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Bad Business

August 2, 1999

[From the Journal of Commerce, July 29, 1999]

The stock market is at record highs. The economy has been booming. So why
are many of America's largest corporations still receiving handouts from
Uncle Sam?

The Budget Committee of the House of Representatives addressed this paradox
during hearings late last month.

Not only did public-interest groups from across the political spectrum
demand an end to corporate welfare, but a group of technology firms also
declared their "independence" from Washington's wasteful spending.

The declaration, signed by 50 executives and submitted to Congress, states:
"The high taxes that our company and its employees pay to support the
current local-state-federal government tax burden of 35% of GDP hurts our
economy more than any possible corporate benefit from government spending."

Other companies should heed the technology firms' message -- corporate
welfare is bad business. These subsidies have many disadvantages.

First, government support for corporations undermines sound business
decision-making. Companies that accept government assistance are forced to
comply with rules limiting the products, activities and locations
subsidized.

For example, each year the Department of Agriculture determines in advance
the products and countries for which U.S. exporters will receive Export
Enhancement Program cash bonuses. A bureaucratic agency is not capable of
fine-tuning international marketing strategies, which may require rapid
adjustments to changing conditions abroad.

Respondents to a World Institute survey of firms even suggested that
government incentives are counterproductive because they often lead to
unproductive and unsustainable investments.

Legislators pass laws and establish subsidy programs that help some
companies at the expense of others. The Sugar Program limits U.S. sugar
imports, which boosts prices and profits for the sweetener industry but
increases costs for companies that use sugar.

According to congressional testimony by the Export-Import Bank's president,
only 1% of U.S. exports benefit from Ex-Im's financing and insurance
programs; the other 99% must compete against subsidized businesses or find
other assistance programs.

Some federal programs force businesses to compete against the government and
may even inhibit the development of private-sector companies. Political risk
insurance has been provided primarily by public entities, such as the U.S.
Overseas Private Investment Corp.

A consortium led by Exporters Insurance Co. proposed a plan for privatizing
most of OPIC's outstanding risk insurance policies, demonstrating that
private companies are fully capable of serving this market.

Regardless, the Senate Foreign Relations Committee approved the renewal of
OPIC (including its insurance program) for another four years, forcing
private risk insurers to continue to compete with it.

Government support for companies can increase regulatory burdens. Subsidy
programs require applicants to endure endless hours of red tape with no
guarantee of receiving the support. Companies also are subjected to
regulations that would not apply in the private sector.

Even OPIC, in its comparison of public and private insurance, admits that
private carriers are more flexible than official insurers because their
operations are not inhibited by considerations of public policy or
international relations.

Government support for companies can contradict business public policy
campaigns. Corporate leaders who campaign for less government intervention
appear hypocritical when they also take government subsidies, services and
products.

It is especially ironic when U.S. companies accept government assistance for
business in communist and former communist countries, while simultaneously
encouraging these countries to adopt the free-market system. In 1998, U.S.
companies benefited from $1.3 billion in U.S. Eximbank assistance for
exports to China and $600 million for exports to Russia.

Corporations spend billions of dollars annually to promote themselves and
their products, but government support for companies may sabotage these
efforts.

McDonald's became the corporate welfare poster child in editorials and op-ed
articles throughout the country when the company took Market Access Program
subsidies to cover part of its overseas advertising costs. Activists report
the profits, chief executives salaries and PAC expenditures of corporate
welfare beneficiaries, resulting in negative press coverage.

Business leaders seeking to reduce the harmful impact of government aid and
maximize shareholder wealth have begun working to eliminate these programs.
The Sweeteners Users Association, which includes Ben & Jerry's, Coca-Cola
and M&M/Mars, is fighting the Sugar Program. The technology executives who
declared independence from subsidies support the formation of an independent
commission to identify a block of programs to cut.

There is a growing realization that government subsidies do not benefit
business as a whole.

Now is the time for Congress to stop doling out favors to special interests
and start protecting the public interest. Corporate America and the general
public would profit immensely from the elimination of corporate welfare.

**********

Janice Shields is director of the Institute for Business Research. href="mailto:sheehand@cei.org">James Sheehan is a policy analyst at the href="http://www.cei.org"target="_new">Competitive Enterprise Institute. Mr. Sheehan is author of Global Greens: Inside the International Environmental Movement.

c) copyright 1999, The Journal of Commerce.


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