Tim Carney: The US government subsidizes businesses in all sorts of ways, including grants,
tax breaks, protectionism, and regulation. A favorite way to subsidize businesses,
though, is through loans and loan guarantees. But when the government acts
like an investment bank to help some businesses, it harms other businesses and
places taxpayers at risk. Many federal agencies loan out money or guarantee
loans. The businesses that receive this financing benefit, as do their customers,
but, of course, this puts taxpayer money at risk.
The US government finances billions of dollars in aircraft purchases. That
allows airlines to better afford the jets. But what happens if the customer
goes bankrupt? Well, the taxpayer picks up the tab. Something just like this
happened after the Energy Department in 2009 guaranteed a large loan to a solar
company in California.
Joe Biden: I'm really happy, along with the secretary, to announce
today that we've closed a 535 million dollar loan guarantee for Solyndra, more
than half a billion dollars.
Tim Carney: Things soon turned south, and Solyndra went bankrupt,
leaving taxpayers with the tab. Similarly, when government-sponsored housing
financiersFannie Mae and Freddie Mac went under in 2008 taxpayers, bailed them
out. Defenders of these programs, though, argue that government can absorb these
costs, and that most of these taxpayer-backed finance programs, quote, "turn a profit."
Fred Hochberg: Ex-Im makes money for taxpayers. That's not corporate welfare.
Tim Carney: But even when they're not sticking taxpayers with the tab, government creates other victims
when it acts as a bank or a venture capital firm. Most obviously, when
government subsidizes a company, it's hurting that company's competitors. Delta
Airlines, for instance, was harmed when the US Export-Import bank financed
foreign airlines. Ex-Im does this in order to help the airlines buy Boeing jets and
General Electric engines.
Richard B. Hirst: Ex-Im's support of Boeing means that it supports our
competitors. Ex-Im's support for Emirates provides
them with a subsidy of about 20 million dollars in aircraft, and that kind of
subsidy — that level of impact — has an impact on Delta's ability to compete with Emirates.
Tim Carney: And that's not the only way the Export-Import Bank creates
victims. When Ex-Im subsidizes foreign buyers, that increases demand for what
they're buying. Increased demand means increased prices
for the US buyers who don't get the same subsidy. This is a matter of basic
economics. As trade economist Stephen Saran of it writes: "When a large
exporting country implements an export subsidy, it will cause an increase in the
price of the good on the domestic market and a decrease in the price in the rest
of the world. Sometimes, instead of making direct loans, government gives guarantees
to the loans made by regular banks. In that case, the government is choosing who
gets the loan. This creates another victim — the borrower who would have
gotten the loan if Uncle Sam hadn't propped up its own favored borrower with
a guarantee. This is why economists agree that such government financing, quote,
"merely shifts production among sectors within the economy, but does not add to
the overall level of economic activity." The final victim is the entire US
economy. When the government is a lender, or is directing lenders through
guarantees, money goes to the politically favored businesses instead of the most
economically promising. That harms economic efficiency, especially because
politicians aren't exactly the best at figuring out where economic promise lies.
Steven Chu: As you can see if you build a better solar panel the world will beat a path
to your door. Building a smarter solar panel is exactly what Solyndra has done.
Tim Carney: So while government financing helps some lenders, manufacturers, and foreign buyers,
it creates many victims. US taxpayers bear the risk for this lending. American
companies who compete against subsidized companies become at a disadvantage. US
consumers suffer as subsidized buyers bid up the price of goods. And US
businessmen who don't have access to Uncle Sam's backing find it harder to
get financing. And the US economy as a whole suffers as
politicians instead of market players allocate financing around the economy.
It's just one more example: Every time the government tries to pick an economic
winner, it creates economic losers. These are the victims of cronyism.