Participants in this week’s Republican debate had their differences, but all agreed that government needs to get out of the business of picking economic winners and losers. This predicable byproduct of expansive government has come to be known as cronyism, and politicians rightly attack it.
Some businesses choose to compete on Capitol Hill rather than on Main Street. When this happens, established industries benefit from government protection and special treatment, but consumers and the economy suffer.
Cronyism is seen throughout the economy. Here are three particularly egregious examples.
The sugar industry receives a variety of costly government benefits. In one major program, the U.S. Department of Agriculture makes loans to sugar farmers that can be repaid with sugar when the commodity’s price falls. Including loans that were not repaid, the government spent $170 million on this program in fiscal year 2013, and $280 million the previous year. The United States also levies tariffs and quotas on imported sugar, limiting the supply of cheaper imported sugar. Talk about a sweet deal.
Not only must Americans pay for costly subsidies—they also have to pay higher prices for everything that contains sugar. These programs force Americans to pay about 30 cents more per each dollar that they spend on sugar. Government subsidies and restrictions also harm domestic companies that produce goods that require sugar. America’s 20,000 sugar farmers gain from this program, but everyone else loses.
The sugar industry is able to get away with this scheme because its members spend millions of dollars on campaign contributions and lobbying. Recipients are spread across both parties and top defenders of the sugar industry include politicians who are as ideologically diverse as Senator Bernie Sanders (I-VT) and Senator Marco Rubio (R-FL).
The Jones Act
The Jones Act requires all goods transported by water between U.S. ports to be carried on ships built in America, owned by U.S. citizens, and crewed by U.S. residents. This relic of the 1920s raises prices for consumers and producers by protecting American shipping companies and unions from competition.
The Jones Act is the reason why it costs about $6 per barrel to move crude oil from the Gulf Coast to New England—triple what it costs to ship crude from the same destination to Canada on a foreign-flagged ship. Bars on competition have created a system where American crew costs are about 4.5 times higher than crew costs on foreign-flagged ships. Despite the drawbacks from this antiquated law, few in Congress besides Senator John McCain (R-AZ) care to take on shipping interests and repeal the Jones Act.
Imagine the increase in costs if only planes, trains, and trucks constructed in the United States, owned by U.S. citizens, and crewed by U.S. permanent residents could transport goods and people between American cities. The Jones Act’s negative economic consequences are borne by Americans every day when they purchase anything that was transported by water, in whole or in part.
The recent House vote to reauthorize the 80-year-old Export-Import (or Ex-Im) Bank shows just how difficult it is to kill programs that benefit large, established businesses. The Ex-Im Bank provides government financing for foreign companies that buy goods from American businesses. The bank drives up prices for American buyers and costs taxpayers $2 billion each decade.
Despite the claims of Ex-Im Bank defenders, the bank does not benefit small businesses. Foreign customers of just five corporations, Applied Materials, Bechtel, Boeing, Caterpillar, and General Electric, receive nearly 60 percent of Ex-Im financing authorizations.
Large companies do not need taxpayer help to sell their products—98 percent of U.S. exports do not rely on Ex-Im Bank financing. If the deals are sound investments, large corporations can easily secure private lending for their foreign customers, or even finance the deals themselves. Taxpayers are asked to provide funding for higher-risk loans that cannot attract private funding.
Regardless of the costs, the Ex-Im Bank is coming back from the dead thanks to a majority of both “free-market” House Republicans and “anti-corporate” House Democrats who joined forces to reauthorize the bank.
A common theme seen in these examples is that some special interest groups end up reaping large benefits, while the costs are dispersed on the rest of the population. Because some people have millions of dollars to lose from eliminating a program while others have only a few dollars to gain, subsidies are difficult to end.
Though each program places real costs on consumers, it does not make economic sense for people to spend their valuable time fighting back. But when hundreds, if not thousands, of these programs exist, the cumulative costs to Americans in the form of higher prices and limited choices are significant.
It is easy to rail against special interests when running for office. Unfortunately, doling out special favors has been, and continues to be, a bipartisan priority. Though it is too early to tell if the winning candidate will stand up for consumers, the debaters’ rejection of cronyism is promising.
Jared Meyer is a fellow at the Manhattan Institute. He is the coauthor with Diana Furchtgott-Roth of Disinherited: How Washington Is Betraying America's Young. Follow Jared on Twitter here.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.