it stands at half that, at only .4%, and headed 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 drastic declines in spending. It is evident! All we need do is look at the dilapidated condition of the schools, roads, bridges, etc.

Spending on the needs of the population is not being steeply cut like this because there is no money. No, there is plenty of money and resources. But those resources are being channeled to the bourgeoisie. The state, using its budgetary and taxing authority, lays its hands on part of the wealth the working class produces and hands it over to the bourgeoisie in the form of subsidies, grants and tax breaks, enabling the bourgeoisie to increase its profits.

These profits are not used to expand production, create jobs and produce what the working people badly need. No, the bourgeoisie uses its increased profits for financial dealings for the vast speculation which has already aggravated the crisis of its own system and ruined entire countries, leaving millions of people in a drastic situation. This casino economy is likely even to lead to a generalized crash; that is to say, the outrageous price we have already paid for boosting the profits of this tiny minority could zoom up even higher.

The bourgeoisie lives more and more as a parasite on society, to the detriment of the vast majority.

The pretexts which the bosses and the government use to make workers accept more and more concessions are nothing but lies. The workers have every reason to reject them and, with them, the outrageous sacrifices which have been forced on the population over these last decades.

As a matter of fact, when the working class begins to fight back and oblige the government to stop giving away all this public money to the bosses, it would be beneficial for the vast majority of the population. That money should be used for the needs of the population: to improve public services; to provide a decent job for everyone (with shorter hours of work and decent working conditions); to ensure education, health services, housing and transportation in good condition and at cheap prices. If the public money is not enough, then workers can force the bosses to dip into their profits to accomplish what needs to be done for society. The bosses have benefitted enough up to now it would be only fair to make them pay for the crises of their own system.

It is a vital necessity that the riches that are produced be used to secure decent conditions of life for the population rather than to enrich even further a parasitic propertied class and the politicians at their service.