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We continue our mental models on political economy with Part 2 (Corporate Welfare) in this essay. If you want to circle back to Part 1, do so here.
Corporate Welfare and Rent-Seeking Behavior
Having looked at various descriptions of capitalism in Political Economy Part 1, it’s worth taking a snapshot of corporate welfare in the United States and the rent-seeking behaviors that are indicative of corporatocracy and crony capitalism. Corporate welfare is a term for describing government benefits that flow to corporations. Rent-seeking is an economic concept that occurs when an entity seeks to gain additional profits without any reciprocal contribution of productivity. This behavior can be viewed as shrewd or, alternatively, as a potentially manipulative use of public policy and society’s resources.1
Adam Smith, the Scottish economist and philosopher who authored The Wealth of Nations (1776), suggested that entities earn income from wages, profit, and rent. Profit usually comes from risking capital with the goal of gaining a return. Earning wages comes from employment. Rent, however, is the easiest to obtain of the three and often requires little risk. Business social services—another name for corporate welfare—create the opportunity for business entities to use political means to enhance rents to increase profits. There are so many examples: subsidies, grants, tariffs, barriers to entry, licensing requirements, regulatory capture, extensions of patents, and land-use restrictions. Not all of these are bad, but the practice of abusing them through extensive lobbying efforts is pervasive.
To keep this section short, let’s dive into a few examples of corporate welfare and rent-seeking in the current system.
Occupational Licensing
To start, let’s skim the surface of occupational licensing, a potential form of rent-seeking that acts as a barrier to entry. While some professions require critical standards for public health and safety, others do not. In 2016, a Senate subcommittee held a hearing on “occupational licensing” laws, which require individuals or firms to acquire government-issued licenses to perform certain types of work. Senator Mike Lee (R-Utah) said, “Sadly, occupational licensing is too often one more form of the crony capitalism that's born whenever big government gets in bed with big business.”2 A White House report from 2015 found that occupational licensing requirements had increased fivefold since the 1950s, covering more than a quarter of all workers in 2008.3 Does it seem right that cosmetologists, tree trimmers, and even interior designers need licenses in some states? Is the rent-seeking coming from employees/employers already in these fields who want to gatekeep a possible flood of new entrants? Studies show those protected by licenses earn 15% more than expected. Is it coming from educational establishments that want to sell programs needed to qualify for licensure? Have you ever asked your barber if he/she has a license? All 50 states require licensure for barbers. Nevada ranks the worst in terms of licensing burden with a $165 fee, 1500 clock hours, 18 months of experience, 4 exams, and a minimum age of 18. Wow!
The Institute for Justice publishes “License to Work”, a comprehensive report on the burden and status of licensure requirements. The third edition of their report has the following highlights:
In all, this edition catalogs 2,749 licenses across the 50 states and the District of Columbia and our sample of 102 lower-income occupations. On average, the requirements to secure these licenses remain steep: 362 days lost to education and experience, at least one exam, and $295 in fees. Interior design remains the most difficult occupation to enter, though it is licensed by only two states and the District of Columbia. Among universally licensed occupations, barber and cosmetologist continue, despite reforms, to rank as some of the most difficult to enter. Louisiana still licenses the most occupations of any state, 77 of 102. Hawaii’s licenses still rank as the nation’s most burdensome, while Nevada is the most widely and onerously licensed state.4
Subsidies and Grants
Next, subsidies and grants—this field is massive and complex. The website for Good Jobs First provides a subsidy tracker online (not likely to be comprehensive). Many subsidies and grants have been rolled up for the past several decades based on the sector and recipients. Top sectors receiving tens of billions of dollars include utilities and power generation, motor vehicles, oil & gas, chemicals, and financial services companies. Among the top 50 companies that receive state and local economic development awards (either by dollar value or number of subsidies awarded), we find companies like The Boeing Company, Alcoa, Intel, General Motors, Ford, Nike, Dow Chemical, Koch Industries, Goldman Sachs, JPMorgan Chase, Amazon, and Alphabet (Google). The drip of corporate welfare for some of the biggest and sometimes most profitable companies is a strange feature of capitalism in America.
