Government Subsidies for Business

Long before the government bailouts of certain faltering businesses, during what has come to be called The Great Recession, the U.S. government had subsidized many sectors of business vital to the economy and to our national well-being.

TUTORIAL: The Federal Reserve

Because there are so many industries receiving government assistance, this article will focus on three representative business sectors that receive subsidies: energy, agriculture, and transportation. Each of these business sectors receives billions of dollars annually from the government.

The Energy Sector

America and the world run on energy – mainly oil and petroleum products. But there are other economically important forms of energy as well, including nonrenewable energy sources (gas, oil, coal, etc.) and renewable energy sources (ethanol, biodiesel, wind, etc.).

To aid in the development and exploration of both old and new energy sources, the federal government provides subsidies to businesses pursuing these initiatives. Subsidies are also awarded to energy producers developing more efficient and economical production and distribution procedures.

A broad variety of tax accounting allowances, credits, exemptions, deductions, depreciation, and other financially beneficial tax breaks are given by the federal government to energy producers.

Types of Energy Subsidies

The government provides funds for research and development in the form of grants and loans at favorable rates and repayment terms, but some risks of the nuclear energy industry and its consequent liabilities are indemnified by the federal government.

To assure power availability at lower than the market price, the federal government owns certain dams that generate hydroelectric energy. Bonds—interest-bearing debt —are issued by power-generating facilities owned by the U.S. Department of Energy, such as the Tennessee Valley Authority.

For example, government land is leased or sold for oil and coal exploration at lower-than-market rates, and import tariffs are imposed on biofuels (such as ethanol) in order to protect prices.

The Agriculture Sector

Food is the most vital product of the agriculture sector. But there other non-food products critical to the economy generated in this multi-billion dollar industry, including cotton, wool, and tobacco.

Prior to the Great Depression, government subsidies to the agriculture sector were relatively limited. Beginning in 1933, however, with the first administration of President Franklin D. Roosevelt, new legislation was enacted to support commodity prices, control production, restrict competition, insure crops and impose tariffs on imports. These subsidies supported many commodities in the agriculture field, including (but not limited to) corn, wheat, peanuts, honey, and dairy.

"Too big to fail" is a term heard frequently, referring to the banks and financial and insurance institutions "bailed out" by government money during the financial crisis that began around December 2007.

The agriculture sector that provides the food we eat daily is another entity that the government can't let fail. Farmers must be kept in business, and consumers must be fed. Food prices, although they fluctuate, must be kept relatively low and affordable.

Types of Agriculture Subsidies

There are various ways that the government subsidies the agriculture industry – both monetarily and non-monetarily. These include:

• Direct cash payments made to farmer-producers when farm commodity prices fall, in order to make up for their financial losses.
• Loans with no penalty for default are granted to farmers by the U.S. Department of Agriculture. The loans, in effect, are a gift, since defaults are not penalized.
• The USDA sells insurance against weather and pest damage to crops at affordable prices.
• In addition to payments from government insurance, farmers may also receive government disaster aid (cash payments) if crop damage is suffered.

The Transportation Sector

The transportation sector includes not only the vehicles, trains, aircraft and water-borne vessels that travel from one location to another, but a vast, nationwide supporting infrastructure.

These include rail lines, roads and highways, bridges, waterways, air, and rail terminals, and port facilities for lake, river, and ocean traffic.

The government subsidizes many elements of the transportation sector to assure the fast, efficient, reliable, and economical movement of people, commercial goods, and mail from one place to another. Both domestic and international commerce depends on the smooth functioning of the nation's various transportation modes, with major support beginning after World War II. One of the most costly and far-reaching subsidies of this sector was the Federal Aid Highway Act of 1956, which provided funding for the Transcontinental Interstate Highway System.

Types of Transportation Subsidies

Subsidies for the transportation sector are similar to subsidies for the sectors mentioned above. In some instances, user fees levied on air, rail, and highway users help the government recover a portion of the money expended on subsidies via direct cash payments, funding for airport and railway construction, and tax incentives (or exemptions) to privately owned transportation systems.

The Bottom Line

Government subsidies of critical business sectors have promoted profitability in many enterprises and assured general national prosperity and domestic well-being.

Despite these positive benefits, critics have complained of the unfair competitive advantages given to some businesses, have cited damage to the environment as a result of some subsidized activities, and have proposed massive cuts in subsidies because of expanding government debt and declining tax revenues.

Even with government subsidies, some businesses have not survived. In recent decades, America has seen the decline of the railroad industry, the bankruptcy and extinction of several once-major airlines and the disappearance of smaller farms acquired or put out of business by big agriculture, all supported by government subsidies.

Although some businesses claim that they cannot survive economically without government help, the questions that must be answered are: which businesses will continue to get government support, which will not, how much will be spent, and will the expense be worth the return?