Government Subsidies (Farm, Oil, Export, Etc)
What Are the Major Federal Government Subsidies?
Each year, the U.S. federal government subsidizes a wide
range of economic activities that it wants to promote. What exactly are
subsidies? The definition may be broader than you think. Find out about the
most well-known subsidies, the history of these subsidies, and some of their
costs.
01 - What Is a Subsidy?
Most subsidies are cash grants or loans that the government
gives to businesses. It encourages activities the government wishes to promote.
The subsidy depends on the amount of the goods or services provided.
The World
Trade Organization has a broader definition of subsidies. It says a subsidy is
any financial benefit provided by a government which gives an unfair advantage
to a specific industry, business, or even individual. The WTO mentions five
types of subsidies:
- Cash
subsidies, such as the grants mentioned above.
- Tax
concessions, such as exemptions, credits, or deferrals.
- Assumption
of risk, such as loan guarantees.
- Government
procurement policies that pay more than the free-market price.
- Stock purchases
that keep a company's stock price higher than market levels.
These are all considered subsidies because they reduce the
cost of doing business.
02 - Farm Subsidies
Many experts argue that U.S. farms don't even
need subsidies. After all, they are located in one of the world's most
favorable geographic regions. It has rich soil, abundant rainfall, and
access to rivers for irrigation when rainfall fails. Today's farms have all the
advantages of modern business. They have highly trained labor, computerized
equipment, and cutting-edge chemical research in fertilizers and seeds.
But America's food supply must
also be protected from droughts, tornadoes,
and recessions.
In fact, agricultural subsidies were originally created to help farmers ravaged
by the Dust
Bowl and the Great
Depression of 1929.
This price support system lasted until the 1990s. The
federal government guaranteed farmers a high enough price to remain profitable.
How did it do this? It paid farmers to make sure supply did not exceed demand.
The government subsidized farmers to keep croplands idle in order to prevent
overproduction. It also bought excess crops. It then either stored them or gave
them away to feed low-income people throughout the world.
Most subsidies went to farmers of grains, such as corn,
wheat, and rice. It’s because grains provide 80 percent of the world's caloric
needs. By 1999, farm subsidies had reached a record $22 million.
Between 2001 and 2006, farm subsidies tapered off a bit, averaging $19 billion a
year. Of this, about 15 percent was wasteful, unnecessary, or redundant.
Between 1995 and 2010, farm subsidies had ballooned to $52
billion a year on average. Of this, more than 6 percent went toward four "junk
food" components: corn syrup, high-fructose corn syrup, corn starch, and
soy oils. Many people wondered why the federal government was subsidizing food that
contributed to America's obesity problem.
During the recession, as lawmakers looked for ways to cut
the budget, many asked, "Do corn growers need subsidies?" In 2011, a
record 12.4 billion bushels of corn were produced. In 2012, 94 million
acres of corn were scheduled to be planted. This was more than in any year
since World War II.
By 2017, large farms dominated the industry. Farms generating $1
million or more in sales produced two-thirds of the nation's agricultural
output. Only 4 percent of farms were that large. Big farms gobbled up small
ones that couldn't compete. They relied on economies of scale to
produce more food at a cheaper price. That sent prices down even more, putting
more small farmers out of business.
The 2012
budget proposed a 22 percent cut to farm subsidies, including the $5
billion direct payment program. Half of farmers receiving subsidies made more than
$100,000 a year. Between 1995 and 2016, the top 10 percent of farmers received 77 percent
of subsidies. The top 1 percent received 26 percent or $1.7 million per
recipient. The top recipient was Deline Farms Partnership, which received $4
million in 2016.
The House budget also proposed $180 billion in cuts to the farm subsidy
program. But $133 billion of the cuts were to the food stamp program, affecting
8 million consumers, not farmers.
03 - Oil Subsidies
In March 2012, President Obama called for an end to the $4
billion in oil industry subsidies. Some estimates indicated that the real level
of oil industry subsidies is higher, between $10 and $40
billion. At the same time, oil company profits benefited
when oil
prices reached a record of $145 a barrel in 2008.
The oil industry subsidies have a long history in the United
States. As early as World War I, the government stimulated oil and gas
production in order to ensure a domestic supply.
In 1995, Congress established the Deep Water Royalty Relief Act. It allowed oil companies to
drill on federal property without paying royalties. This encouraged the
expensive form of extraction since oil was only $18 a barrel. The Treasury
Department reported that the federal
government has missed $50 billion in foregone revenue over the
program's lifetime. It argued that this may no longer be needed now that
deepwater extraction has become profitable.
Here is a summary of the 2011 oil industry subsidies
compiled by Taxpayers for Common Sense in its report, "Subsidy Gusher."
- Volumetric Ethanol Excise Tax Credit -
$31 billion.
- Intangible Drilling Costs -
$8.9 billion.
- Oil and Gas Royalty Relief -
$6.9 billion.
- Percentage Depletion Allowance -
$4.327 billion.
- Refinery Equipment Deductions
- $2.3 billion.
- Geological and Geophysical Costs Tax Credit -
$698 million.
- Natural Gas Distribution Lines -
$500 million.
- Ultradeepwater and Unconventional Natural Gas and other Petroleum Resources R&D -
$230 million.