Subsidies can come in the form of direct cash payments, but usually just involve major tax breaks (indirect subsidies), which could involve property tax abatement, sales tax exemptions, tax credits, or other tax incentives. While some are federal in nature, many are the result of corporations playing states for locating projects in certain areas for economic gain. It’s a pay-to-play game for corporations that have significant investments to make in various states and cities. Unfortunately, small and medium-sized businesses—which employ 58% of American workers—typically don’t get the same red carpet treatment. They have to pay their full share.
Consider sports stadiums: According to Brookings, different experts have estimated the total stadium bill from $10 billion to $12 billion (all federal, state, and local subsidies combined) in the past decade.5 Since 2000, Yankee Stadium has received federal subsidies of more than $400 million dollars (and double that amount in state & local subsidies). Thank goodness that all American taxpayers love the Yankees so much!
What would sports be without food? In 2021, the American Action Forum published stats on agriculture subsidies and their influence on U.S. food supply and consumption. The research highlighted that subsidies for farmers averaged $16 billion per year over the past decade. And these subsidies often go to big farm corporations. The report summarized the following findings:
The federal government has long subsidized America’s farmers, significantly affecting our food supply and what we eat. The most highly subsidized crops—corn, soy, wheat, and rice—are the most abundantly produced and most consumed, often in the form of ultra-processed foods. Sugar is also highly subsidized in the form of indirect price supports that benefit producers and drive-up prices, yet sugar is also widely overconsumed. Fruits and vegetables, on the other hand, receive relatively little subsidization—and Americans eat much less produce than recommended.6
The agriculture subsidy report concludes: “It is critical that both policymakers and the American public understand the influence that federal agricultural subsidies have on our food supply and diet and, in turn, our nutrition and health.” When we think about chronic health conditions that are so abundant in the U.S., the complex chain back to rent-seeking subsidies is important to understand.
Patents
Perhaps it’s time to rethink the patent system in the United States. In 2021, the list of firms having created the most design patents in the U.S. included many technology firms with nearly 100 or more patents: Samsung, Apple, LG Corporation, Alphabet, and Amazon.
The power of patent protection was developed by the Patent Act of 1790 after the drafters of the U.S. Constitution, adopted in 1787, included a provision for protecting intellectual property. From 1790-1835, patents lasted for 14 years, from 1836-1860 they lasted 21 years, from 1861-1994 they lasted 17 years from the grant date, and since 1995 patents have been valid 20 years from the filing date.
In the 2015 book, No Ordinary Disruption: The Four Global Forces Breaking All the Trends, three authors from the McKinsey Global Institute, Richard Dobbs, James Manyika, and Jonathan Woetzel, make the case that the world economy’s operating system is being rewritten. The four forces include urbanization, accelerating technological change, human aging, and a mishmash of global connections in trade, people, finance, and data. So what does this have to do with patents? The authors note: “Compared with the Industrial Revolution, we estimate that this change is happening ten times faster and at 300 times the scale, or roughly 3,000 times the impact.” With global economic impact moving at 3,000 times the force, should patents confer 20 years of corporate advantage? What if patents lasted half of the current time?
While I’m not suggesting that we kill the profit motive driving some forms of complex innovation, we seem to not have much profitable innovation without already providing billions and trillions in subsidies, so why allow patents to confer monopoly rents to the corporate sector for these extended time frames? We now have a secondary market for patents where patent trolls seek to pervert the intended benefits of innovation that traditionally fell to inventors. Entire books have been written on just pharmaceutical patent protection. One can argue that profit incentives built into a system dating back to 1790 are now driving trillions of dollars in healthcare costs. Given the unique nature of healthcare as a common good in society, maybe a shift away from patents for the pharmaceutical industry and a move toward a prize system would improve the general welfare of most Americans.7
Conclusion
I did not attempt to discuss tariffs on trade to protect domestic markets or the problem of regulatory capture through the federal bureaucracy in Washington, D.C. These areas are just as real and have become equally bloated over decades of corporate lobbying on Capitol Hill.
Giving away corporate welfare benefits in federal and state legislation packages doesn’t seem to be a Democrat vs. Republican issue. The Uniparty seems to be just fine with continuing the system of corporate giveaways, while the occasional right-leaning or left-leaning politician tries to draw attention to the establishment giving big corporations breaks in exchange for campaign contributions to ensure future election victories. Some activists refer to this situation as “socialism for the rich and capitalism for the poor.”
