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.
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.
One level of government can also give subsidies to another. This includes federal grants given to state or local governments and state grants given to municipal governments.
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.
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% of the world's caloric needs. By 1999, farm subsidies had reached a record $22.5 million.
Between 2001 and 2006, farm subsidies tapered off a bit, averaging $19 billion a year. Of this, about 15% 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% 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% 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% 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% of farmers received 77% of subsidies. The top 1% received 26% 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.
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 Bureau of Economic Analysis (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.
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% 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% of America's fuel consumption needs.
(Source: “Ethanol Subsidy Dies But Wait There's More,” MSNBC.com, December 29, 2011.)
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.
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. 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% of all home loans. The agencies replaced the private sector's role in the home mortgage market in the United States.
The U.S. federal government offers many more subsidies that it thinks will improve the economy.
For example, the 2009 Cash for Clunkers program 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.
More than half of the Obamacare subsidies are 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 Children’s Health Insurance Program for the poor.
The Bottom Line
Any financial benefit, whether cash or tax cuts, given by the government to businesses or government organizations is considered a subsidy. Subsidies are given to help companies reduce their costs of doing business. In doing so, the government helps boost certain sectoral activities for the economy.
The U.S. government grants subsidies to the following industries:
- U.S. farm exports.
- Automobile market.
- Healthcare through Obamacare subsidies.
The ethanol industry used to be subsidized until 2012 through corn subsidies.
Some economists though are opposed to government subsidies. They believe these end up doing more harm than good in the long run.