Bottom line is that the idea of corporate welfare is that government and not the market knows best.
Although corporate welfare as policy has increasingly been embraced by elected officials, the debate has been going on since the United States became a country.
Alexander Hamilton, a Founding Father and first Secretary of the Treasury who gave us our monetary system, believed strongly in central planning of our economy and corporate welfare, then called "mercantilism." As part of that belief, he believed that government should subsidize certain businesses over other businesses. Hamilton also though debt and a national bank were a good thing.
Jefferson's viewpoint won out. Or so it appeared. Hamilton's ideas of government subsidies to favored businesses though never quite went away. Hamilton's idea of government subsidizing businesses has increasingly come back into favor despite the fact that the public's opposition to corporate welfare remains very strong. A Summer 2012 article in Forbes Magazine, which focuses on corporate welfare at the national level, adroitly explains why:
The problem with government economic intervention is simple: while participants in the marketplace are imperfect and make mistakes, the marketplace involves people and institutions from across the nation and even world. Their collective judgment will almost always be better than that of ambitious and self-interested politicians and apparatchiks who control government. Explains [Cato Institute's Tad] DeHaven: “Policymakers do not possess special knowledge that enables them to allocate capital more efficiently than markets. ... Thus, when the government starts choosing industries and technologies to subsidize, it often makes bad decisions at taxpayer expense.”
Tad DeHaven of the Cato Institute
As a result, argues DeHaven: “corporate welfare often subsidizes failing and mismanaged businesses and induces firms to spend more time on lobbying rather than on making better products. Instead of correcting market failures, federal subsidies misallocate resources and introduce government failures into the marketplace.” That is, government intervention in the name of fixing private problems almost always exacerbates private problems.
Federal benefits for a favored few businesses also unfairly put business competitors at a competitive disadvantage....
Upsetting the competitive balance hurts the rest of us. For instance, federal water subsidies “encourage farmers to grow crops in areas where it is inefficient or unsuitable to do so,” notes DeHaven. That’s not only financially wasteful; it also is environmentally destructive.Although the lengthy Forbes article focuses on corporate welfare at the national level, the arguments are equally applicable to the state and local level.
That is just one example of the massive distortions caused by corporate welfare. Among the worst were pervasive housing subsidies, which flooded the industry with money. When the federally-inflated bubble finally burst, the entire economy crashed in 2008.
Moreover, corporate welfare politicizes the economy. Washington’s economic policy never has been genuine laissez faire. Indeed, in the new republic Alexander Hamilton was not alone in promoting corporate welfare before there were modern corporations. But the problem has exploded as government has expanded.
Observes DeHaven: “The more that the government intervenes in the economy, the more lobbying activity is generated. The more subsidies that it hands out to businesses, the more pressure lawmakers face to hand out new and larger subsidies. As the ranks of lobbyists grow, more economic decisions are made on the basis of politics.” And the more we all pay.
Ironically, while the Left tends to rail against special interests and their role in election campaigns, its support for ever larger government inevitably enhances the role of special interests and their role in election campaigns. If government is actively enriching and destroying companies and entire industries, they have a right to influence government. The more booty that is available for political winners, the more business will spend and the harder it will fight to achieve victory.
But the greater outrage is support for corporate welfare from the Right. Political conservatives wax poetic about the virtues of the free market, but conservative office-holders often are pro-business rather than pro-market...
Unfortunately, corporate welfare has proved to be resilient even in the face of pressure to cut a trillion dollar plus deficit. As Public Choice economics observes, concentrated interests organize to defeat the diffuse public interest. So it is with business subsidies. Those benefiting from federal largesse work very hard to keep their ill-gotten gains.
But America can no longer afford politics as usual. Washington’s finances are in crisis. Only a ruthless assault on unnecessary spending will stop the U.S. from eventually becoming Greece or worse. A good place to start cutting federal outlays is money for dependent corporations.
In short, the Forbes article makes this point: the institutional structure of our political system creates an environment where corporate welfare flourishes despite popular opposition from the right and left to the as well as intellectual opposition from economists and other academics who see the policy as terribly flawed.
But therein also lies a political opportunity. One area where voters on the right and left strongly agree is that our hard-earned tax dollars should not be handed out to favored corporations and businesses interests. It doesn't matter that down the road, conservatives would want the money returned to taxpayers and liberals want the money spent on social welfare programs, that is a battle far down the road. Right now the battle is to stop the corporate giveaways which have played no small role in our federal budget deficit, and increased spending at the state and local level. On that issue voters on the right and left are united against what our politicians are doing.
A skillful politician, seeing the voters' overwhelming opposition to corporate welfare, could use it as the issue to propel himself or herself to enormous popularity and as high an office as President of the United States.
The Forbes article can be found here.
A paper authored by DeHaven titled "Corporate Welfare in the Federal Budget," which is discussed extensively in the Forbes article can be found here.