Business Columns & Blogs

We want to reform welfare? Start at the top, with the corporations

Peter Crabb
Peter Crabb

This month voters in Idaho decided to expand the government-provided safety net. More residents will now be eligible for Medicaid.

The Medicaid program has at times been labeled the most inefficient government program. So we can now expect Republican leaders and state officials to call for reform of this program so health care spending doesn’t crowd out other government initiatives.

But if these leaders are to be consistent, they must also seek to reform corporate welfare, or cronyism. Tax incentives and government subsidies to private business are just as much a welfare program as any government-sponsored health plan.

Many industries in Idaho and around the country receive some form of government assistance. For example, a few years back two Idaho-based wineries received grants from the US Department of Agriculture to help improve wine “processing” and to market their products.

Economics shows us that such programs are a waste for society.

Consider a competitive market before the tax incentives, subsidies or other industry preferences show up. In this market, many buyers and sellers with the freedom to come or go as they please bring about an equilibrium price that makes everyone as well off as possible. Buyers who want the product at that price make the purchase, those who do not, don’t. This free market directs the good or service to the buyers who value it most highly, as measured by their willingness to pay.

Similarly, sellers in this competitive market are those who can produce the product at a cost below the going price. Those firms that can’t will not be in the market. Thus, the free market allocates the going demand for any good or service only to those businesses that can produce it at the lowest cost.

Corporate welfare messes this all up. Preferential treatment to these suppliers keeps inefficient firms afloat, and/or increases the return to capital in an industry where it is not needed. This second problem, capital flowing only to certain industries, slows the growth of the overall economy. Capital that could be going to new, innovative industries is tied up in a lower-return product or service.

Idahoans are already pretty good at what we do. Some households may need help with their health care, but businesses shouldn’t need taxpayer assistance.

If we want welfare reform, let’s start with corporate welfare.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. pcrabb@nnu.edu.

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