Part Three – End Corporate Welfare

You’ll note in these posts on things to cut, I do not take any prisoners.  There is enough waste and abuse (not to mention fraud) going around on all sides to make a big difference.

It is time to end corporate welfare.  I’m not saying the federal government should end R&D on important things such as renewable energy or space exploration.  I am talking about money given to companies for a wide range of reasons.

The stimulus package basically ended up being a bail out of large corporations. We bailed out giant banks, while leaving tens of thousands of people in foreclosure.  Recently, the Fed gave Bank of America and other banks $1.2 Trillion dollars to keep them afloat.  Guess how much all the foreclosures in the United States amount to?  Yep!  $1.2 Trillion.

Instead of directly bailing out banks, then giving Quantative Easings 1, 2, (and stay tuned for part 3), we could have paid off the failed mortgages, kept people in their homes, the money would have flowed back to the banks, and we would have prevented spending trillions more.

We need to allow businesses to succeed or fail on their own merits.  Had we not instituted many protections for the “too big to fail” banks and corporations, they would have been more careful in their loans and investments, and the crash may not have occurred in the first place.  That said, since we are spending vast sums to prop them up that provides temporary stimulus in only a few areas, it takes money and incentive away from other markets and businesses. We cause an overall stagnation, which now many economists are seeing leading to a double dip recession.  Had we propped up the American people, but allowed companies to fail, we probably would not now be going into a second recession.

Next, when Congress establishes tax loop holes for big corporations, it means it is not a fair or balanced market.  Either remove all taxes from corporations (since they push taxes down to the consumer anyway), or remove the loop holes so all pay the same amount.

Third, the moneys being spent are going to certain groups, while others are negatively impacted.  While overall unemployment is at 9.1%, unemployment for blacks is over 16%, and double that in some areas.  Spending tons of money on banks and large corporations does not help the average black person to get a job.

We spend three times as much on corporate welfare as on welfare for the poor (about $167 B vs $51B in 2002).  Dozens of corporations pay no taxes at all, and some receive billions back in tax credits due to the loopholes now in place.

If we eliminated all loopholes and established a flatter tax rate, we could save $150 billion a year, or $1.5 Trillion over a decade!  Or if we completely eliminated Corporate taxes and directly taxed the American people (as corporations just pass the tax down to us anyway), products would be cheaper to buy, and we would still save $150 billion a year.

Thoughts?

http://www.thedailybeast.com/cheats/2011/08/22/fed-lent-1-2-trillion-to-banks.html?om_rid=D35lbT&om_mid=_BOUkqeB8cz-Uuh

http://www.ombwatch.org/node/341

4 thoughts on “Part Three – End Corporate Welfare

  1. Well, I’m not actually prepared to commit to loaning banks 1.2trillion being a bad thing. I don’t like it, but I’m not sure it’s worse than the alternative. I could go either way I guess…

    But saying “Guess how much all the foreclosures in the United States amount to? Yep! $1.2 Trillion.” does not summarize the situation right. That 1.2 trillion was paid back by the banks with interest. It was kept secret to preserve confidence in the banks so unscrupulous investors did not bet against banks that were vulnerable and make money basically out of arbitrage.

    The dichotomy you present seems to suggest that we bailed out the banks instead of just paying for those foreclosures. The foreclosures you would have never been paid back in 30 years, let alone the time period the money was paid back. In that sense it was good policy.

    In a moral hazard sense, it creates issues I’m not happy with.

    But it’s agreed that size and scope of government involvement with corporate “welfare” so I agree generally with what you’re saying. Really my thinking on the matter is if we didn’t have a Fannie Mae/Freddie Mac who was gobbling up mortgages with the backing of the government these banks couldn’t have swelled so huge and vulnerable to begin with. And if you want to look at the real problems it’s Fannie,et al. and the creation of the 30 year fixed rate mortgage combined with a no early payoff penalty. It dramatically lowered the “cost” of buying a home and cost you nothing if you “flipped” it and paid the loan off early. So that process put an increasingly exponential amount of money into mortgages, with little to no cost to the consumer, and continued to drive up prices exacerbating the problem.

    And thus we see that by small means the the combination of Caesar and Mammon can screw up large things.

  2. As a Molly Ivins/Jim Hightower populist (without their acid wit) I really want to agree with you. But, my old age and general contrary nature lead me to make a few comments (please mentally edit out any gratuitous snarkiness).

    Please include agricultural subsidies. Large scale farming has turned into a corporate affair and most of those sudsidies do not go to Ma and Pa on their 30 acre farm. In a few years only tobacco farmers, marijuana growers and and boutique organic raddichio planters will have profitable small farms.

    Ethanol support has to be examined. It is not as eco-friendly as first thought and is driving up the price of food.

    Our friends and neighbors at Exxon don’t need subsidies in this age of enormous profits.
    The Obama administration proposed a 4 billion dollar cut, but others say more could be eliminated.

    Strangely, I would advance care be taken in raising taxes on some “under taxed” luxury items. We wiped out our yacht building industry by raising a too hefty luxury tax. Buyers simply went abroad to purchase their expensive toys.