One more point about corporate welfare and rent-seeking is worthy of note. To the extent that government actions have facilitated increasing concentration within the corporate sector (lack of antitrust enforcement and support of too-big-to-fail), there is evidence that such concentration has contributed to the growing divergence of the labor share and the profit share of wealth creation in the economy. A 2019 article in the Princeton University Journal of Public & International Affairs states as follows:
The “profit share” is implicitly the opportunity cost of rent-seeking on society; it is income neither distributed to labor for work, nor to the future productive potential of the economy, but captured by the most wealthy and powerful segments of society for the purposes of furthering their wealth and power.8
Perhaps more general welfare and less corporate welfare would be good for society. Perhaps some deep, new thinking is needed to stem the tide of economic rent-seeking behaviors in the American economy. If not, the obituary for capitalism will be written alongside the obituary for political liberalism.
Up next: Political Economy Part 3: Where Do Profits Come From?
Notes for new readers:
The Common Sense Papers are an offering by Common Sense 250, which is a nonprofit startup proposing to realign the two-party system with the creation of a new political superstructure that circumvents the current dysfunctional duopoly. The goal is to heal political divisions and reboot the American political system for an effective federal government. If the movement can gain appeal, a call to crowdfund the project may occur in 2024. Subscribe for free with an email to follow along.
The tabs on the top of the Substack page can bring you to earlier essays that spell out key political issues. Common Sense Paper No. 1, No. 2, No. 4, and No. 5 can help anyone get up to speed on the project.
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For those who want to volunteer immediately to help reform the political landscape, I recommend looking at any of the following organizations:
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Christina Majaski, "Rent-Seeking," Investopedia, December 3, 2021, https://www.investopedia.com/terms/r/rentseeking.asp (accessed August 29, 2023).
Daniel Woodruff, "Utah Sen. Mike Lee slams state rules for licensing," KUTV 2 News, February 2, 2016, https://kutv.com/news/local/utah-sen-mike-lee-slams-state-rules-for-licensing (accessed August 29, 2023).
The White House, Occupational Licensing: A Framework For Policymakers (Washington, D.C.: The White House, 2015), https://obamawhitehouse.archives.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf (accessed August 29, 2023).
Institute for Justice, License to Work, 3rd Edition (November 2022), https://ij-org-re.s3.amazonaws.com/ijdevsitestage/wp-content/uploads/2022/09/LTW3-11-22-2022.pdf (accessed August 29, 2023), 4.
Eric Bull, "Top 10 Biggest Federal Subsidies for Pro Stadiums (Hint: The Yankees are #1)," Brookings Institution, September 9, 2016, https://www.brookings.edu/articles/top-10-biggest-federal-subsidies-for-pro-stadiums-hint-the-yankees-are-1/ (accessed August 29, 2023).
Tara O’Neill Hayes, "Primer: Agriculture Subsidies and Their Influence on the Composition of U.S. Food Supply and Consumption," American Action Forum, November 3, 2021, https://www.americanactionforum.org/research/primer-agriculture-subsidies-and-their-influence-on-the-composition-of-u-s-food-supply-and-consumption/ (accessed August 29, 2023).
Lachlan Carey and Amn Nasir, "Something for Nothing? How Growing Rent-Seeking Is at the Heart of America's Economic Troubles," Journal of Public and International Affairs, May 28, 2019, https://jpia.princeton.edu/news/something-nothing-how-growing-rent-seeking-heart-americas-economic-troubles (accessed August 29, 2023).
Great article Joe. I have done a lot of research into the patent problem and determined, paradoxically, they aren't as bad as we think. The article on that comes out Sept 14th at Risk+Progress
There are legitimate problems, however. I just updated an essay discussing some possible ways to make patents work better: https://www.lianeon.org/p/supercharging-innovation
Excellent work, Joe, I want to join you in this effort to build this movement. Our whys coincide. I am in the process of reading all your essays and I am with you. I do have some things I would like to add to all this, perhaps a tweak or two. I am the former president of the Alliance For Just Money, monetaryalliance.org. Indeed, enough is enough. My essays are here. https://howardswitzer.substack.com/archive?sort=new