One healthy development to emerge from the generally poisonous debt-ceiling debate is that some Republicans have come to embrace the phrase “corporate welfare.”
Corporate welfare is a pejorative term for subsidies and tax breaks that the government gives to private companies. For a while, it seemed as if the Republicans might agree to raise some revenue by ending some of these deductions and not calling it a tax increase.
They’ve since changed their minds, but their bout of reasonableness marked an important change.
A friendlier term for corporate welfare is “industrial policy.” They aren’t exactly the same thing, but they’re close. Industrial policy means a conscious government decision to help certain industries -- through subsidies, protectionism, exemptions from regulations (such as antitrust) and so on -- and not to help other industries.
This is different from government’s role in attempting to guide the general economy, through fiscal and monetary policy. And it’s different from special burdens the government places on certain industries -- legitimate burdens for the most part -- to protect the environment, public health and the like. Industrial policy was based on the theory that the invisible hand of free-market capitalism needed some help in guiding us toward a 21st-century economy.
An Old Debate
A few decades ago, there was a vigorous debate in the U.S., mainly among liberals, about whether we should have such a policy. In those ancient days, the great economic bogeyman was Japan, playing approximately the role that China plays today.
There are important differences. In China’s case, the fear is of competing with an endless supply of cheap labor. In Japan’s case, the fear was of a country that seemed totally organized for production, with close cooperation among giant corporations and between corporations and the government.
Japan seemed to have cracked the nut of advanced capitalism, while the U.S. floundered. In response, some Democrats suggested an industrial policy to improve U.S. competitiveness.
But “industrial policy” turned out to mean different things to different people. Was the idea to “pick winners” -- i.e., decide which industries are most promising and give them enough help to guarantee success? Or was it to ensure the survival of losers on the theory that the U.S. must retain the ability to make whatever it is these troubled companies make? Should the government be pouring resources into Silicon Valley, or should it be mitigating the suffering of the Rust Belt?
Many noted that the U.S. has an industrial policy -- just not a coherent one. Our government subsidizes agriculture through crop price supports, oil and gas through tax credits, housing through the mortgage-interest deduction, and on and on.
Of course the fact that it’s going on already doesn’t necessarily make it a good idea. Skeptics said: Why not get rid of all these subsidies -- all this corporate welfare -- instead of using existing subsidies as an excuse to lard on even more?
Then the American economy entered the Clinton boom years, Japan faltered and began its “lost decade” of economic stasis, and industrial policy went out of fashion. No one had a good answer to the question: Why should the government know which industries deserve support better than individual investors with their own money on the line?
And that’s where matters stood until about two years ago, when -- very suddenly, with almost no public discussion -- the government owned a controlling interest in General Motors Co., was arranging the sale of Chrysler Group LLC, ordering banks to borrow government money, creating shotgun weddings among financial institutions, taking over a huge insurance company, and generally playing a far greater role in a few industries than even the biggest enthusiasts for industrial policy had recommended.
No one especially wanted it. No one called it industrial policy. It was imposed on our leaders by the economic crisis. And yet: It’s all turning out rather well. Or at least it’s turning out well as industrial policy -- helping particular companies and industries. With substantial government help, GM went from bankruptcy to profitability (for the first time since 2004) in just 13 months. The government still owns 27 percent of the company. The Treasury says that it actually made money on its loans to various banks under TARP.
As to whether these federal interventions served the larger purpose of slowing or preventing a more general economic catastrophe -- that remains to be seen. But as industrial policy, well, you can’t argue with success.
Or can you? Industrial policy for its own sake -- which the recent episodes were not -- still strikes us as a pretty dubious idea.
For one thing, the government doesn’t have the money, and won’t for many years. Meanwhile, nothing has changed to make protectionism a good policy. It’s true that even many free traders recognize a very narrow exception to their prohibition on tariffs and import quotas, involving protection of infant industries: nurture them behind a tariff wall, then tear it down when they’re ready to take on the world. But the chance of such a strategy working in real life is usually slim. Politicians will be unable to limit the gift of protectionism once they start -- and they’ll never be able to take it away, once given.
When it’s done through tax deductions rather than a government check, corporate welfare is virtually invisible. It does not get reviewed every year like normal budget items. Now that they’ve brought it up, perhaps some Republicans will be more open to ending tax exceptions for business, even if this plays little or no role in resolving the debt-ceiling mess.
In the end, industrial policy is corporate welfare. Sure, it worked once or twice lately. We advise the federal government not to risk another throw of the dice, but to take its winnings and go home.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.