- Passive Loss Exemption -
$105 million.
- Unconventional Fossil Technology Program -
$100 million.
- Other
subsidies - $161 million.
Greenpeace argues that the oil industry subsidies should
also include the following activities:
- The Strategic
Petroleum Reserve.
- Defense
spending that involves military action in oil-rich countries in the
Persian Gulf.
- The
construction of the U.S. federal highway system which encourages reliance on
gas-driven cars.
The BEA argues
that these federal government activities were primarily done to protect
national security and not promote specific activities within the oil industry.
Even though the intent was not to directly subsidize it, they may have
benefited the industry indirectly.
04 - Ethanol Subsidies
Between 1979 and 2010, the corn industry received $20
billion in federal subsidies. Congress wanted to divert production into
ethanol, a component of gasoline. The subsidies were meant to help producers
meet a 2005 federal law that required 7.5 billion gallons of renewable
fuel to be produced by 2012. In 2007, a revision increased the goal to
36 billion gallons by 2022. Only 6.25 billion gallons were produced in 2011.
The corn subsidy, a tax credit of $0.46 a gallon, ended in January 2012.
Ethanol producers would have liked to see a larger credit of $1.10 per gallon
remain. The credit was to research cost-effective ways to convert other
bio-fuels, like switchgrass, wood chips, and nonfood corn byproducts.
When the corn subsidy ended in 2012, ethanol producers were
left in a bit of a glut. But that was because gasoline refiners stocked up on
subsidized ethanol before prices went up. The glut was absorbed over
time. Demand increased
during the U.S. summer driving season. Growing markets, such as Brazil, couldn’t
keep up with their own need for ethanol. They began importing it from the
United States.
Converting corn for fuel became controversial when it
helped drive
food prices higher in 2008. That created food riots throughout the
world. That was just one reason for the high price for corn and other commodities.
Also, investors fled to the commodities markets in response to the global
financial crisis of 2008.
Many experts argue
that using corn for
fuel is a poor allocation of natural
resources when 60 percent of the world's population is malnourished.
Furthermore, corn is not an efficient fuel source. Even if all the corn in the United
States were converted to ethanol, it would only meet 4 percent of America's
fuel consumption needs.
(Source: “Ethanol Subsidy Dies But Wait There's More,”
MSNBC.com, December 29, 2011.)
05 - Export Subsidies
The WTO bans export subsidies. But it allows two U.S.
federal government export subsidy programs. They help U.S. farmers compete
with other countries' subsidized exports. The U.S. Department of Agriculture
promotes:
- The
Export Credit Guarantee Program, which finances U.S. farm exports. The
USDA guarantees the buyers' credit when they can't get credit approval
locally.
- The
Dairy Export Incentive Program, which pays cash subsidies to dairy
exporters. It helps them meet the subsidized prices of foreign dairy
producers.
06 - Housing Subsidies
Housing subsidies promote homeownership and support the
construction industry. They total about $15 billion a year.
Housing subsidies come in two forms: interest
rate subsidies and down-payment assistance. The biggest interest rate
subsidy is the mortgage interest deduction on the federal income tax. There are
also some smaller interest subsidies that reduce mortgage costs for low-income
families.
The federal government also matches the amount low-income
families save for a down-payment. This came to $10.9 million in 2008. (Source:
“Homeowner Subsidies,” Federal Reserve Bank of Cleveland,
February 23, 2011.)
These direct homeowner subsidies paled in comparison to what
the federal government spent to support its Federal Housing Authority mortgage
loan guarantee program.
The real trouble started when it created two
government-sponsored enterprises. Fannie Mae
and Freddie Mac provided a secondary market to buy these mortgages
from banks. But they bought too many. That forced the government to spend
up to $100 billion to bail
out Fannie and Freddie. Even this wasn't enough, and the government
nationalized them.
Was the bailout a subsidy? Yes, in a sense. That’s because
without it, there would have been no housing activity whatsoever after
the subprime
mortgage crisis. Fannie, Freddie and
the Federal Home Loan Guaranty Corporation were behind 90
percent of all home loans. The agencies replaced the private sector's role
in the home mortgage market in the United States.
07 - Other Subsidies
The U.S. federal government offers many more subsidies that
it thinks will improve the economy.
For example, the 2009 Cash for Clunkersprogram was a subsidy to auto dealers,
according to the BEA. In the program, dealers received a subsidy of up to
$4,500 from the federal government after discounting a new vehicle to a consumer who traded in an old car.
The goal was to jump-start the economy after the recession.
It also aimed to encourage people to buy more fuel-efficient vehicles and
lessen U.S. reliance on foreign oil.
08 - Obamacare Subsidies
More than half of the Obamacare
subsidiesare designed to go to middle-income
families. These are hard-working parents. They hold jobs as food
service workers, administrative personnel, and health aides. These are also
jobs that don't provide health
insurance.
Although 10.6 million Americans were eligible for
subsidies as of February 2018, most didn't get them. Why? It’s because they
didn't sign up for insurance on the exchanges.
Obamacare is budgeted to spend $1.039 trillion on
subsidies for these middle-class working families between 2015 and 2024. It
only expects to spend $792 billion on expanded Medicaid and Childrens’
Health Insurance Program for the poor.
kimberly@worldmoneywatch.com