    My inner Ned Ludd comes out when I look at the housing bubble fiasco. The right likes to blame Freddie/Fannie, fiscally illiterate home buyers, poor people and Democrats. The left likes to blame unscroupulous banks, venal business men and Republicans. Frankly, every body and his brother is at fault.

    1. Buyers who smoked a little too much Humboldt Green and believed that their zero down and sub-prime loan could be refinanced in a few years and all would be be wonderful
    2, Real Estate people who sold those buyers on this pile of offal, got their cut while knowing a lot of people never had a chance
    3. Banks that didn’t care because they didn’t hold the loan, they got their cut and shipped the loans off to be bundled.
    4. Companies that gave credit approval. They got their cut without risk and lost business if they didnt approve nearly everybody
    5. Bundlers who put the loans into a mortgage backed security got their cut without any risk
    6. Ratings companies (e.g. Standard and Poors) who got their cut without personal risk and also wouldn’t get business if they didnt have AAA as their favorite letters
    7. Credit Default Swaps which were supposed to protect an MBS from a few losses for bad loans were not regulated. They did not have to have a good reserve and so they did not. When MBSes went down big time, they paid investors bupkis before they went broke.
    8. Investment firms tht sold MBSes that they knew to be bad risks
    9. Legislators of both parties that took their campaign donations and did not do their oversight.
    10. The Bush White House that never saw a regulation it wanted to enforce and appointed industry insiders to run regulatory agencies.

    The above is why I find the Vienna School of Economics and Barn Door Making a totally unrealistic exercise in ganja smoking. Ending regulation would make things even worse.
    There are four main problems with regulation today

    1. The revolving door of industry regulator, legislator and industry employment (e.g. the Congressman who pushed through the Bush Drug Plan wherein we sold out ot big Pharma, quit Congress and became its million dollar a year lobbyist). We need to put barriers in place.
    2. We cannot elect the Ron Paul/George Bush types who are probably even against regulating their own gastric system.
    3. We need to modernize regulation. For example we had none for Credit Default Swaps, so they could get by on small reserves.
    4. Now for Ned Ludd (not the Restaurant in Portland). He gave his name to a movement in England to destroy machines and return to older ways of industry. In the recent past in the United States when you started a business, you were at risk and you watched your business decisions very carefully. If you look at the above sources of the housing boom collapse, a lot of people had no real risk or thought they had no risk. Greed became unbridled. We simply need to go back put risk back in the equation (e.g. make corporate shareholders, Boards of Directors and management liable for unreasonable risk).

    As I proofed this I dicovered that I should apologize for all the marijuana references. I just discovered that I am eligible for a marijuana prescription for the pain from my prosthetic leg. I am afraid a whole series of bad jokes have cluttered my mind recently, like this could give High Priest a whole new meaning. My bad.

  3. Stan, I agree with much of what you say also, AND I liked the HP joke, as well.

    That said, I’m not sure many here are saying “no regulation”, but reducing useless regulation. Part of the problem of your above enumerated trouble makers in the housing bubble is that Congress regulated some parts, didn’t regulate others, ignored some regulation, and winked at industry to let them know they would be bailed out regardless of how stupid they were. Had we told industry that they would take all the risk of their choices, I believe they would have been more circumspect on their investing, etc. Why? Because they would not have been “too big to fail” and so would have better protected their investments. They would not have made loans to people who had no business buying a house. Congress would not have been pressing them to make such loans in exchange for guarantees. And a 10-20% required down payment would have kept the worst risks out of the market entirely. This is how things were before Congress and industry went into bed together with a mixture of regulations that freed banks and others to make crazy loans and investments, while protecting them from bankruptcy.

    The current regulations now in place have not removed the safety net for Bank of America or others. The regulations have caused them to hold onto their money and not lend it out to homeowners or small businesses – exactly where the funds are needed to reinvigorate the economy. So today’s regulations really are not fixing anything, but only extending the recession, and possibly taking us into a double dip recession.

    Congress is filled primarily with lawyers. And former Congressmen/women are now working in various lobbies, lobbying their old friends who are still in Congress. None of them know much about business, economy, or the freedom to not only succeed, but to also fail. Most of them are focused on getting re-elected or benefits for their lobbyist concerns. Banks want freedom to spend recklessly, but have the fed bail them out. Their lobbyists got that passed through Congress, and the scheme made many individuals rich, until it all popped.

    I don’t trust Congress to make regulations that will work. Either the regulations will be designed (as lobbyists get them tweaked) to help big business, or they will over-regulate to the point that it kills business (right now businesses are sitting on $2 Trillion of cash, waiting to see how regulations [Obamacare, tax threats on the rich, environmental regs, etc] will hurt them).

    We have to get back to personal responsibility on all levels. That means we free up markets to work with minimal safety and environmental regulations. Then we allow them to win or lose on their own. Private organizations can license or certify businesses, to give customers a way to determine who is good and who is a quack. Government may or may not regulate lightly those organizations. No one is forced to join such an organization, but benefits come when customers seek those who are certified.

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